1 The Wawanesa Life Insurance Company Financial Statements
4 February 21, 2012 Appointed Actuary s Report To the Shareholder and Policyholders of The Wawanesa Life Insurance Company I have valued the insurance contract liabilities of The Wawanesa Life Insurance Company for its balance sheet at and their change in the statement of operations for the year then ended in accordance with accepted actuarial practice, including selection of appropriate assumptions and methods. In my opinion, the amount of insurance contract liabilities makes appropriate provision for all policyholder obligations and the financial statements fairly present the result of the valuation. Ian R. MacDonald Fellow, Canadian Institute of Actuaries Winnipeg, Manitoba
5 Balance Sheets As at December 31, 2011 December 31, 2010 January 1, 2010 Assets Notes Cash and cash equivalents 5 $ 30,281 $ 12,448 $ 7,115 Investments 6 622, , ,814 Receivables 7 3,546 3,116 2,684 Accrued investment income 4,534 4,069 3,975 Income taxes receivable 17 2,498 - Reinsurance assets 11 4,059 32,382 42,128 Deferred income taxes Property and equipment Intangible assets General fund assets 666, , ,519 Segregated funds net assets , , ,896 Total Assets $ 829,914 $ 804,689 $ 731,415 The accompanying notes constitute an integral part of the financial statements.
6 As at December 31, 2011 December 31, 2010 January 1, 2010 Liabilities Notes Trade and other payables $ 6,128 $ 5,805 $ 6,387 Income taxes payable - - 1,086 Insurance contract liabilities , , ,059 Deferred income taxes General fund liabilities 550, , ,532 Segregated funds contract liabilities 163, , ,896 Total Liabilities 714, , ,428 Equity Share capital 14 26,500 26,500 26,500 Shareholder s retained earnings 60,295 54,886 52,719 Shareholder s accumulated other comprehensive income 6,370 6,252 3,479 Total shareholder s equity 93,165 87,638 82,698 Participating policyholders account 22,272 29,203 29,289 Total Equity 115, , ,987 Total Liabilities and Equity $ 829,914 $ 804,689 $ 731,415 Approved by the Board of Directors Ken E. McCrea President and Chief Executive Officer Delmore C. Crewson Chairman, Audit Committee
7 Statements of Operations For the years ended December Notes Income Gross premiums 21 $ 121,453 $ 109,987 Premiums ceded to reinsurers (15,122) (14,171) Net premiums 106,331 95,816 Fee income 3,045 2,713 Net investment income 6 50,074 45,236 Total income 159, ,765 Benefits and expenses Gross claims and benefits incurred 12 86,954 74,823 Claims ceded to reinsurers (13,179) (9,008) Gross change in insurance contract liabilities 11 22,325 39,069 Change in insurance contract liabilities ceded to reinsurers 11 36,045 10,907 Net insurance claims and benefits 132, ,791 Expenses incurred 15 28,676 26,682 Total benefits and expenses 160, ,473 Income (loss) before income taxes (1,371) 1,292 Provision for income taxes Net income (loss) for the year $ (1,719) $ 1,118 Net income (loss) for the year attributed to: Shareholder $ 4,974 $ 1,711 Participating policyholders (6,693) (593) $ (1,719) $ 1,118 The accompanying notes constitute an integral part of the financial statements.
8 Statements of Comprehensive Income (Loss) For the years ended December Note Net income (loss) for the year $ (1,719) $ 1,118 Other comprehensive income, net of taxes: 13 Unrealized gain on available-for-sale financial assets 865 4,414 Reclassifications to net income for available-for-sale financial assets (550) (678) Total other comprehensive income 315 3,736 Total comprehensive income (loss) $ (1,404) $ 4,854 Total comprehensive income (loss) for the year attributed to: Shareholder $ 5,092 $ 4,484 Participating policyholders (6,496) 370 $ (1,404) $ 4,854 The accompanying notes constitute an integral part of the financial statements.
9 Statements of Changes in Equity For the years ended December 31 Attributed to shareholder Share capital Retained earnings Accumulated other comprehensive income Total shareholder s equity Participating policyholders account (note 16) Total equity Balance at January 1, 2011 $ 26,500 $ 54,886 $ 6,252 $ 87,638 $ 29,203 $ 116,841 Net income (loss) for the year - 4,974-4,974 (6,693) (1,719) Other comprehensive income Transfer (note 16) (435) - Balance at $ 26,500 $ 60,295 $ 6,370 $ 93,165 $ 22,272 $ 115,437 Balance at January 1, 2010 $ 26,500 $ 52,719 $ 3,479 $ 82,698 $ 29,289 $ 111,987 Net income (loss) for the year - 1,711-1,711 (593) 1,118 Other comprehensive income - - 2,773 2, ,736 Transfer (note 16) (456) - Balance at December 31, 2010 $ 26,500 $ 54,886 $ 6,252 $ 87,638 $ 29,203 $ 116,841 The accompanying notes constitute an integral part of the financial statements.
10 Statements of Cash Flows For the years ended December 31 Cash provided by (used in) Note Operating activities Receipts Premiums received $ 121,418 $ 110,134 Reinsurance claims and recoveries received 12,481 8,304 Dividends and distributions received 935 1,045 Interest received 21,544 21,172 Fee income received 3,045 2, , ,368 Payments Claims and benefits paid 85,524 72,253 Reinsurance premiums paid 15,586 14,114 Insurance expenses and taxes 29,642 27,571 Other operating cash flows Income taxes (received) paid (1,642) 4, , ,707 Net cash provided by operating activities 30,034 24,661 Investing activities Bonds purchased (303,621) (322,732) Bonds sold, redeemed or matured 296, ,984 Stocks purchased (9,210) (9,567) Stocks sold or redeemed - 6,604 Mortgage loans advanced (1,012) (1,587) Mortgage loans repaid 5,551 7,025 Policy loans advanced (2,013) (2,260) Policy loans repaid 1,713 1,475 Property and equipment, net (65) (250) Intangible assets acquired (252) - Net cash used in investing activities (12,736) (18,308) Increase in cash and cash equivalents 17,298 6,353 Cash and cash equivalents - Beginning of year 5 10,068 3,715 Cash and cash equivalents - End of year 5 $ 27,366 $ 10,068 The accompanying notes constitute an integral part of the financial statements.
11 1 Corporate information The Wawanesa Life Insurance Company (the Company) is a company federally incorporated by an Act of Parliament and domiciled in Canada. The Company develops, markets and distributes individual insurance and annuity products as well as group life and health insurance products in all provinces of Canada, except Quebec, and in the Northwest Territories. The head office of the Company is Main Street, Winnipeg, Manitoba, Canada. The Company is a wholly-owned subsidiary of The Wawanesa Mutual Insurance Company (the Parent Company), its ultimate parent and controlling shareholder. These financial statements were approved by the Board of Directors on February 21, Reporting responsibilities The financial statements and accompanying notes are the responsibility of management. The external auditors of the Company are required to conduct an examination in accordance with Canadian generally accepted auditing standards to enable their reporting to the policyholders and shareholder as to whether the annual financial statements present fairly, in all material respects, the financial position and financial performance of the Company in accordance with International Financial Reporting Standards (IFRS). The Appointed Actuary (the Actuary) is appointed by the Board of Directors pursuant to the Insurance Companies Act. He is responsible for ensuring that the assumptions and methods used in the valuation of insurance contract liabilities are in accordance with accepted actuarial practice, applicable legislation and associated regulations or directives. He is also required to provide an opinion regarding the appropriateness of the insurance contract liabilities at the balance sheet date to meet all policyholder obligations of the Company. Examination of supporting data for accuracy and completeness and analysis of Company assets for their ability to support the amount of insurance contract liabilities are important elements of the work required to form this opinion. The Actuary uses the work of the external and internal auditors in verifying data files for valuation purposes. (1)
12 3 Significant accounting policies Basis of presentation The financial statements of The Wawanesa Life Insurance Company have been prepared in accordance with Canadian generally accepted accounting principles as set out in Part 1 of the Handbook of the Canadian Institute of Chartered Accountants (IFRS), as issued by the International Accounting Standards Board (IASB) and the accounting requirements of the Office of the Superintendent of Financial Institutions Canada (OSFI). None of the accounting requirements of OSFI are exceptions to IFRS. For all periods up to and including the period ended December 31, 2010, the Company prepared its financial statements in accordance with Canadian Generally Accepted Accounting Principles (Canadian GAAP). Canadian GAAP differs in some areas from IFRS and as such, in preparing these financial statements, the Company has amended certain accounting policies previously applied in the Canadian GAAP financial statements. Reconciliations and explanations of the impact of the transition to IFRS as of January 1, 2010 on the financial position, financial performance and cash flows can be found in note 22. The financial statements have been prepared under the historical cost convention, as modified by the revaluation of financial assets and financial liabilities at fair value through profit or loss (FVTPL) and available-for-sale (AFS) financial assets, with the exception of insurance contract liabilities and reinsurance assets which are measured on a discounted basis in accordance with accepted actuarial practice (which in the absence of an active market provides a reasonable proxy of fair value) as explained throughout this note. The significant accounting policies used in the preparation of these financial statements are summarized in this note. The Company has consistently applied the same accounting policies in its opening IFRS balance sheet at January 1, 2010 and throughout all periods presented, as if these policies had always been in effect. Financial statement values, including the notes to the financial statements, are presented in Canadian dollars ($) which is the Company s functional and presentation currency rounded to the nearest thousand ($000), unless otherwise indicated. The Company presents its balance sheets on a liquidity basis and each balance sheet line item includes both current and non-current balances, as applicable. The distinction between current and non-current is based on expectations regarding recovery or settlement within twelve months after the balance sheet date (current) and more than twelve months after the balance sheet date (non-current), as presented in the notes. The following balances are generally classified as current: cash and cash equivalents, investments in stocks and bonds with maturities within one year, receivables, accrued investment income, income taxes receivable and/or payable, and trade and other payables. The following balances are generally classified as non-current: investments in bonds with maturities greater than one year, reinsurance assets, property and equipment, intangible assets, insurance contract liabilities and deferred income taxes. (2)
13 3 Significant accounting policies (continued) Financial assets and financial liabilities are offset and the net amount reported in the balance sheets only when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the assets and liabilities simultaneously. Income, benefits and expenses are not offset in the statements of operations unless required or permitted by any accounting standard or interpretation, as specifically disclosed in the accounting policies of the Company. Product classification Contracts issued by the Company are classified as insurance, investment or service contracts, depending on the existence of significant insurance risk. The Company defines significant insurance risk as the possibility of having to pay benefits on the occurrence of an insured event that is more than the benefits payable if the insured event did not occur. When significant insurance risk exists, the contract is accounted for in accordance with IFRS 4 Insurance Contracts (IFRS 4). Contracts under which the Company does not accept significant insurance risk are classified as either investment contracts or service contracts. No contracts have been classified as investment contracts. Contracts issued by the Company that do not transfer significant insurance risk and do not transfer financial risk from the policyholder to the Company are classified as service contracts. Service contracts are accounted for in accordance with IAS 18 Revenue. Once a contract has been classified as an insurance contract, it remains an insurance contract for the remainder of its lifetime, even if insurance risk reduces significantly during this period, unless all rights and obligations are extinguished or expire. Investment contracts can however be reclassified as insurance contracts after inception if insurance risk becomes significant. Financial instruments The Company has classified or designated its financial assets and liabilities in the following categories: i) cash and cash equivalents; ii) iii) iv) FVTPL financial assets; AFS financial assets; loans and receivables; v) other financial assets; vi) insurance contract liabilities; and vii) other financial liabilities The Company s financial assets and liabilities are described below. (3)
14 3 Significant accounting policies (continued) Cash and cash equivalents Cash and cash equivalents are comprised of cash at the bank and short-term deposits. Short-term deposits include highly liquid investments that are readily convertible into cash and have maturities of less than three months when purchased. The carrying values of cash and cash equivalents approximate fair value. Investments Bonds and stocks are designated as FVTPL or classified as AFS based on management s intentions or characteristics of the instrument. The Company has designated all of its investments in bonds and stocks as FVTPL, with the exception of bonds and stocks that support capital and surplus, which have been classified as AFS. Stocks are comprised of units in institutional pooled funds. The Company uses trade date accounting for purchases and sales of all of these investments. Transaction costs directly attributable to the acquisition of the financial asset are capitalized. Mortgages and policy loans are classified as loans and receivables. FVTPL financial assets FVTPL financial assets are carried at fair value on the balance sheets with changes in the fair value recorded in net income (loss) in the period in which they occur. Fair values of FVTPL financial assets that do not have a quoted price in an active market are carried at cost, or an amount below cost as determined by management, giving consideration to external data available. AFS financial assets AFS financial assets are initially measured at fair value on the balance sheets from the trade date. Subsequent to initial recognition, AFS financial assets are carried at fair value with changes in fair values recorded, net of income taxes, in other comprehensive income (OCI) until the AFS financial asset is disposed of or has become impaired. When the AFS financial asset is disposed of or has become impaired, the accumulated fair value adjustments recognized in accumulated other comprehensive income (AOCI) are transferred to the statements of operations. Fair values of AFS financial assets that do not have a quoted price in an active market are carried at cost, or an amount below cost as determined by management, giving consideration to external data available. Mortgages and policy loans Financial assets classified as loans and receivables are initially recognized at fair value and subsequently measured at amortized cost using the effective interest rate method, less provision for impairment losses, if any. (4)
15 3 Significant accounting policies (continued) Receivables Receivables include amounts due from individual and group policyholders for insurance premiums, amounts due from reinsurers on paid claims and other receivables and advances. These receivables are recognized when due and are carried at the fair value of the consideration receivable. Reinsurance assets In the normal course of business, the Company uses reinsurance to limit exposure to large losses. Reinsurance assets represent the benefit derived from reinsurance arrangements in force at the balance sheet dates. The reinsurance assets are measured consistently with the amounts associated with the insurance contracts and in accordance with the terms of each reinsurance contract. The Company s retention limits are disclosed in note 20. Trade and other payables Trade and other payables are classified as other financial liabilities. Financial liabilities, other than insurance contract liabilities, are initially recognized at fair value and subsequently measured at amortized cost using the effective interest rate method. Insurance contract liabilities Insurance contracts are those contracts that the Company accepts significant insurance risk from the policyholder by agreeing to compensate the policyholder for specified uncertain future insured events that adversely affect the policyholder. Insurance contracts are issued by the Company with or without discretionary participation features (DPF). DPF is a contractual right to receive potentially significant additional benefits based on the experience of blocks of similar products. This experience includes investment, mortality and expenses. IFRS allows the nonguaranteed, or participating, elements of such contracts to be classified as either a liability or as equity, depending on the nature of our obligation to the policyholder. The contracts issued by the Company contain constructive obligations to the policyholder with respect to the DPF of the contracts. Therefore the Company has elected to classify these features as a liability and they have been included within insurance contract liabilities. The Company s insurance contract liabilities represent an estimate of the amount that, together with estimated future premiums and investment income will be sufficient to pay outstanding claims and provide for future benefits, dividends, expenses and taxes on policies in force. The Actuary is responsible for determining the amount of insurance contract liabilities using accepted actuarial practices according to the standards established by the Canadian Institute of Actuaries (CIA) and the requirements of OSFI. Insurance contract liabilities are determined using the Canadian Asset Liability Method (CALM). As confirmed by guidance provided by the CIA, CALM satisfied requirements for eligibility for use under IFRS. (5)
16 3 Significant accounting policies (continued) Insurance contract liabilities, including policy benefits payable and policyholder amounts on deposit, are presented gross of reinsurance assets on the balance sheets. Any adjustment is recorded as a change in insurance contract liabilities in net income (loss). Fair value of financial instruments Financial assets and liabilities recorded at fair value in the balance sheets are measured and classified in a hierarchy consisting of three levels for disclosure purposes. The three levels are based on the priority of the inputs to the respective valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). An asset or liability s classification within the fair value hierarchy is based on the lowest level of significant input to its valuation. The input levels are defined as follows: Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities. The Company defines active markets based on the frequency of valuation and any restrictions or illiquidity on disposition for stocks and uses the size of the bid/ask spread as an indicator of market activity for fixed maturity securities. Assets measured at fair value and classified as Level 1 include actively traded quoted stocks and all federal government and federal government backed bonds and cash equivalents. These bonds and cash equivalents are classified as Level 1 as they are traded using quoted prices in an active market, which is reflected in their narrow bid/ask spread. Fair value is based on market price data for identical assets obtained from the investment custodian, investment managers or dealer markets. The Company does not adjust the quoted price for such instruments. Level 2: Quoted prices in markets that are not active or inputs that are observable either directly (i.e., as prices) or indirectly (i.e., derived from prices). Level 2 inputs include observable market information, including quoted prices for assets in markets that are considered less active. Assets measured at fair value and classified as Level 2 include provincial bonds, municipal bonds, corporate bonds, asset-backed securities and all other cash equivalents. Fair value is based on or derived from market price data for same or similar instruments obtained from the investment custodian, investment managers or dealer markets. Level 3: Unobservable inputs that are supported by little or no market activity and are significant to the estimated fair value of the assets or liabilities. Level 3 assets and liabilities would include financial instruments whose values are determined using internal pricing models, discounted cash flow methodologies, or similar techniques that are not based on observable market data, as well as instruments for which the determination of estimated fair value requires significant management judgment or estimation. (6)
17 3 Significant accounting policies (continued) Impairment of financial assets All financial assets other than FVTPL instruments are assessed for impairment at each reporting date. Impairment is recognized in net income (loss), when there is objective evidence that a loss event has occurred which has impaired future cash flows of an asset. AFS debt instruments An AFS debt security would be identified as impaired when there is objective evidence suggesting that timely collection of the contractual principal or interest is no longer reasonably assured. This may result from a breach of contract by the issuer, such as a default or delinquency in interest or principal payments, or evidence that the issuer is in significant financial difficulty. Impairment is recognized through net investment income. Subsequent declines in value continue to be recorded in net investment income. Impairment losses previously recorded through net investment income are to be reversed if the fair value subsequently increases and the increase can be objectively related to an event occurring after the impairment loss was recognized. AFS equity instruments Objective evidence of impairment exists if there has been a significant or prolonged decline in the fair value of the investment below its cost or if there is a significant adverse change in the technological, market, economic or legal environment in which the issuer operates or the issuer is experiencing financial difficulties. The accounting for an impairment that is recognized in net income (loss) is the same as described for AFS debt securities above with the exception that impairment losses previously recognized in net income (loss) cannot be subsequently reversed until the instrument is disposed of. Any subsequent increase in value is recorded in OCI. Mortgages and policy loans These financial assets are considered impaired when there is objective evidence of deterioration in credit quality that indicates the Company no longer has reasonable assurance that the full amount of principal and interest will be collected. The Company then establishes specific provisions for losses and balances are subsequently measured at their net realizable amount based on discounting the cash flows at the original effective interest rate inherent in the loan or the fair value of the underlying security. Changes in the net realizable value of impaired loans are recognized in net investment income. Policy loans are not subject to impairment losses because they are fully secured by the policy values on which the loans are made. (7)
18 3 Significant accounting policies (continued) Reinsurance assets Impairment occurs when there is objective evidence as a result of an event that occurred after initial recognition of the reinsurance asset that the Company may not receive all the outstanding amounts due under the terms and conditions of the contract and the event has a reliably measurable impact on the amounts that the Company will receive from the reinsurer. Changes in the net realizable value of impaired reinsurance assets are recognized in the statements of operations. Income taxes Income taxes are comprised of both current and deferred taxes. Income taxes are recognized in the statements of operations, except to the extent that they are related to items recognized in OCI or directly in equity. In this case, the tax is recognized in OCI or directly in equity, respectively. Current tax assets and/or liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities for the current and prior periods. The tax rates and tax laws used to compute these amounts are those that have been enacted or substantively enacted at the end of each reporting period. Deferred income tax assets and liabilities are recorded for the expected future income tax consequences of events that have been included in the financial statements or income tax returns. Deferred income taxes are determined using the liability method. Under the liability method, deferred income taxes are recognized for all significant temporary differences between the tax and financial statement bases for assets and liabilities and for certain carry-forward items. However, if the deferred income tax arises from initial recognition of an asset or a liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable income, it is not accounted for. Deferred income tax assets are recognized only to the extent that, in the opinion of management, it is probable that the deferred income tax assets will be realized. Deferred income tax assets and liabilities are adjusted for the effects of changes in tax laws and rates, on the date the changes in the tax laws and rates have been enacted or substantively enacted. In determining the impact of taxes, the Company is also required to comply with the standards of the CIA. Deferred income tax assets and/or liabilities arising from temporary timing differences are computed without discounting. The insurance contract liabilities include an amount to convert deferred income taxes to a discounted basis for timing differences related to these liabilities. (8)
19 3 Significant accounting policies (continued) Property and equipment Property and equipment are carried at cost less accumulated depreciation and accumulated impairment losses. Replacement costs are capitalized when incurred and if it is probable that future economic benefits associated with the item will flow to the Company and the cost of the item can be measured reliably. All other repairs and maintenance costs are charged to net income during the period in which they are incurred. Depreciation is calculated on a diminishing balance basis over the useful lives at a rate of 20% for furniture and equipment and 30% for computer hardware. The assets residual values, useful lives and depreciation methods are reviewed and adjusted if appropriate at each reporting date. Impairment reviews are performed when there are indicators that the net recoverable amount of an asset may be less than the carrying value. The net recoverable amount is determined as the asset s fair value less cost to sell. Impairment losses are recognized in the statements of operations as an expense. In the event that the value of previously impaired assets recovers, the previously recognized impairment loss is recovered in income at that time. An item of property and equipment is derecognized upon disposal or when no further economic benefits are expected from its use. Any gain or loss arising on de-recognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the statements of operations in the period the asset is derecognized. Intangible assets Intangible assets consist of certain acquired and internally developed software some of which may have not yet been put into use. Intangible assets are carried at cost, less accumulated amortization and accumulated impairment losses, if any. Input costs directly attributable to the development or implementation of the asset are capitalized if it is probable that future economic benefits associated with the expenditure will flow to the Company and the cost can be measured reliably. Finite life intangible assets are tested for impairment when events or circumstances indicate that the carrying value may not be recoverable. In addition, intangible assets not yet in use are tested for impairment annually. When the recoverable amount is less than the net carrying value an impairment loss is recognized. Intangible assets, once functional, are amortized on a straight-line basis over their useful lives. Research costs are recognized as an expense in the period incurred. (9)
20 3 Significant accounting policies (continued) Segregated funds Segregated funds are investment options available to annuity policyholders in which the benefit amount is directly linked to the fair value of the investments held in the particular segregated fund. Although the underlying assets are registered in the name of the Company, and the annuity policyholder has no direct access to the specific assets, the contractual arrangements are such that the annuity policyholder bears the risk and rewards of the fund s investment performance. In addition, certain annuity policies have minimum maturity value and death benefit guarantees from the Company. Payments for such guarantees are included in amounts paid or credited to policyholders and their beneficiaries in the statements of operations. Additional liabilities, if any, associated with these minimum guarantees are recorded in insurance contract liabilities in the General Fund. The Company derives fee income from segregated funds, which is included in fee income on the statements of operations. Policyholder transfers between general funds and segregated funds are included in gross claims and benefits paid on the statements of operations. Investments held in segregated funds are carried at fair value. Segregated funds are presented separately within the Company s financial statements and do not form part of the General Funds of the Company. Provisions and contingent liabilities Provisions are recognized when the Company has a present legal or constructive obligation as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. When the Company expects some or all of the provision to be reimbursed, the reimbursement is recognized as a separate asset but only when the reimbursement is virtually certain. The expense of any provision is recognized in the statements of operations net of any reimbursement. If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognized as a borrowing cost. Contingent liabilities are disclosed if there is a possible future obligation as a result of a past event, or if there is a present obligation as a result of a past event but either a payment is not probable or the amount cannot be reasonably estimated. Revenue recognition Gross premiums for all types of insurance contracts and contracts with limited mortality or morbidity risk, excluding segregated funds contracts, are generally recognized as revenue when due. Expenses are recognized when incurred. Insurance contract liabilities are computed at the end of each period, resulting in benefits and expenses matching with the premium income. Fee income is recognized when earned. Fee income includes fees earned from the management of segregated fund assets and fees earned on service contracts, specifically administrative services only (ASO) group health contracts. (10)
21 3 Significant accounting policies (continued) Interest and dividend income is recorded as it accrues. Distributions on pooled funds are recorded on the income distribution dates. Gains and losses are determined and recorded as at the trade date, and calculated on the basis of average cost. The effective interest rate method is used to amortize premiums or discounts over the life of bonds. Investment and interest expenses are recognized when incurred. Foreign currency transactions Foreign currency transactions are translated into Canadian dollars using the exchange rate in effect on the dates they occur. Gains and losses arising as a result of foreign currency transactions are recognized in the statements of operations. Employee future benefits Employees of the Company are provided with pension and post employment benefits on a defined benefit basis through membership in plans sponsored by the Parent Company. The Parent Company owns 100% of the issued and outstanding shares of the Company. The obligation for funding of these plans rests with the Parent Company. The Company is charged appropriate annual service costs for all benefits and remits these amounts to the Parent Company. Comprehensive income Comprehensive income consists of net income and OCI. OCI includes unrealized gains or losses on AFS financial assets, net of amounts reclassified to net income (loss). Future accounting changes Certain new standards, interpretations, amendments and improvements to existing standards were issued by the IASB or International Financial Reporting Interpretations Committee (IFRIC) that are mandatory for annual reporting periods beginning on July 1, 2011 or later periods. The standards that have been impacted and may be applicable to the Company are: IFRS 4 - Insurance Contracts The IASB issued an exposure draft proposing changes to the accounting standard for insurance contracts in July This proposed accounting method for recognizing insurance contracts separates the valuation of insurance liabilities from the assets that they are matched to. Consequently, these proposals could lead to an increase in insurance liabilities on initial adoption and volatility in future results. The Company will continue to measure insurance contract liabilities using CALM until such time when a new IFRS for insurance contract measurement is issued. A final standard is not expected to be implemented before The Company continues to monitor developments in this area. (11)
22 3 Significant accounting policies (continued) IFRS 7 - Financial Instruments: Disclosures An amendment was issued which requires additional disclosures in respect of risk exposures arising from transferred financial assets. This amendment is effective for annual periods beginning on or after July 1, The Company does not expect the amendment to have a significant impact on its financial statements. IFRS 9 - Financial Instruments IFRS 9 was issued in November 2009 and contained requirements for financial assets. This standard addresses classification and measurement of financial assets and replaces the multiple category and measurement models in IAS 39 Financial Instruments: Recognition and Measurement for debt instruments with a new model only having two categories: amortized cost and fair value. IFRS 9 also replaces the models for measuring equity instruments and such instruments are either recognized as FVTPL or at fair value through OCI. Where such equity investments are measured at fair value through OCI that do not clearly represent a return of investment, the dividends are recognized in net income under net investments gains and income; however, other gains and losses associated with such instruments remain in AOCI indefinitely. Requirements for financial liabilities were added in October 2010 which largely carried forward existing requirements in IAS 39, except that fair value changes due to credit risk for liabilities designated at FVTPL would generally be recorded in OCI. The IASB recently issued an amendment to this standard that delays the effective date from accounting periods beginning on or after January 1, 2013 to January 1, The amendment also modifies the relief from restating prior periods. As part of this relief, the IASB published an amendment to IFRS 7 to require additional disclosures on transition from IAS 39 to IFRS 9. The Company continues to monitor developments in this area. IFRS 13 - Fair Value Measurement IFRS 13 defines fair value, sets out a single IFRS framework for measuring fair value and requires disclosures about fair value measurements. IFRS 13 applies to IFRSs that require or permit fair value measurements or disclosures about fair value measurements, except in specified circumstances. IFRS 13 is to be applied for annual periods beginning on or after January 1, Earlier adoption is permitted, however OSFI has indicated that it will not allow early adoption of this standard for federally regulated financial institutions. IAS 1 - Presentation of Financial Statements IAS 1 was amended in 2011 to require profit or loss and OCI to be presented together either as a single statement of comprehensive income or separate income statement and statement of comprehensive income. The amendments also requires presentation of OCI based on whether or not the balance may subsequently be reclassified to net income, with the tax associated with each type of OCI based on whether or not the balance may subsequently be reclassified to net income, with the tax associated with each type of OCI balance to be presented separately. IAS 1 amendments are to be applied for annual periods beginning on or after July 1, (12)
23 3 Significant accounting policies (continued) IAS 12 - Income Taxes IAS 12 was amended to introduce an exception to the general measurement requirements of IAS 12 in respect to investment properties measured at fair value. These new amendments will be effective for the fiscal year beginning on or after January 1, Significant accounting judgements, estimates and assumptions The preparation of financial statements in accordance with IFRS requires management to make judgements, estimates and assumptions that affect reported amounts of assets and liabilities as at the date of the financial statements and the reported amounts of revenue and expenses during the periods covered by the financial statements. 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. Actual results could differ from those estimates. Judgements In the process of applying the Company s accounting policies, management has made the following judgements, aside from those involving estimations and assumptions, which have the most significant effect on the amounts recognized in the financial statements. a) Impairment of AFS financial assets The Company assesses whether an AFS equity instrument is impaired by assessing whether there is a significant or prolonged decline in the fair value below cost. This determination of what is significant or prolonged requires judgement. Had all the declines in fair values below cost been considered significant or prolonged, the Company would have transferred a $705 loss to the statements of operations from OCI at ( $1,359). (13)
24 4 Significant accounting judgements, estimates and assumptions (continued) b) Measurement of income taxes Management exercises judgement in estimating the provision for income taxes. The Company is subject to income tax laws in federal and various provincial jurisdictions where it operates. Various tax laws are potentially subject to different interpretations by the Company and the relevant tax authority. To the extent that the Company s interpretations differ from those of tax authorities or the timing of realization is not as expected, the provision for income taxes may increase or decrease in future periods to reflect actual experience. Significant management judgement is also required to determine the deferred income tax balances. Management is required to determine the amount of deferred income tax assets and liabilities that can be recognized, based on their best estimate of the likely timing that the temporary difference will be realized, and of the likelihood that taxable income will exist in the future. Estimates and assumptions The key estimate and assumption that has a significant risk of causing a material adjustment is the valuation of insurance contract liabilities. The estimation of the ultimate liabilities arising from claims made under insurance contracts is the Company's most critical accounting estimate. There are several sources of uncertainty that need to be considered in the estimate of these liabilities. The liabilities have been determined by the Actuary using CALM, which involves the use of assumptions for such factors as mortality and morbidity rates, future investment yields, future expense levels and rates of withdrawal. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to estimates are recorded in the accounting period in which they are determined. 5 Cash and cash equivalents Cash and cash equivalents presented in the balance sheets and the statements of cash flows consist of the following: Cash $ 6,294 $ 7,455 Cash equivalents 23,987 4,993 Cash and cash equivalents 30,281 12,448 Less: Outstanding cheques, included in trade and other payables (2,915) (2,380) Net cash and cash equivalents $ 27,366 $ 10,068 The carrying amount disclosed above reasonably approximates the fair value at the balance sheet dates. (14)
25 6 Investments and net investment income a) Carrying and fair value of investments The carrying and fair values of the Company s investment portfolio by financial instrument classification are as follows: 2011 Designated as FVTPL Classified as AFS Classified as loans and receivables Total carrying value Total fair value Bonds $ 423,565 $ 95,783 $ - $ 519,348 $ 519,348 Stocks 52,598 21,007-73,605 73,605 Mortgages ,313 14,313 14,770 Policy loans ,708 15,708 15,708 $ 476,163 $ 116,790 $ 30,021 $ 622,974 $ 623, Designated as FVTPL Classified as AFS Classified as loans and receivables Total carrying value Total fair value Bonds $ 382,137 $ 94,740 $ - $ 476,877 $ 476,877 Stocks 47,244 23,262-70,506 70,506 Mortgages ,851 18,851 19,356 Policy loans ,408 15,408 15,408 $ 429,381 $ 118,002 $ 34,259 $ 581,642 $ 582,147 Bonds are comprised of government 48.0% ( %) and corporate 52.0% ( %). Bonds with a quality rating of BBB or higher represent 99.6% ( %) of the portfolio. Bonds rated A or higher constitute 96.0 % ( %) of the portfolio. The fair value of bonds is determined using quoted market bid prices. (15)
26 6 Investments and net investment income (continued) Stocks consist of institutional pooled funds, which include investments in common stock of major Canadian, U.S. and International companies and in Canadian corporate and government bonds. In general, stocks have no fixed maturity date and are not exposed directly to interest rate risk. Dividend yields on these funds range from 2.2% to 3.8% ( % to 3.1%). Stocks are valued at the underlying mutual fund s transactional net asset value per unit at the end of each valuation day. Bid prices are not available for the underlying funds. Mortgages are secured by first recourse on residential properties and 28.5% ( %) of balances are insured. Principal and interest payments are received on a monthly or more frequent basis. There is no provision for impairment loss on mortgages. The Company commences foreclosure proceedings in the event that any mortgage becomes delinquent. The fair value for mortgages is determined by discounting the mortgage cash flows by the Canadian yield curve plus a margin. The carrying value is the outstanding principal balances. Policy loans have interest rates which are set annually. The outstanding balance for policy loans approximates fair value since interest rates are set annually and approximate market rates. Information regarding interest rates and maturity dates is as follows: Interest rates ranging from 2011 Maturity dates ranging from Bonds 1.0% - 9.5% Less than 1 year - 50 years Mortgages 3.0% - 6.8% 6 months - 5 years Policy loans 6.0% - 6.3% - Interest rates ranging from 2010 Maturity dates ranging from Bonds 0.8% % Less than 1 year - 36 years Mortgages 2.9% - 6.8% 6 months - 5 years Policy loans 6.0% - 6.5% - (16)
27 6 Investments and net investment income (continued) b) Fair value hierarchy The Company has categorized its assets measured at fair value into the three-level fair value hierarchy as summarized in the following table, based upon the priority of the inputs to the respective valuation technique as defined in note 3. Level 1 Level 2 Total FVTPL Cash equivalents $ 23,987 $ - $ 23,987 Bonds 62, , ,565 Stocks 52,598-52,598 AFS Cash equivalents Bonds 4,130 91,653 95,783 Stocks 21,007-21,007 Segregated funds net assets 163, , $ 327,779 $ 452,797 $ 780,576 Level 1 Level 2 Total FVTPL Cash equivalents $ - $ 4,993 $ 4,993 Bonds 86, , ,137 Stocks 47,244-47,244 AFS Cash equivalents Bonds 9,338 85,402 94,740 Stocks 23,262-23,262 Segregated funds net assets 167, , $ 334,523 $ 385,695 $ 720,218 The Company has not adjusted the quoted price for any instruments included in Level 2. There are no investments that meet the Level 3 fair value measurement criteria. No investments were transferred between levels in 2011 or (17)
28 6 Investments and net investment income (continued) c) Net investment income Change in fair value of FVTPL financial assets (note 6d) $ 24,481 $ 21,325 Realized gain on sale of AFS financial assets (note 6e) Other net investment income (note 6f) 24,831 22,945 Total $ 50,074 $ 45,236 d) Change in fair value of FVTPL financial assets Bonds $ 30,165 $ 16,569 Stocks (5,684) 4,756 Total $ 24,481 $ 21,325 Net fair value gains on financial assets at FVTPL relate entirely to assets designated to be in this category upon initial recognition. e) Realized gain (loss) on sale of AFS financial assets Bonds $ 762 $ 1,128 Stocks - (162) Total $ 762 $ 966 The Company did not have any write downs for impaired AFS assets in the current year or prior year. Recovery of previously recognized write downs for impaired AFS debt securities in the current and prior years was nil. General provisions made for anticipated future losses of principal and interest on investments are included as a component of insurance contract liabilities and are $8,545 ( $7,157). (18)
29 6 Investments and net investment income (continued) f) Other net investment income Interest income FVTPL bonds $ 15,821 $ 15,384 AFS bonds 4,322 4,308 Mortgages 848 1,137 Policy loans Cash, cash equivalents and other interest income Dividend and distribution income FVTPL stocks 2,368 1,118 AFS stocks Other income ,376 23,564 Investment expenses (529) (525) Interest expense (16) (94) (545) (619) Other net investment income $ 24,831 $ 22,945 g) Securities lending The Company engages in securities lending to generate fee income. Certain securities from its portfolio are loaned to other institutions for short periods. An agreement between the Company and its custodian limits lending activity to approved creditors and specifies suitable types of collateral. The collateral pledged by the borrower exceeds the value of the assets on loan. At, the Company had securities on loan with a fair value of $66,537 backed by collateral with a fair value of $69,175 ( securities on loan with a fair value of $62,014 were backed by collateral with a fair value of $64,188). (19)
30 7 Receivables Insurance receivables Due from policyholders $ 502 $ 466 Due from reinsurers on paid claims 998 1,009 Other receivables 2,046 1,641 Total $ 3,546 $ 3,116 Current $ 3,226 $ 2,914 Non-current Total $ 3,546 $ 3,116 (20)
31 8 Property and equipment 2011 Furniture and equipment Computer hardware Total Cost At January 1 $ 854 $ 6 $ 860 Additions At December Accumulated depreciation At January Depreciation At December Net book value at December 31 $ 612 $ 3 $ Cost At January 1 $ 610 $ - $ 610 Additions At December Accumulated depreciation At January Depreciation At December Net book value at December 31 $ 687 $ 5 $ Intangible assets Intangible assets of $252 were acquired ( nil) but have not yet been put into use and are currently not being amortized. (21)