MANITOBA PUBLIC INSURANCE

Transcription

1 MANITOBA PUBLIC INSURANCE AI.19 Asset and Liability Allocation Report In PUB Order 161/09, the Public Utilities Board ordered MPI submit to the Board for review and approval its proposed asset and liability allocation methodology, in writing by January 31, In response to this order, the Corporation, on January 29, 2010, filed the Policy for Allocation of Assets and the Policy for Allocation of Liabilities. In addition, the Corporation retained Deloitte & Touche LLP (Deloitte) to conduct a study to review the current allocation approach and to provide recommendations to update the methodology. The Deloitte report entitled Asset and Liability Allocation Methodology is attached. The recommendations to this report are still subject to Board of ors approval. The Corporation has analyzed the difference between the proposed Deloitte methodology and the current MPI methodology on the February 28, 2010 Basic balance sheet. Refer to pages 4 to 6 for the differences. The primary differences between the proposed asset and liability allocation methodology and the current methodology that impact Basic are as follows: The allocation of customer time payments accounts receivable (A/R). Currently the allocation is based on direct premiums written for Basic and. The Deloitte report allocates these A/R using direct premiums written (Basic and ) plus Registration Fees and Driver Licence Fees collected. The portion related to Registration Fees and Driver Licence Fees is not allocated to Basic. Page 1

2 AI.19 Asset and Liability Allocation Report The allocation of Service Centre property and equipment for the February 28, 2010 Balance Sheet was based on the January 2009 approved policy. At the time of the policy approval (January 2009), the new service centres were not constructed and therefore not required to be allocated. The January 2010 asset allocation policy was updated to include service centre allocation (based on expense distribution ratio) and is applied effective March 1, The Deloitte report proposes to allocate service centre property & equipment based on the property cost ratio as set out in the Deloitte expense allocation methodology and has applied this to the February 28, 2010 balance sheet. The proposed asset and liability allocation uses allocators determined by the Deloitte expense allocation methodology. The Deloitte expense allocation methodology produces a revised expense distribution ratio, which in turn results in revisions to the asset and liability allocators. These results in changes in allocations to numerous accounts, including impacts to Cityplace building, accounts payable, and employee current and future benefit allocations. Proposed changes in the balance sheet allocations produce an increase in the investment portfolio allocation to Basic, which would revise the investment income allocation. The change in the investment income allocation would be 1.04 %, which would result in a $1.0 M increase on the 2009/10 Basic investment income. Also, the proposed change in the allocation of customer time payments A/R would also impact the allocation of the revenue related to time payments, a reduction of $1.8 M (based on 2009/10 results) in Basic other revenue. Therefore the net income impact of the proposed asset and liability allocation methodology, based on 2009/10, is a reduction of $0.8 M to Basic net income or approximately 0.1% of the Basic rate requirement. Page 2

3 AI.19 Asset and Liability Allocation Report The Corporation also recognizes the Public Utilities Board will review this Expense Allocation Study at the 2011 General Rate Application and may have comments leading to possible changes in the methodology, in so far as it is accepted for rate setting purposes for the 2011/12 rates. Page 3

4 Asset and Liability Allocation Report AI.19 MANITOBA PUBLIC INSURANCE BALANCE SHEET BASIC ACTUAL DELOITTE FEB. 28, FEB. 28, Increase (Decrease) Notes ASSETS $000 $000 $000 Cash and investments 1,894,901 1,917,933 23,032 (5) Due from other insurance companies 9,807 9,807 0 Accounts receivable 242, ,494 (31,066) (1) Prepaid expenses (139) Deferred policy acquisition costs 28,193 28,193 0 Reinsurers' share of unearned premiums 9,019 9,019 0 Reinsurers' share of unpaid claims 41,163 41,163 0 Property and Equipment 109,047 93,771 (15,276) (2) Deferred development costs 30,944 31, Total Assets 2,366,402 2,343,206 (23,196) LIABILITIES Due to other insurance companies 20,219 19,061 (1,158) Accounts payable and accrued liabilities 39,147 31,642 (7,505) (3) Capital Lease Obligation Unearned premiums 368, ,109 (474) Provision for employee current benefits 12,270 11,367 (903) Provision for employee future benefits 177, ,582 (13,077) (4) Provision for unpaid claims: 1,489,170 1,489, ,107,048 2,083,931 (23,117) RETAINED EARNINGS Rate stabilization reserve 224, ,709 0 Immobilizer incentive fund Total retained earnings 224, ,709 0 ACCUMULATED OTHER COMEHENSIVE INCOME 34,645 34,566 (79) Total Liabilities, Retained Earnings and Accumulated Other Comprehensive Income 2,366,402 2,343,206 (23,196) Page 4

5 Asset and Liability Allocation Report AI.19 (1) Accounts Receivable Accounts Receivables Customers time payments Financing receivables from customers who choose time payment options. The current allocation is based on Motor Vehicle and Drivers Premiums Written ratio between Basic and. The Deloitte Study allocation is based on Motor Vehicle and Drivers Premiums Written, Registration Fees and Drivers Licence Fees ratio between Basic and. The amount based on Registration Fees and Drivers Licence Fees will be allocated to. Current Deloitte Feb. 28, 2010 Allocation Allocation Inc.(Decr.) Total 235,601 Basic % % 202, ,732 (28,378) (2) Property and Equipment Service Centres Land, Buildings, Land Improvements The allocation in 2009/10 is based on Claims Incurred ratio between Basic, and SRE Lines of Business (LOB). The allocation in 2010/11 is based on Expense Distribution ratio between Insurance and NonInsurance Category of Business (COB). The Insurance portion is then allocated based on Claims Incurred ratio between the Insurance LOBs. The Deloitte Study allocation is based on the Property Cost Ratio the ratio of annual property operating expenses allocated to the Insurance LOBs and the NonInsurance COB as calculated by the new MPI expense allocation methodology proposed in the Deloitte Cost Allocation Study undertaken in Current Deloitte Feb. 28, 2010 Allocation Allocation Inc.(Decr.) Total 53,494 Basic % % 45,950 37,071 (8,878) Cityplace Land and Building The current allocation is based on Expense Distribution ratio between the Insurance LOBs and NonInsurance COB. The Deloitte Study allocation is based on the Property Cost Ratio the ratio of annual property operating expenses allocated to the Insurance LOBs and the NonInsurance COB as calculated by the new MPI expense allocation methodology proposed in the Deloitte Cost Allocation Study undertaken in Current Deloitte Feb. 28, 2010 Allocation Allocation Inc.(Decr.) Total 68,069 Basic % % 53,312 47,172 (6,141) Page 5

6 Asset and Liability Allocation Report AI.19 (3) Accounts Payable and Accrues Liabilities Accounts Payable Prov. Of MB. Registration Fees The current allocation is based on Motor Vehicle and Drivers Premiums Written ratio between Basic and. The Deloitte Study directly assigns the account to the NonInsurance COB. Current Deloitte Feb. 28, 2010 Allocation Allocation Inc.(Decr.) Total 3,531 Basic % 0.000% 3,007 0 (3,007) Accounts Payable Prov. Of MB. Other The current allocation directly assigns the account to Basic. The Deloitte Study allocation is based on the Expense Distribution Ratio the ratio of operating expenses, claims expenses, regulatory/appeal expenses and loss prevention/ road safety expenses for each Insurance LOB and NonInsurance COB. Current Deloitte Feb. 28, 2010 Allocation Allocation Inc.(Decr.) Total 5,023 Basic % % 5,023 3,539 (1,484) (4) Provision for Employee Future Benefits Provision for Pension and Post Retirement Benefits The current allocation is based on Expense Distribution ratio between the Insurance LOBs and NonInsurance COB. The Deloitte Study allocation is based on the Payroll Ratio the ratio of salary and benefit expenses allocated to the Insurance LOBs and the NonInsurance COB as calculated by the new MPI expense allocation methodology proposed in the Deloitte Cost Allocation Study undertaken in Current Deloitte Feb. 28, 2010 Allocation Allocation Inc.(Decr.) Total 226,834 Basic % % 177, ,582 (13,077) (5) Cash and Investments The corporate deposit bank account, shortterm investments, equities and longterm investments are allocated based on the percentage of investments which must be allocated to each Insurance LOB and NonInsurance COB as determined by the allocations of all other items on the Balance Sheet. Current Deloitte Feb. 28, 2010 Allocation Allocation Inc.(Decr.) Total 2,218,912 Basic % % 1,906,045 1,928,787 22,742 Page 6

7 Asset and liability allocation methodology Manitoba Public Insurance Corporation July 29, 2010

8 Table of contents 1 Introduction Historical context and background Scope and purpose of the report Report overview MPI operations overview Overview Business operations Transfer of driver licensing and vehicle regulation to MPI Overview of accounts Research and practices Introduction Research methodology and process Primary comparators Secondary comparators Conclusion Guiding principles and approach Overview Guiding principles Conceptual approach Assignment vs. allocation Allocator development Allocation methodology Overview Current methodology overview Methodology and approach Account evaluation and assignment (Stage I) Account allocation (Stage II) Summary comments Appendix Deloitte & Touche LLP and affiliated entities. Asset and liability allocation methodology i

9 1 Introduction Since its inception, Manitoba Public Insurance ( MPI ) has operated several lines of business and has applied allocation policies to allocate revenue, expenses, assets and liabilities among the various lines. Through time, and since the basic compulsory line of business ( Basic ) began to have rates reviewed and approved by the Public Utilities Board of Manitoba ( PUB ), the policies have become more formalized. The PUB has always concerned itself with MPI s allocation policies as these policies influence the total net cost base upon which Basic insurance rates are determined. MPI has historically prepared a separate segmented set of financial statements for Basic, employing a formal asset and liability allocation methodology to prepare the segmented balance sheet for Basic and also allocate a portion of the investment pool income to Basic. The segmented Basic financial statements are prepared and audited, in addition to the financial statements prepared for the entire entity, which include all lines of business, and are intended to provide external audit verification that approved allocation policies have been adhered to. In 2004, the Province of Manitoba Division of Driver and Vehicle Licensing ( DVL ) functions were merged into MPI. Subsequent to the merger, MPI has made certain adjustments to its asset and liability allocation methodology to reflect the merger s implications to its balance sheet. Along with a new expense allocation methodology study, the PUB ordered a new asset and liability allocation methodology study also be done. MPI recognized the need for independent professional assistance in conducting a study of their asset and liability allocation methodology and has retained Deloitte & Touche LLP ( Deloitte ) to assist. 1.1 Historical context and background MPI was created in 1971 and from the beginning, Basic insurance was charged to both drivers and vehicle owners, in an integrated manner along with vehicle registration and driver licensing. Said another way, registration and insurance have been inextricably linked on both driver s licences and vehicle registration since From 1971, until the merger in 2004, work effort and responsibility were shared in the following manner: MPI administered vehicle registration and insurance processing, including the vehicle information database and Autopac OnLine ( AOL ), the vehicle registration and insurance online and realtime transaction processing system used by more than 300 insurance brokers across the Province. In 2003/04, Manitobans paid a total of $75.8 million in vehicle registration fees and $627.2 million in Basic and insurance premiums and fees. Manitoba government DVL administered driver s licensing and insurance, including the driver records database and driver s licence transaction processing system, on an older mainframe system used by internal DVL staff, with paperbased services provided by approximately 100 insurance brokers across the Province. In 2003/04, Manitobans paid a total of $14.5 million in driver licensing fees and $33.9 million in Basic driver insurance premiums and fees. In total, from the two systems, the government of Manitoba received $90.2 million and MPI received $661.2 million, respectively. Deloitte & Touche LLP and affiliated entities. Asset and liability allocation methodology 1

10 In 2004, the government merged the operations of the former DVL (which was a division of the Department of Transportation) into MPI. One outcome of the merger was that MPI began receiving $21.0 million in annual funding from the Province of Manitoba ( Manitoba ). These funds were to offset the cost of administering the functions that were merged into MPI and represent the Department of Transportation s budgeted costs for these functions in Effective April 1, 2011 that annual cost reimbursement payment will increase to $28.0M. The Corporation became responsible for the administration of The Drivers and Vehicles Act ( DVA ). The government s stated objectives for the 2004 merger were: Improve customer service; Save costs and become more efficient by reducing overlap and duplication; and Create a new model for meeting the licensing, registration and insurance needs of Manitobans. To that end, MPI has indicated it has closed redundant facilities, decommissioned old singlepurpose computer systems in favour of integrated systems and databases and provided seamless cohesive services to Manitobans. MPI has represented that the result of these efforts has been a complete integration of the four components of driver s licensing and vehicle registration (driver licensing, vehicle registration, driver insurance and vehicle insurance). 1.2 Scope and purpose of the report The objective of Deloitte s mandate is to review the existing asset and liability allocation methodology and potentially develop a new or revised allocation methodology that will apply now and continue to be suitable for application once planned operational and service delivery integration is complete. In particular, MPI requested that we: Review the current asset and liability allocation methodology; Conduct a review of asset and liability allocation practices among other industry participants; Define each asset and liability account or category; Identify and define appropriate allocators; and Prepare a report on our findings and recommendations. This report contains our findings and recommendations regarding the allocation of assets and liabilities between the insurance lines of business and the noninsurance category of business. The allocation of costs was the subject of a separate review undertaken in 2009 and is beyond the scope of this report. 1.3 Report overview The report has been laid out to address each of the requirements of MPI, as outlined above. Our report is structured under the following sections. 2.0 MPI operations overview This section provides an overview of the past, current and anticipated operations of MPI to assist the reader in understanding the operations, cost structure and financial position of MPI as well as the progress it has made with respect to integration and the anticipated final state of operations. 3.0 Research and practices This section provides insight into the operations and practices of the Saskatchewan Auto Fund ( SAF ), which is administered by Saskatchewan Government Insurance Corporation ( SGI ), and the Insurance Company of British Columbia ( ICBC ). It will also examine other authoritative information on industry practices and policies which are relevant to either the insurance industry or regulatory environment. Deloitte & Touche LLP and affiliated entities. Asset and liability allocation methodology 2

11 4.0 Guiding principles and approach This section outlines the guiding principles and approach adopted in the review and development of an asset and liability allocation methodology. 5.0 Allocation methodology This section provides an overview of the existing methodology, outlines the proposed allocation methodology which has been developed as well as summarizes the results of the application of the proposed methodology based on the balance sheet of MPI as at February 28, Appendix The Appendix contains a listing of all MPI s asset and liability accounts organized by balance sheet line item, with a description of each account s content and use as well as the allocator developed for each account. Deloitte & Touche LLP and affiliated entities. Asset and liability allocation methodology 3

12 2 MPI operations overview 2.1 Overview MPI is a Manitoba Crown Corporation which was established and began selling automobile insurance in 1971 under the terms of The Manitoba Public Insurance Corporation Act. MPI was established as the exclusive provider of Basic universal compulsory automobile insurance in Manitoba. MPI provides products and services across Manitoba through approximately 1,800 employees and 325 authorized MPI agents or brokers. MPI also provides other types of auto related insurance in the competitive market space in Manitoba. Prior to 2004 MPI provided insurance products only and responsibility for the licensing of drivers and regulation of motor vehicles resided with DVL. In 2004, MPI and Manitoba entered into an agreement to transfer certain responsibilities of DVL to MPI and Manitoba agreed to compensate MPI annually to administer the driver licensing and vehicle regulation programs formerly undertaken by DVL. Prior to DVL merging with MPI, MPI and DVL had a long history of cooperating in the collection of each other s fees or premiums and the sharing of information. At the time of the merger, MPI had approximately 1,500 employees located in Winnipeg and claim centres across Manitoba and DVL had approximately 300 employees located in Winnipeg and service centres across the Manitoba. Since the merger MPI has actively pursued the integration of the two organizations to: Enhance customer service; Realize on efficiencies by reducing overlap and duplication; and Create a new service delivery model to provide licensing, registration and insurance services to Manitobans. 2.2 Business operations Services provided Currently MPI provides the following services to Manitobans: Basic universal compulsory automobile insurance product which includes Personal Injury Protection Plan ( PIPP ) and all perils coverage. This coverage is mandatory for all Manitoba vehicles and drivers. automobile insurance products which include enhancements to Basic coverage as well as other insurance products for specialty types of vehicles such as snowmobiles and allterrain vehicles. These products are optional and can be purchased from competitors in the marketplace. Special Risk ( SRE ) insurance products which provide insurance coverage for specialized risks such as large commercial truck fleets and garages. These products can also be purchased from competitors in the marketplace. Driver licensing services which include the testing, record keeping and renewal of driver licences for Manitobans. Vehicle regulation services which includes the registration and administration of vehicles in Manitoba and the mandatory vehicle safety program. Deloitte & Touche LLP and affiliated entities. Asset and liability allocation methodology 4

13 Identification card issuing services which ensures that the identity of customers is properly verified and established according to national standards. There are two classes of identity card products, regular identity and enhanced identity. Enhanced identity products include both an enhanced identity card and the enhanced driver licence document which both meet the requirements established by the Western Hemisphere Travel Initiative ( WHTI ) a United States law which sets standards for identity documents acceptable for entry into the United States effective June 1, Required driver licensing and vehicle regulation functions are determined by the Highway Traffic Act and the DVA. The responsibilities of MPI in this regard are referenced in the DVA and in its agreement with Manitoba. For purposes of this report we have categorized the MPI services provided into two (2) categories of business ( COB ); Insurance and Noninsurance. Within each category of business we have further identified 3 lines of business ( LOB ). The Insurance COB includes the following LOBs: Basic coverage; coverage; and SRE coverage. The Noninsurance COB includes the following LOBs: Driver licensing; Vehicle regulation; and Identification services. While three noninsurance LOBs have been identified, development of a methodology for the assignment or allocation of Noninsurance COB assets and liabilities to specific Noninsurance LOBs is beyond the scope of this report and has not been undertaken. Consequently for purposes of this report the Non Insurance lines of business are considered as one NonInsurance COB. Deloitte & Touche LLP and affiliated entities. Asset and liability allocation methodology 5

14 2.2.2 Significant business processes The business activities of MPI include the following significant business processes which include the key steps and functions noted. Business process Key steps Functions involved Insurance operations Insurance underwriting Claims processing Asset/liability management Noninsurance operations Driver licence issuance Vehicle registration Develop coverage options Develop rates Support sales channel Gather insured identity information Prepare and issue policy Collect premiums/registration fees/licensing fees Document claims Confirm coverage Adjust claims Manage claims Pay claims Establish reserves Invest reserves Account and report on reserves Gather driver identity information Test drivers Issue and renew licence/proof of insurance Collect fees and insurance premium Monitor driving record Gather vehicle owner identity information Issue registration documents/proof of insurance Issue licence plate Collect registration fee Product development Pricing Brokers Call Centre Service Centres Accounting Call Centre Claims Centres Service Centres Personal injury claims management Accounting Pricing Investments Accounting Driver testing Service Centres Brokers Driver records Accounting Brokers Vehicle records Accounting Vehicle regulation Monitor licensed inspection facilities Safety standards enforcement Identity card issued Gather identity information Verify identity information Produce identity card Collect fee Brokers Identify verification Accounting While the key business processes have been categorized and described as either insurance or noninsurance, certain of the key steps in both the insurance and noninsurance lines of business are undertaken by the same personnel and, in fact, are often undertaken concurrently. Deloitte & Touche LLP and affiliated entities. Asset and liability allocation methodology 6

15 2.3 Transfer of driver licensing and vehicle regulation to MPI In 2004, the operations of DVL were merged into MPI and MPI became responsible for the administration of The Drivers and Vehicles Act ( DVA ). To offset the cost of administering the driver licensing and vehicle regulation program Manitoba agreed to provide MPI with an annual payment of $21.0M. Effective April 1, 2011 that annual payment will increase to $28.0M. Responsibilities of DVL that were transferred to MPI are: Driver licensing; Vehicle registration; Driver improvement and control; Alcohol and drug program; Vehicle dealers, salespersons and recyclers; Driver training schools and instructors; Vehicle standards and inspection programs; Provincial photo identification card program; Medical records; Driver testing; Driver records and suspension; Research and information services; Maintaining registries; and Record keeping, reporting and information management relating to the services described above. Manitoba will retain responsibility for: Driver licensing standards and policy development, including establishment of driver medical standards and guidelines, driver examination and testing criteria; Vehicle registration standards and policy development, including establishment of vehicle classes; Standards of vehicles and inspections and policy development, including equipment requirements and safety standards, vehicle weights and dimensions on highways; Establishment and waiver of any charges, taxes or other amounts for driver licensing and vehicle registration services; Rules respecting control of traffic, including seatbelt and child restraint requirements and physically disabled person s parking permits; establishing standards of conduct for all users of Manitoba s highways, including drivers, pedestrians, cyclists and operators of horsedrawn vehicles; Social policy initiatives to enhance sustainable transportation, including measures to implement Manitoba s climate change objectives related to reducing the onroad emissions from vehicles; Social policy countermeasure initiatives, including impaired and disqualified driving, prostitutionrelated offences, domestic and family related offences, stalking legislation, etc.; Statutory bodies, including the Licence Suspension Appeal Board, the Medical Review Committee, the Taxicab Board, the Highway Traffic Board and the Motor Transport Board; Motor carrier fitness, including regulation of public service, commercial and other vehicles; and Establishment of driver licence and vehicle registration rates. MPI collects these fees from the customer and forwards those funds to Manitoba. During the course of the year ended February 28, 2010, MPI collected and remitted just over $147.4M Arrangements prior to transfer Prior to the transfer of DVL functions to MPI, MPI and DVL already worked closely with each other in a number of areas. The principal areas of cooperation and information exchange were: Collection of insurance premiums and surcharges with driver licence fees In Manitoba all driver licences carry with them an insurance component. Consequently the annual amount paid for a drivers licence in Manitoba includes at least two components, a driver licence fee and the Basic insurance premium. DVL collected the Basic premiums at time of renewal on behalf of MPI and forwarded those premiums to MPI. MPI did not reimburse DVL for this service. Deloitte & Touche LLP and affiliated entities. Asset and liability allocation methodology 7

16 Registration and collection of registration fees with vehicle insurance sales In Manitoba all motor vehicles must be registered and insured in order to operate them on a public roadway. Virtually all Manitobans with a vehicle must register their vehicle with Manitoba and also purchase Basic insurance from MPI. Vehicle registration classes and registration rates were established by DVL; however MPI completed the registration documentation, issued the licence plate, collected the registration fee on behalf of Manitoba and forwarded registration information and the funds collected to DVL. DVL did not reimburse MPI for this service. Reliance on driver records maintained by DVL The driver records maintained by DVL provided both the court system and the Province with relevant driver information upon which to base decisions regarding the suspension or reinstatement of driver licences. This same information which was compiled and maintained by DVL was also a key input into the driver merit program utilized extensively by MPI to determine registrants eligibility for vehicle insurance discounts and the need for, and extent of, insurance surcharges attached to driver licences. The driver merit program has now been replaced with the Driver Safety Rating program. MPI did not reimburse DVL for this service. Key attributes shared by both MPI and DVL were extensive record keeping requirements and the commonality of their customer base. Each entity maintained its own customer records despite significant overlap in customers and common required customer information such as legal name, address, date of birth, etc. In virtually every case DVL vehicle registrants were also MPI insureds and the vast majority of vehicle registrants and insureds were also vehicle operators who required a driver s licence and insurance. As such these shared attributes represented an area of significant potential to realize efficiencies through the synchronization, integration and maintenance of a single customer database and the delivery of service to customers Post transfer activities Subsequent to the transfer of DVL responsibilities to MPI, MPI began to execute a plan to integrate the accounting, functions and operations of DVL into MPI. Significant changes to date include: Integration of the accounting and financial records of DVL into MPI existing accounting structure and system. Integration of the former DVL support functions such as finance, administration, information technology and research and planning into the MPI operating environment. This integration has resulted in the reduction of FTE positions from the former DVL organization. Integration and synchronization of the driver licensing and insurance core information database records with existing MPI vehicle insurance and registration database records. This was a significant undertaking and required significant efforts as the combination of the previous entity databases produced many duplicate records with variations of names or addresses, etc. Aligning the timing of driver licence and insurance renewal with vehicle registration and insurance renewal for all drivers. Transition of driver licensing functions such as renewal processing, new licence applications, photo taking, etc. to the broker network. Transition of current claims centres into full service centres which provide certain driver testing services to customers such as driver road tests, online access to driver written exam and general customer service. The closing of virtually all current DVL driver testing locations and shifting of driver road test personnel into service centres. Significant integration steps initiated but not yet concluded include: Development of a centralized driver testing appointment computer application which will allow driver testing appointment booking by MPI broker network. Completion of a new driver records system and final decommissioning of the former DVL driver records system still resident on the existing DVL mainframe system. MPI continues to maintain the existing DVL mainframe system for driver records and will continue to so until such time as a new system can be developed with appropriate interfaces for the legal system and police. Deloitte & Touche LLP and affiliated entities. Asset and liability allocation methodology 8

17 The ultimate objective is to shift all routine driver application and renewal processes to the broker network with the MPI service centres providing access to online driver testing as well as road testing services. The alignment of timing of driver and vehicle renewals will facilitate all annual renewals at the same time for individual customers. To support the transition of certain driver licensing transactions to the broker network, MPI has built upon its existing AOL capabilities and network currently utilized by the broker network for the insurance business, developing additional functionality to accommodate the requirements of the driver licensing program. Back office type functions such as the maintenance of driver medical records, driving records and driver control will continue to be performed by MPI personnel. Vehicle registration functions such as registration record keeping and maintenance of the vehicle safety program will continue to be performed by MPI personnel. 2.4 Overview of accounts The insurance industry is considered a service industry. In common with many other service industry organizations the operations of MPI are not particularly capital investment intensive but are people, information and information technology intensive. Capital investment is largely limited to technology infrastructure, furniture and fixtures and physical property required to support and house MPI s service and service support operations. Common to the insurance industry is the requirement to hold significant volumes of investment assets to offset future existing claim obligations as well as to serve to mitigate the potential risks from extraordinary unanticipated events. Consequently a significant component of MPI s assets is investments and a significant component of MPI s liabilities are claims reserves and liabilities Statement of operations While the purpose of this report is focused on the allocation of assets and liabilities, it is useful to review the key revenue and expense components of the statement of operations as they give rise to the nature of the assets and liabilities. The following section provides an overview of the key components of the MPI statement of operations. Revenues Revenues are earned from the following significant sources: Insurance premiums which represents by far the largest source of revenue and includes premiums from the underwriting of insurance coverage from all three lines of business. Service fees and other revenue which includes fees and interest earned from policy premiums and fees which are paid for by the customer over time. Investment income earned from investments which arise primarily from unearned premiums, claims reserves and retained earnings. Expenses The principal categories of expenses incurred by MPI are: Claims incurred represents all payments made by MPI directly to insureds and the cost of goods and services purchased by MPI on behalf an insured arising from a claim made under a policy issued by MPI. Net claims reflect the costs and benefits of any reinsurance programs utilized by MPI to mitigate risks. Premium taxes are taxes paid to Manitoba on premiums collected on insurance policies issued by MPI. Broker commissions are commissions paid by MPI to approximately 325 MPI insurance broker agents located across the Province for selling MPI insurance products and processing vehicle registration and driver licensing transactions on behalf of MPI. Deloitte & Touche LLP and affiliated entities. Asset and liability allocation methodology 9

18 Internal operating expenses incurred by MPI to conduct its business activities, excluding amounts paid to brokers for their services as noted above, including: Salary and benefit expenses which are the compensation costs for all employees of MPI. Benefits include all benefits paid to or incurred on behalf of employees such as CPP, EI, pension costs, medical benefits, retirement allowances, etc.; Physical property expenses which are costs of operating the physical properties located throughout the Province which house the business operations of MPI. Head office and support functions are located in Winnipeg with customer service facilities located in across Winnipeg and the Province; and Out of pocket type costs such as: General office supplies and services such as stationary postage, telephone, travel, etc.; Consulting and professional fees such as actuarial fees, audit fees, research, management consultants; Software and hardware licences and service contracts; Software and systems amortization; Special supplies such as forms and licence plates; and Technology licences, forms, professional fees and other purchased services. MPI also collects driver licensing and vehicle registration fees and remits those to Manitoba. These fees are not considered nor recorded as revenue or an expense of MPI but merely flow through the balance sheet accounts of MPI. The cost of providing DVA services is currently offset by an annual cost reimbursement payment of $21.0M from Manitoba. Effective April 1, 2011 that annual payment will increase to $28.0M. Expenses and investment income must be allocated to Basic insurance for Basic insurance rate establishment and regulatory purposes. MPI has an established methodology to do so. With respect to expenses, a new methodology for allocation of expenses has been developed, based on a study undertaken by Deloitte in 2009, and presented to the PUB. This report presumes that the proposed new expense allocation methodology will be accepted by PUB, except as amended for PUB s directives in its December 2009 Order Balance sheet MPI maintains one integrated set of balance sheet accounts for assets, liabilities and retained earnings which are utilized for all insurance and noninsurance activities. As at February 28, 2010 MPI maintained approximately 260 active balance sheet accounts comprised of: 147 asset accounts 106 liability accounts 7 retained earnings, reserve or fund accounts Certain of these accounts are directly related to a particular LOB where as other accounts reflect activity of two or more LOBs or COBs combined. For financial reporting purposes, accounts of a similar classification (e.g. Accounts Receivable) are grouped together on the balance sheet, regardless of whether they are directly related to a particular LOB or reflect activity of two or more LOBs or COBs. The following table provides a summary of the balance sheet of MPI by balance sheet line item at February 28, 2010, indicating the proportion of each balance sheet line, that, according to MPI s current asset and liability allocation methodology, is directly related to a specific insurance LOB or the Noninsurance COB and the proportion that reflects activity of two or more LOBs or COBs. The not directly related category reflects account balances which are subject to allocation between two or more LOBs or the noninsurance COB. Deloitte & Touche LLP and affiliated entities. Asset and liability allocation methodology 10

19 Balances at February 28, 2010 (amounts in thousands of dollars) Percentage of Total Balance sheet line item ly related Not directly related Total ly related Not directly related Assets Cash and investments 1,063 2,205,388 2,206, % 100.0% Due from other insurance companies 10,656 10, % 0.0% Accounts receivable 7, , , % 97.5% Prepaid expenses % 90.9% Deferred policy acquisition costs 43,143 43, % 0.0% Reinsurers share of unearned premiums 11,853 11, % 0.0% Reinsurers share of unpaid claims 59,489 59, % 0.0% Property and equipment 1, , , % 98.9% Deferred development costs 24,451 10,167 34, % 29.4% 159,390 2,632,161 2,791, % 94.3% Liabilities Due to other insurance companies 11,707 11,679 23, % 49.9% Accounts payable and accrued liabilities 12,971 36,511 49, % 73.8% Unearned premiums 416,929 32, , % 7.3% Provision for employee current benefits 15,666 15, % 100.0% Provision for employee future benefits 226, , % 100.0% Provision for unpaid claims 1,628,528 1,628, % 0.0% 2,070, ,315 2,393, % 13.5% Retained Earnings Rate stabilzation reserve 224, , % 0.0% development fund 48,279 48, % 0.0% Retained earnings 85,389 85, % 0.0% 358, , % 0.0% Accumulated other comprehensive income 39,724 39, % 100.0% 2,428, ,039 2,791, % 13.0% As noted in the table above, only 5.7% of total assets are directly related to a specific insurance LOB or the Noninsurance COB. In contrast 87.0% of all liabilities and retained earnings are directly related to a specific insurance LOB or the Noninsurance COB. Within the assets not directly related and thereby subject to allocation, 83.7% ($2,205,388/$2,632,161) are cash and investment assets. A description of the principal activities and nature of the account balances which comprise each balance sheet line are provided in the Appendix. Deloitte & Touche LLP and affiliated entities. Asset and liability allocation methodology 11

20 3 Research and practices 3.1 Introduction In response to the requirements of MPI and to assist in our review of the asset and liability allocation methodology we conducted research looking for existing acceptable practices already developed and adopted in other similar organizations or jurisdictions. This section reviews the research conducted by Deloitte in examining industry practices and regulatory guidance in the insurance and related industries and assessing their potential applicability to MPI. 3.2 Research methodology and process In conducting research, Deloitte utilized a number of sources at its disposal including internally prepared reports, external research including websites, publicly available information from regulators and other institutions, industry group publications, professional standards and textbooks on the subject matter. Deloitte also contacted certain organizations by telephone. Research efforts on asset and liability allocation practices were separated into two categories: 1. Primary comparators: Research in this category focussed on identifying accepted practices in the automobile insurance industry and regulatory findings from regulators of insurance. Identified entities were the Saskatchewan Auto Fund ( SAF ) and the Insurance Corporation of British Columbia ( ICBC ) as they are Crown owned automobile insurance entities that are subject to rate regulation. Analysis and findings for each of these organizations will be reviewed in greater detail below. 2. Secondary comparators: This category involved research into the asset and liability allocation methodologies employed in other industries and regulatory findings from their regulators. Our research examined information from insurance industry associations, review panels and companies subject to review panels. While the research in relation to these organizations has not been produced in detail in this report, should information obtained from this research have assisted in forming the recommendations made it will be referred to as necessary and appropriate in subsequent sections. 3.3 Primary comparators Other than SAF and ICBC, in the course of our research we did not identify any other organizations or situations similar to MPI. That is we did not identify any other rate regulated mandatory automobile insurance provided in a legislated monopoly environment. A significant number of Canadian and US jurisdictions were identified where automobile insurance rate regulation took place, however these were all jurisdictions where automobile insurance was provided in a competitive environment and the regulator appeared to review the competitors rates for reasonableness. For these jurisdictions, we were unable to determine the level of due diligence conducted by these regulators in their review process and there was no published information on any specific findings. While we did not identify any public automobile insurance companies that are directly comparable in all aspects to MPI, both SAF and ICBC possess similar business and operational characteristics. The following sections will provide an overview of the MPI, SAF and ICBC product offerings and operating environments to understand the similarities and differences between them before examining asset and liability allocation approaches adopted. Deloitte & Touche LLP and affiliated entities. Asset and liability allocation methodology 12

21 3.3.1 Manitoba Public Insurance MPI offers insurance products and coverage organized in three lines of business. 1. Basic insurance: In Manitoba, all motor vehicle owners are required to purchase Basic insurance. This line of business offers three general types of coverage: a. Personal injury coverage: Provided through the PIPP, this includes protection against personal bodily injury, loss of life and loss of income. All Manitoba residents injured in automobile accidents in Canada or the United States are protected under PIPP. b. All Perils collision coverage: This includes protection against damage that occurs to an insured s vehicle as a result of an insured peril. This category is termed All Perils as it provides comprehensive coverage of possible accidents such as collisions, upsets, hail, fire and vandalism. Basic insurance provides protection of the actual cash value of the vehicle (fair market value) at the time of the accident (up to a maximum vehicle value of $50,000). c. Third party liability coverage: This pertains to protection from claims brought against an insured for injuries or death caused to another person or damage to another s vehicle or property through the use of the insured s vehicle. Basic insurance includes third party liability coverage for claims up to a maximum of $200,000. Purchasers of MPI s Basic insurance for passenger vehicles are covered with a deductible of $500. However, Basic insurance does provide for reduced deductible levels for certain types of claims. For example, if an insured s vehicle is stolen despite having used an approved antitheft device, the required deductible is reduced by 50% (due to the use of the antitheft measure). Extended insurance coverage options are also offered by MPI. These options can be divided into two lines of business or divisions: 2. insurance: This line of business offers products that are largely comprised of additional coverage or modifications to the Basic insurance product. This can include: a. Reducing deductible levels b. Extending third party liability coverage c. Extending the maximum vehicle value protected in excess of the $50,000 level covered by Basic insurance d. Loss of use protection enabling the rental of a replacement vehicle during the period in which the insured s vehicle cannot be or is unsafe to be driven e. New and leased vehicle coverage which provides protection during the first 12 to 24 months of owning or leasing a new or nearly new vehicle to ensure that losses on the investment are minimized in the case of a writeoff f. Layup coverage which (unlike the above options) actually reduces the protection offered by the Basic insurance to address the reduced risk profile for vehicles that will be stored for a prolonged period of time Rental car insurance is another insurance product but is not a modification of an existing Basic insurance contract. Instead, this insurance option provides the same types of protection options available as discussed above. This MPI product is offered in competition with insurance offered through rental car companies themselves. 3. Special Risk (SRE): This line of business offers products for vehicles which are not eligible for either All Perils insurance or insurance products discussed above. Such vehicles may include large commercial trucks, public service vehicles, semitrailers, and fire department vehicles. This category also captures the more customdesigned insurance plans offered by MPI in direct competition with private insurers. This can include the more unusual optional extensions desired for owners of passenger vehicles such as income replacement coverage (for individuals earning more than $76,000 per year), and sound equipment coverage (for aftermarket sound and communication equipment permanently installed in the insured s vehicle). Deloitte & Touche LLP and affiliated entities. Asset and liability allocation methodology 13

22 3.3.2 Saskatchewan Auto Fund Company overview SAF is a fund managed and administered by Saskatchewan General Insurance Company ( SGI ). SGI also manages SGI Canada Insurance Services, Coachman Insurance Company and the Insurance Company of Prince Edward Island. The ultimate parent of SGI is the Crown Investments Corporation of Saskatchewan. SGI is a fully competitive insurance company selling a broad range of property and casualty insurance products that vastly exceed those available through MPI. SGI s products include home, farm, and business insurance and extended automobile coverage. SGI Canada currently operates in Saskatchewan, Alberta, Manitoba, Ontario, Prince Edward Island, Nova Scotia and New Brunswick. SAF is a fund of the Province of Saskatchewan and as such its financial results are not reported in the consolidated financial statements of SGI. It should be noted that while it is a fund of the Province, it does not receive any money from or pay any dividends to the Province. Products and services Similar to MPI s position in Manitoba, SAF is the sole provider of compulsory universal vehicle insurance required of all Saskatchewan automobile owners. SAF s mandate for this is provided by the Automobile Accident Insurance Act. Consistent with the Manitoba experience, due to its monopoly position in this product line, SAF is regulated by the Saskatchewan Rate Review Panel with respect to the rates that it can charge for this basic level of insurance. SAF s compulsory insurance product is referred to as Licence Plate Insurance ( LPI ) and is very similar to the Basic insurance offered by MPI. LPI provides an insured with the following: 1. Personal injury coverage: This covers injuries sustained by the insured as a result of a vehicle crash. LPI differs from MPI s Basic insurance in this coverage area in that Saskatchewan purchasers have the ability to elect between No Fault Coverage and Tort Coverage. The former is consistent with the MPI personal injury insurance coverage (i.e. comprehensive benefits are received by an insured who is injured as a result of a collision regardless of fault) while the latter provides a basic level of benefits and then allows the injured party to sue for additional expenses as well as pain and suffering. 2. Core collision coverage: This protects the insured against damage to his or her vehicle, subject to the required deductible (LPI carries a deductible of $700). 3. Third party liability insurance: This protects the insured against claims made by those who have been injured or whose vehicle or property may have been damaged through the use of the insured s automobile. The maximum claim insured by LPI for a single accident is $200,000. SAF s operations also extend beyond insurance products. SAF is responsible for driver licensing and vehicle registration, and also administers safety initiatives aimed at keeping customers safe. SAF is not permitted to compete in the market of optional or supplemental insurance products. Such extended coverage is offered by SGI. Summary of financial allocation process SGI operates each of its insurance operations in a separate fund or subsidiary. Consequently, there is no allocation of assets or liabilities between the different insurance operations as discrete balance sheets are maintained for each operation. SGI s 2009 annual report has standalone financial statements for the overall SGI operations, and merely discloses segmented financial information including Total Assets and Shareholder s Equity by province or group of provinces. That information is derived from individual entity balance sheets and does not include the SAF. Deloitte & Touche LLP and affiliated entities. Asset and liability allocation methodology 14

23 SAF s 2009 annual report provides standalone financial statements that are audited, however as noted above there is no allocation of assets or liabilities that occurs between SAF and other businesses managed by SGI. As there was no allocation of assets or liabilities identified at either the SAF or SGI level, no information was identified in Saskatchewan regulatory proceedings regarding the allocation of assets and liabilities Insurance Company of British Columbia Business overview ICBC is a provincial crown corporation established in 1973 in accordance with the Insurance Corporation Act. While ICBC originally served as the sole provider of all automobile insurance in British Columbia, subsequent changes in legislation facilitated competition in the market for optional insurance products beyond the legislative minimum requirements. Accordingly the monopolycompetitive balance faced by ICBC is similar to that faced by MPI in Manitoba. ICBC is the one of the largest corporations in the Province of BC and one of the largest property and casualty insurers in the country. It operates exclusively in BC through a vast network of independent brokers (~900) and claim centres (~39) in addition to having an online presence and call centre. Products and services The universal automobile insurance offered by ICBC is the minimum level of insurance which vehicle owners in the Province of BC are required to carry. The rates charged by ICBC for this mandatory coverage are reviewed by the British Columbia Utilities Corporation ( BCUC ). While these characteristics of the BC insurance scheme appear consistent with the practices in Manitoba and Saskatchewan, it must be noted that there is a significant difference between the contents of mandatory minimum insurance coverage provided by ICBC compared to that provided by SAF and MPI. Basic insurance in BC includes the following coverage components: 1. Third Party Legal Liability: This coverage is similar to that provided by SAF and MPI. When an insured s vehicle has been involved in an accident, this component of basic insurance provides protection against claims brought by the other motorist for injuries and property damages sustained. Basic insurance provides coverage up to a maximum claim amount of $200, Accident Benefits: This component provides coverage for the costs of medical care and rehabilitation, replacement of lost income (up to $300 per week), and funeral expenses and death benefits for surviving spouse and/or dependants. This coverage is extended to the vehicle owner, his or her household members, passengers in licensed and insured vehicles, as well as any pedestrians or cyclists who may have been involved in the accident. This protection is available regardless of the person who is found to be at fault. This component of basic insurance is similar in coverage to that provided by SAF s Person Injury Tort Coverage Package but with lower levels of financial support. ICBC s approach to accident benefits is based on a full tort system in which the injured party is permitted to sue the party atfault for the full amount of the damage sustained. As acknowledged by ICBC in its annual report, this approach is different from the insurance schemes in all other provinces in Canada which are based on either a nofault or mixed nofault/tort program, and [t]hese differences make interprovincial comparisons difficult since the products, services and cost structures of each are unique. 1 1 ICBC 2007 Annual Report on Page 12 Deloitte & Touche LLP and affiliated entities. Asset and liability allocation methodology 15

24 3. Underinsured Motorist Protection: This covers the insured who is involved in an accident from the risk that the party atfault does not have adequate insurance to satisfy the insured s claims. Basic insurance provides protection for the first $1 million in excess of the atfault party s coverage. 4. Protection against HitandRun and Uninsured Motorists: This component protects every resident of BC regardless of whether he or she owns or insures a vehicle. Residents are entitled to a maximum claim of $200,000 for damage (excluding vehicle damage), injury, or death as a result of a hitandrun or accident caused by an uninsured motorist. 5. Inverse Liability Coverage: This aspect of ICBC s basic package enables an insured to collect for damages and injuries sustained as a result of an accident in another jurisdiction where that jurisdiction does not permit legal claims to be made against the party at fault. Coverage is limited to the proportion of the claim for which the insured was not atfault. While some of the above components of ICBC s basic insurance product provide coverage for vehicle damage as a result of a collision (e.g. Inverse Liability Coverage), the most significant difference between MPI s Basic insurance and that provided by ICBC is that comprehensive and collision coverage is not part of ICBC s mandatory basic coverage, but is optional insurance coverage offered by ICBC in BC. ICBC offers optional comprehensive and collision coverage, in addition to the same types of optional vehicle insurance products offered by MPI as discussed earlier. Similar to the situation in Manitoba, ICBC s optional product offerings compete against those available through private insurance companies and are not subject the public rate review. ICBC is also engaged in noninsurance activities including driver licensing, vehicle licensing and registration, and fines collection as well as road safety and loss management programs to reduce automobile accidents, crime, and fraud. Unlike MPI, ICBC s driver licensing operations are physically separated from the remainder of the business operations and the operating costs are funded by basic insurance premiums. Summary of financial allocation process ICBC is required to allocate its investment assets between its basic and competitive lines of business, however this allocation process is relatively simplistic and does not include the allocation of other assets and liabilities. Information regarding ICBC s investment allocation methodology is provided in its annual report and ICBC personnel were available to discuss its allocation approach. The ICBC approach is as follows: ICBC assigns unearned premiums, unpaid claims and retained earnings to their respective lines of business. ICBC then allocates its investments, and related investment income, on a pro rata basis using the ratio developed by the unearned premiums, unpaid claims and retained earnings, however they do not prepare detailed balance sheets for each line of business. ICBC does disclose the unearned premiums, unpaid claims and retained earnings by line of business in its annual report, however they do not disclose the remainder of the assets or liabilities. ICBC initially filed this allocation methodology with the BCUC in August 2003 and has utilized it since that time. The need to prepare a complete balance sheet for each line of business has not been identified nor has the BCUC expressed an interest in being provided with such. Deloitte & Touche LLP and affiliated entities. Asset and liability allocation methodology 16

25 3.3.4 Summary comparison table The following table illustrates the insurance offerings, noninsurance activities, and other characteristics of primary comparators and MPI: Category Saskatchewan Auto Fund Insurance Corporation of British Columbia Manitoba Public Insurance Insurance offerings Personal Injury Included in required basic insurance coverage No fault or tort options. Included in required basic insurance coverage full tort add on. Included in required Basic insurance coverage No fault. Third Party Liability Included in required basic insurance coverage. Included in required basic insurance coverage. Included in required Basic insurance coverage. Core Collision Included in required basic insurance coverage. Not included in required basic insurance coverage. Options available through competitive lines of business. Included in required Basic insurance coverage. Extended Coverage Options Offered No; offered by SAF administrator, SGI. Yes; available through competitive lines of business. Yes; available through competitive lines of business. Other insurance products offered SAF: None. SGI: Wide range of property and casualty insurance products. None. None. Noninsurance activities Responsibility for driver and vehicle licensing and registration Administers driver licensing and vehicle registration. Administers driver licensing and vehicle registration. Administers driver licensing and vehicle registration. Funding for DVL Operations Provided by basic insurance rate revenue. Provided by basic insurance rate revenue. Province of Manitoba provides annual funding of $21.0M. Costs in excess of this amount are funded by the LOB. Other significant activities Driver and road safety programs. Road safety and loss management programs. Driver and road safety programs. Other characteristics Geographic area serviced SAF: Saskatchewan SGI: SK, AB, MB, ON, PEI, NS, and NB British Columbia Manitoba Regulatory Oversight Saskatchewan Rate Review Panel British Columbia Utilities Commission Manitoba Public Utilities Board Legal Structure Fund of the Province of Saskatchewan Provincial Crown Corporation Provincial Crown Corporation Integration of Operations Separate locations for claims centres and driver examination offices. Degree of system integration unknown. Driver licensing operations are physically separate from the remainder of the business (separate locations, systems, and staffing). Integrating all lines of business including physical locations, employee tasks, information system applications, data warehousing, etc. As noted from the analysis above, SAF and ICBC are both regulated entities providing basic mandatory vehicle insurance in a monopolistic environment however neither entity undertakes an allocation process to produce a separate balance sheet for its basic line of insurance business. Deloitte & Touche LLP and affiliated entities. Asset and liability allocation methodology 17

26 3.4 Secondary comparators A search was conducted for professional guidance or publicly available information on asset and liability allocation methodologies from industry groups, other regulators and rate regulated entities Professional guidance Professional accounting standards applicable in Canada were reviewed to determine whether any relevant guidance was provided with respect to the allocation of assets and liabilities for reporting purposes. Professional standards reviewed were: International Financial Reporting Standards ( IFRS ) Canadian Institute of Chartered Accountants ( CICA ) Handbook While neither standard directly addressed the issue of allocation of assets and liabilities, each standard provided related guidance as follows: IFRS requires that allocation of assets, if required, in an asset impairment test should be on a reasonable and consistent basis. Both IFRS and the CICA Handbook reference the allocation of expenses and assets in segmented reporting and address the issue of symmetry. Symmetry refers to when an expense and the related asset are both allocated to a segment for reporting purposes. Asymmetry refers to when an expense is allocated to a segment for reporting purposes but the related asset is not. When segment reporting is asymmetric, that information requires disclosure. Both standards are silent on the basis of allocation. While neither standard provides direct guidance on allocation, the concepts of reasonable and consistent are encouraged as well as the concept of symmetry between expense and asset allocation Industry associations Industry associations considered included: Insurance Bureau of Canada ( IBC ) National Association of Insurance Commissioners (US) ( NAIC ) IBC indicated to us that they do not provide any guidance on asset and liability allocation to the industry. NAIC provided no specific guidance with respect to the allocation of assets and liabilities Review panels Our research considered information available on the websites of the following provincial review panels: Manitoba Public Utilities Board Alberta Utilities Commission Alberta Rate Review Board Saskatchewan Rate Review Panel Financial Services Commission of Ontario Ontario Energy Board Island Regulatory and Appeals Commission (PEI) Yukon Utilities Board A review of information available from review panels did not uncover or reference any standard or universal asset and liability allocation methodology. Rather the review panels rulings would evaluate submissions for consistency with previously approved filings for the same entity. Deloitte & Touche LLP and affiliated entities. Asset and liability allocation methodology 18

27 3.4.4 Companies subject to review panels A search and review of information that was publicly available from various companies, primarily energy companies, that are subject to review panels was conducted. With the exception of one particular filing with Alberta Utilities Commission, references to the allocation of assets pertained to the allocation of investment assets within an investment portfolio. No references to the allocation of liabilities were identified. The Alberta Utilities Commission findings pertained to the reorganization of two privately held gas distribution and consumer supply entities and the requirement for the potential allocation of assets and liabilities was in the preparation of a beginning balance sheet for the reorganized entities. Findings indicated acceptance of an account by account approach either by direct assignment, if appropriate, or allocation based on ratios or percentages. The approach also included the designation of a short term investment/borrowing account as a balancing account containing an amount determined by allocations of all other items on the balance sheet. While not identified through our research, we also made specific enquiries with Manitoba Hydro regarding its approach to any allocation of assets and liabilities. While Manitoba Hydro has two distinct lines of business, electric and gas, our findings indicate that there is no allocation of assets or liabilities allocated between the lines of business; rather each line of business is accounted for as a separate entity with its own general ledger. Any assets that are jointly used are minimal, kept on the balance sheet for the electricity line of business and a charge levied for use of the asset (e.g. information technology). Manitoba Hydro does disclose total assets and liabilities for both of its lines of business in its annual report. 3.5 Conclusion Based on our research and analysis of publicly available information related to primary and secondary comparators we note the following: Primary comparators As primary comparators both SAF and ICBC are similar in that they offer mandatory insurance to the citizens of their respective provinces. However, there are significant differences in the basic mandatory insurance offered by these comparators and the fact that driver and vehicle licensing function is considered part of their basic insurance lines of business. SAF has no requirement to allocate its assets and liabilities to specific lines of business as the entire fund relates to the basic line of business. The balance sheet of SAF represents the balance sheet of its basic insurance. ICBC does not prepare a segmented balance sheet for its basic line of business. ICBC does pool its investments related to all lines of business, so allocation of that pool is required to allocate investment income. For this purpose ICBC calculates an allocator for the investment pool based on the combined ratio of the three primary balance sheet accounts which give rise to the investments which are unearned premiums, unpaid claims and retained earnings. Each of these three accounts is directly assignable to a line of business. ICBC has utilized this methodology since its initial filing of the policy in Secondary comparators We investigated the existence of industry standard methodologies or allocators through the research of industry associations and the publicly available information related to regulated industries. Professional standards provided some general guidance with respect to the allocation of assets and expenses; however, no specific guidance was found. Findings from research of other regulated entities in other jurisdictions did identify one specific instance of asset and liability allocation which was subjected to the review of a regulator. In that case, a line by line approach to the assets and liabilities, either assigning amounts or utilizing various allocators relevant to each line, with one line designated as a balancing account was an accepted approach. Deloitte & Touche LLP and affiliated entities. Asset and liability allocation methodology 19

28 3.5.3 Summary In summary, we found little direct information or guidance through our research of primary and secondary comparators which would assist in the development of the MPI asset and liability allocation methodology. The allocation approach selected for MPI is consistent with that accepted by the regulator in Alberta. Deloitte & Touche LLP and affiliated entities. Asset and liability allocation methodology 20

29 4 Guiding principles and approach 4.1 Overview Prior to our detailed review of the MPI asset/liability allocation methodology certain guiding principles were identified and established to guide our work. These guiding principles were developed based on our research, previous cost allocation study and any established professional, academic or regulatory guidance or principles. An overall approach was also developed to guide the development of any new or revised methodology. This section sets out the guiding principles and approach adopted in our review and development of the asset and liability allocation methodology. 4.2 Guiding principles While our research indicated that there is no universally accepted standard allocation methodology, research did indicate that most allocation policies and methodologies were based on certain guiding principles. In developing this allocation methodology we adopted the following overall guiding principles and attributes: Fair and reasonable Practical and efficient Flexible and adaptable for future Acceptable in a regulatory context Consistent with any industry standards Symmetric Fair and reasonable Fair and reasonable is a key objective of a methodology in that the final result produced by adoption of the methodology will produce a result which fairly reflects the assets utilized and liabilities created in providing a specific service and that the result is reasonable. While it is recognized that the concepts of fair and reasonable may be somewhat vague and in that what is fair or reasonable may be subject to opinion, this principle was none the less a key guiding principle in the development of a methodology Practical and efficient Practical and efficient were also key guiding principles. Practical means that the methodology is suited to the business environment for which it is being developed, can be applied with relative ease and can be readily understood by those examining it. The principle of efficiency focuses on striking a balance between complexity and accuracy. The principle of efficiency suggested that the methodology should be as simple as possible to adopt, implement and maintain without sacrificing a sufficient level of complexity that may be required to arrive at an accurate result Flexible and adaptable The methodology should be flexible and adaptable to changing conditions and operations. Many changes have taken place at MPI in recent years and changes will continue to occur as integration activities continue. The methodology developed should be flexible and be able to adapt to the ongoing changes in operations, business processes and models. The methodology should be developed at a sufficiently conceptual level so that business and process changes can be incorporated without creating a need to develop a new methodology. Deloitte & Touche LLP and affiliated entities. Asset and liability allocation methodology 21

30 4.2.4 Acceptable in a regulatory context The methodology should be acceptable in a regulatory context. Asset and liability allocation methodologies are developed and implemented within organizations, often driven by the requirement to assess financial performance of a business segment or management performance within an organization. In these situations the degree of precision for the methodology is often less rigorous. Asset and liability allocation in a regulatory context generally requires a greater level of rigour in both development and design as the results of the methodology have a potential effect on a much larger group of people and those people generally include the average consumer Consistent with industry standards The methodology should be consistent with any published or generally accepted industry standards or practices. Section 3 of this report outlines any industry guidance and common practices identified Symmetric Many asset and liabilities are created by or directly related to specific types of revenue and expenses. While the concept of symmetry in published professional guidance refers to the allocation of an expense and related asset or liability in segmented reporting, the concept of symmetry can be extended to the development of allocators for an expense and related assets or liabilities. For example, when a specific expense item creates a specific liability, it is reasonable to expect that an appropriate allocator for the liability should be consistent with the allocator for the related expense item. 4.3 Conceptual approach Key to development of an allocation asset and liability methodology is understanding the nature of the operations, key revenues and expenses, and operational and organizational changes that have occurred over time. Based on our discussions with management regarding its operations, recent changes and future plans, we considered options as to the conceptual approach to an allocation methodology. Two options considered were an incremental approach and the prorata full cost approach Incremental approach The incremental approach advocates that the asset and liability amounts when adding a new service offering to existing service offerings should be confined to only those incremental asset and liability amounts required by the new service and that no asset or liability which existed prior to the addition should be attributable to the new business segment but should remain with the existing service offering. In the case of an incremental approach any capital efficiencies gained from combining two business segments are realized by the new segment being added. A simple example might be the cost of a building utilized in the provision of a service. The addition of a new service which requires a renovation to an existing building will not have any effect on the cost of the original building so there would be no incremental cost of the existing building which would attribute to the new service. Only the cost of the renovation would be attributed to the new service. Concurrently the cost of operating the building may increase due to the renovation. In this case only the additional or incremental cost between the pre and post new service date operating costs would be considered a cost of the new service. The entire pre renovation cost of utilities would continue to remain a cost of the existing service. The incremental approach can be particularly appropriate in situations where relatively small new business segments are added to a large already established business segment and the two businesses share many of the same attributes. What gave rise to consideration of this approach is that the transfer of certain DVL responsibilities to MPI was a situation which mirrored in many respects an incremental cost situation. The pre 2004 scope of DVL operations was relatively small in comparison to MPI s and MPI already had a significant amount of the assets and liabilities required to provide the DVL services. Deloitte & Touche LLP and affiliated entities. Asset and liability allocation methodology 22

31 Identified advantages of the incremental approach were: It leaves the insurance business and its assets and liabilities as it was and recognizes that the synergies achieved through integration reduce the asset and liability requirements of DVL services It is consistent with management s view of operations, which has been to minimize the incremental effects associated with providing DVL services Identified disadvantages of the incremental approach were: Significant changes since the transfer of DVL responsibilities would create challenges in measuring the initial asset and liability base and then preserving that asset and liability base over time The approach may accurately reflect the current situation however, it may not stand the test of time as a result of ongoing changes in the business The asset and liability allocation would not be based on the current activity of business lines The calculations required to adopt this approach would be quite complex There was no support for this allocation approach in the research that we undertook of the regulatory environment Prorata full cost approach The prorata full cost approach advocates that the full amounts of assets and liabilities that are shared between two services should be allocated between those two services on some prorata basis. Prorata means in proportion and the proportions are determined on some basis which is often called an allocator or allocation basis. In the case of a prorata approach any capital efficiencies gained from combining two business segments are shared by both the new and existing business segment. The full cost prorata approach is widely used in allocation methodologies. Identified advantages of the prorata approach are: It reflects MPI s go forward integrated business The allocation of assets and liabilities is based on activity/causation This approach would be adaptable into the future to respond to changes in MPI s business This approach is widely accepted in the regulatory environment Identified disadvantages of the prorata approach were: The assets and liabilities allocated to Insurance operations would be reduced as a result of certain shared assets and liabilities now being allocated to DVL while the quantum of insurance provided to Manitobans has not changed This methodology has the potential to become overly complicated Approach adopted Upon consideration of both approaches, and weighing the advantages and disadvantages of each, we would advocate the prorata approach in the development of the allocation methodology. The incremental approach was abandoned in large part due to the difficulties in developing a baseline and in sustaining an incremental approach over the years. In addition, the prorata approach was already adopted in the expense allocation methodology and the concept of symmetry would suggest that the same approach should be adopted for asset and liability allocation. In doing so, we recognized that while, conceptually, the incremental approach is highly aligned with management s strategy for the integration of its historical insurance operations and the DVL operations it assumed in 2004, it would not be practical for the reasons identified. In selecting the prorata approach, we have also selected the approach that is used by ICBC, as described in Section Deloitte & Touche LLP and affiliated entities. Asset and liability allocation methodology 23

32 4.4 Assignment vs. allocation As we followed these principles, it was beneficial to consider asset and liabilities as being one of two possible types. Asset and liabilities can be viewed as either directly assignable or requiring allocation Assignment An asset or liability which is directly assignable is one which contains amounts or activity specific to one line of business. For example, the commission entitlement of a broker for the underwriting of a policy in a specific insurance LOB represents a direct cost of that specific insurance LOB and until actually paid out, represents a liability than can be directly related to that insurance LOB. That liability can be assigned directly to that line of business and no allocation is required Allocation An asset and liability requiring allocation is one which contains amounts or activity related to two or more LOBs. For example, the cost of a building such as a service centre, which is utilized to provide services in two or more lines of business is an asset held for the benefit and use of each of those lines of business. In this case, the value of the building asset must be allocated to those two or more LOBs utilizing an appropriate allocator. 4.5 Allocator development Causality In developing the asset and liability allocation methodology we adopted the principal of causality. The principles of causality is that, to the extent possible, assets and liabilities should be assigned or allocated on the basis of causality; i.e. assets and liabilities should be assigned or allocated to the LOB or COB that created the asset or liability, at least to the extent that a causal relationship can be established. Causality also implies that the selected allocators need to be closely associated with the activity or factors that drive the amount of the asset or liability Allocator types Based on our experience many different allocators and types of allocators are in use in organizations that utilize allocation of balances for various purposes within their organization. While what an appropriate allocator would be is generally situation specific, there are certain common approaches particular to the allocation of assets and liabilities which include: Ratios ratios can be developed with operating statistics, cost pools or groupings of costs, FTEs, salary costs, etc. These are commonly used allocators as they are generally easy to develop, calculate and apply on an ongoing basis. They often rely on existing operating or financial data and are expressed as a relationship between numbers in the underlying data. Percentages similar to ratios these can be developed utilizing operating statistics, costs, cost groupings, FTE s, salaries, customer statistics, etc. These are commonly used allocators as they are generally easy to develop, calculate and apply on an ongoing basis. They often rely on existing operating or financial data and are expressed as a percentage of the whole. Deloitte & Touche LLP and affiliated entities. Asset and liability allocation methodology 24

33 5 Allocation methodology 5.1 Overview In developing an overall approach to the review of MPI s asset and liability allocation methodology we first considered the nature of MPI s core business. Even though MPI has in recent years become a provider of other services, MPI is at its core a provider of compulsory automobile insurance products to Manitobans. Other services provided are complimentary in that they leverage existing MPI customer records and customer points of contact. As an insurance company, the nature of MPI s business is that it is information and people intensive. Information is a cornerstone of an insurance operation as the collection and maintenance of information is a key component in development of product offerings, policy rates, processing of claims and management of claims. Equally important are the people who design the products, underwrite the policies, adjudicate the claims, manage the settlements and case manage injury rehabilitation. From a financial position perspective, consistent with the nature of the insurance industry, the largest component of MPI s assets are investment assets. These assets fund the largest components of MPI s liabilities, unearned premiums and claims reserves, as well as accumulated retained earnings. A differentiating aspect of MPI is that it performs services on behalf of Manitoba in the administration of driver licensing and motor vehicle registration. MPI also collects the fees related to driver licensing and vehicle registration, however amounts collected are not considered revenues of MPI, nor are the amounts remitted to Manitoba considered expenses. Consequently, when examining the financial structure of MPI and reviewing its asset and liability allocation methodology we continued to revisit the relationship between the nature of a service and the quantum of assets and liabilities required to deliver that service. 5.2 Current methodology overview We began our work with a review of the existing MPI asset and liability allocation methodology. MPI currently has in place a defined approach, methodology and allocators for the allocation of assets and liabilities. This current methodology had been in place since prior to the merger with DVL. While the approach and methodology had not been changed since the merger, a number of the allocators applied to various accounts requiring allocation have been changed, first to reflect the merger of DVL account balances into the existing MPI general ledger ( GL ) and secondly to reflect changes in account content as operations and accounting processes have changed. MPI s current allocation methodology is based on the prorata approach where accounts requiring allocation are allocated on a prorata basis between the LOBs and COB reflected in the account activity or balance. The methodology is to address each asset and liability GL account separately, first determining whether the account is directly related to a specific LOB or the Noninsurance COB, and if so assigning the account to that LOB or COB. Included in this first step is the assignment of retained earnings accounts to their respective LOB or COB. These accounts can be assigned as they are each directly related to a LOB or COB and determined annually by adding the current year s operating surplus or deficit to the prior years ending balance by LOB or COB. Secondly, the remaining accounts require allocation and MPI has adopted a series of allocators based on GL and other system reporting data which are to be applied to specific accounts. The designated allocator is then applied to the appropriate remaining account balances resulting in an allocation of each of those Deloitte & Touche LLP and affiliated entities. Asset and liability allocation methodology 25

34 accounts between two or more LOBs or COB. Of the nonassignable accounts, certain cash accounts, accounts receivable accounts relating to investments, all investment accounts and accumulated other comprehensive income are not allocated based on a predetermined allocator. These accounts are left until last, combined together and then allocated on a basis so that each of the individual insurance LOBs and the Noninsurance COB balance sheets balance. These accounts essentially become a balancing account, in the balance sheet of each insurance LOB and the noninsurance COB. Our review was not limited to the approach and methodology current in place at MPI, but also included a review of each asset and liability account to determine the reason for its existence, the nature of the activity in the account in the past year and the appropriateness of its grouping for financial reporting purposes. We also reviewed each allocator currently utilized to determine the appropriateness of the allocator given the current nature of the underlying account being allocated. Our overall observations based on our review are as follows: The prorata approach taken by MPI is a commonly utilized approach to allocation and widely accepted. The methodology of addressing each asset and liability account separately, while potentially time intensive, results in a high level of accuracy. The methodology of first assigning as many accounts which are directly related to specific LOBs or the noninsurance COB increases accuracy and reduces the balances requiring allocation. The practice of utilizing a specific account or group of accounts as the accounts used to balance the individual LOB or COB balance sheet is a recognized practice and required when allocating assets and liability accounts utilizing different allocators. In limited instances the content of and activity in certain accounts had changed over time, however the allocator had not been revisited to determine whether it was still the appropriate allocator for that account. In summary, the approach and methodology employed in the current asset and liability allocation methodology appears sound and is based on the same principles that we advocate. Instead of creating an entire new approach and methodology, we have therefore developed the following approach and methodology which builds on the existing current methodology, incorporating changes in certain areas, primarily in regards to allocators utilized for certain accounts. 5.3 Methodology and approach In developing the revised asset and liability allocation methodology we developed and followed the approach and decision making process noted in the diagram below. The first objective of the process was to maximize the number of accounts which could be assigned either directly to an insurance LOB or the noninsurance COB. This would, in turn, minimize the extent of allocation that would need to be done between insurance LOBs and the noninsurance COB. A second key objective was to seek out operating information, measures of activity and existing related expense allocation measures or allocators which could reasonably be utilized as the basis of allocation for specific assets and liabilities requiring allocation. In establishing the most appropriate basis of allocation, we endeavoured to strike a balance between the precision and suitability of a particular allocator, on one hand, and the effort and extent of analysis required to develop and quantify the allocator on an ongoing basis, on the other hand Overview of the methodology The process was designed so that as we work through the decision making process, accounts might be assigned directly to lines or categories of business thereby reducing the number of accounts ultimately requiring allocation. As we are approaching the allocation process at the GL account level, this process requires only two key decision points as noted in the diagram below. Stage I involves a decision point as to which accounts are directly related to a specific insurance LOB or the noninsurance COB so they can be assigned directly whereas Stage II involves the allocation of accounts which are not directly assignable. Deloitte & Touche LLP and affiliated entities. Asset and liability allocation methodology 26

35 Recap of Stages Stage I This stage is designed to identify all asset, liability and retained earnings accounts that relate directly and entirely to one of Basic insurance, insurance, SRE insurance or the noninsurance COB. If an account meets this criterion, the account is assigned directly to the appropriate LOB or COB. Included in this first stage is the assignment of all retained earnings accounts to their respective LOB or COB. Retained earnings accounts can be assigned as they are each directly related to a LOB or COB and determined annually by adding the current year s operating surplus or deficit to the prior years ending balance by LOB or COB. All remaining accounts, which are not directly assignable are consider subject to allocation. Stage II This stage handles all accounts that must be allocated between one or more of the insurance LOB s and/or the noninsurance COB. These are accounts that could not be directly assigned one of either Basic insurance, insurance, SRE insurance or the noninsurance COB. The allocation at Stage II for each account is done based on a specific allocator. Allocators are designed to allocate an account to two or more of the three insurance LOBs and the noninsurance COB. For example, an account balance might relate to only two insurance LOBs so consequently the allocator selected would reflect an allocation to just those two LOBs. 5.4 Account evaluation and assignment (Stage I) In Section of this report, we noted that approximately 260 active asset, liability and retained earnings accounts existed at February 28, As our approach is to allocate assets and liabilities at the account level, each account must be individually assessed to determine how it should be handled. Each account was individually evaluated as to the content of the account and the normal source of activity within the account Purifying accounts As noted, the first objective in the process is to maximize the quantum of accounts which can be assigned directly to a LOB or the noninsurance COB, thereby reducing the quantum of accounts and account balances requiring allocation. During the course of our review of each specific account we considered the content and source of activity in each account to identify whether, if some component of activity or the balance was removed and moved to another existing account or to a new account, the original account could then be assigned as opposed to allocated. Our review did not identify specific opportunities of significance, however as MPI adds new accounts and reevaluates the status of existing accounts each year, we would encourage MPI to attempt to identify and consider potential changes to accounting which might result in allocated accounts being purified so they may be assigned in the future. Deloitte & Touche LLP and affiliated entities. Asset and liability allocation methodology 27

36 5.4.2 Account assignment On the basis of our detailed review of accounts 122 of the approximate 260 accounts were identified as directly assignable to a specific insurance LOB or the noninsurance COB. The Appendix lists each active asset and liability GL account, describes its contents and indicates whether it is assigned at Stage I or allocated at Stage II. To demonstrate the application of our proposed methodology, it has been applied against the MPI GL account balances that existed at February 28, The Appendix also outlines the allocation approach for each individual G/L account that must be allocated as described in section 5.5. In the body of the report, the results of each stage are summarized by balance sheet line item. This summary enables an overview of the aggregate results of the application of the methodology at the GL account level and it permits comparison of the results of our proposed methodology with the balance sheet allocation as at February 28, 2010 previously reported by MPI. The table below summarizes the results of the Stage I assignment, by financial statement line item. Asset, liabilities and retained earnings accounts that are directly assignable to one of the three insurance LOBs or the noninsurance COB are identified, with the remaining accounts in that financial statement line item, if any, included in the amounts noted as subject to allocation. Deloitte & Touche LLP and affiliated entities. Asset and liability allocation methodology 28

37 Stage I Assignment (all amounts in thousands of dollars) Balance sheet line item February 28, 2010 balance Basic LOB Amounts directly assigned Ext. LOB SRE LOB NonIns COB Total Amounts subject to allocation Cash and investments 2,206,451 1, ,063 2,205,388 Due from other insurance companies 10,656 9, ,656 Accounts receivable 289, , , ,160 Prepaid expenses Deferred policy acquisition costs 43,143 28,194 13,243 1,706 43,143 Reinsurers share of unearned premiums 11,853 9,019 1,162 1,672 11,853 Reinsurers share of unpaid claims 59,489 41, ,506 59,489 Property and equipment 134, ,649 Deferred development costs 34,618 22, ,078 11,540 Due to other insurance companies 23,386 1,802 1,802 21,584 Accounts payable and accrued liabilities 49,482 4, ,225 13,297 36,185 Unearned premiums 449, ,596 56,955 19, ,029 32,525 Provision for employee current benefits 15,666 15,666 Provision for employee future benefits 226, ,834 Provision for unpaid claims 1,628,528 1,489,170 48,390 90,968 1,628,528 Rate stabilzation reserve 224, , ,709 development fund 48,279 48,279 48,279 Retained earnings 85,389 76,751 36,316 (27,678) 85,389 Accumulated other comprehensive income (loss) 39,724 39, Account allocation (Stage II) Based on the assignment of accounts in the previous section the following section outlines the allocation of accounts which are subject to allocation Allocators Each account identified in Stage I as requiring allocation is allocated in Stage II on the basis of a specific allocator. Allocators were developed or selected based on the following approach: Each account was reviewed to identify its: Content Key activity Which LOBs or COB the activity originated from What type of revenue or expense accounts the activity is related to Based on that account by account review existing allocators were assessed for suitability, and if there was no suitable existing allocator, a new allocator was developed. Deloitte & Touche LLP and affiliated entities. Asset and liability allocation methodology 29

38 Whenever appropriate, allocators were developed which reflected the revenue or expense activity related to the asset or liability. These allocators could be based on expense allocators already utilized or data developed by the application of allocators applied to related revenues or expense categories. For example, for account A/P Brokers Commissions, the allocator selected was the Commission Written Ratio, a ratio developed based on annual commission paid. The following table describes the allocators developed for use in the asset and liability methodology. Allocator code Allocator name Description of allocator CPWR Ceded Premiums Written Ratio Basic and Percentage of annual ceded premiums for Basic and as a percentage of combined Basic and annual ceded premiums. CWR Commissions Written Ratio Percentage of annual commmissions written for each insurance LOB and the noninsurance COB as a percentage of total annual commissions written. EDR Expense Distribution Ratio Percentage of annual expenses 2 for each insurance LOB and the noninsurance COB as a percentage of total annual expenses 2. EDREXNI Expense Distribution Ratio Excluding Noninsurance EDREXSRE Expense Distribution Ratio Excluding SRE Percentage of annual expenses 2 for each insurance LOB as a percentage of total insurance COB annual expenses 2. Percentage of annual expenses 2 for Basic, and the noninsurance COB as a percentage of the combined Basic, and the noninsurance COB annual expenses 2. FPER Fleet Premiums Earned Ratio Percentage of annual fleet premiums earned for Basic and as a percentage of combined Basic and fleet premiums earned. IR Investment Ratio This allocator is not predetermined, but is the percentage of investments which must be allocated to each insurance LOB and the noninsurance COB as determined by allocations of all other items on the balance sheet, as further described in Section 5.6. ITCR Information Technology Cost Ratio Percentage of annual information technology expense allocated to each insurance LOB and the noninsurance COB as a percentage of total annual information technology expense as calculated by the new MPI expense allocation methodology proposed in PCR Property Cost Ratio Percentage of annual property operating expense allocated to each insurance LOB and the noninsurance COB as a percentage of total annual property operating expense as calculated by the new MPI expense allocation methodology proposed in PLR Paid Losses Ratio Percentage of annual insurance losses paid for each insurance LOB as a percentage of total annual insurance losses paid. Payroll Ratio Percentage of salary and benefit expense allocated to each insurance LOB and the noninsurance COB as a percentage of total annual salary and benefit expense as calculated by the new MPI expense allocation methodology proposed in PWFCEXSRE Premiums Written and Fees Collected Ratio Excluding SRE Percentage of annual premiums written for Basic and and fees collected for driver licencing and vehicle registration as a percentage of the combined annual premiums written for Basic and and fees collected for driver licencing and vehicle registration. 2 Annual expenses include all expenses except claims incurred, broker commissions and premium taxes Deloitte & Touche LLP and affiliated entities. Asset and liability allocation methodology 30

39 Allocator code Allocator name Description of allocator PWFCF Premiums Written and Fees Collected Ratio Financing PWREXSRE Premiums Written Ratio Excluding SRE Percentage of annual premiums written for Basic, and a combination of annual premiums written for and fees collected for driver licencing and vehicle registration, as a percentage of the combined annual premiums written for Basic and and fees collected for driver licencing and vehicle registration. Annual fees collected for driver licencing and vehicle registration are combined with annual premiums written for, and considered as for allocation purposes, since provides the financing services for all noninsurance products. Percentage of annual premiums written for Basic and as a percentage of the combined annual premiums written for Basic and. SARR Salvage Recoveries Ratio Percentage of annual salvage recoveries for each insurance LOB as a percentage of total annual salvage recoveries. SBRR Subrogation Recoveries Ratio Percentage of annual subrogation recoveries for each insurance LOB as a percentage of total annual subrogation recoveries Account allocation Each account requiring allocation was then allocated to two or more insurance LOBs and/or the noninsurance COB utilizing an appropriate allocator from the table above. As previously described the Appendix sets out each individual general ledger account, describes its contents and indicates whether it is assigned at Stage I or allocated at Stage II. In addition, the Appendix identifies which allocator is used for each individual general ledger account that is allocated at Stage II. The table below summarizes the results of that allocation. It should be noted that each balance sheet classification in the table is comprised of one or more accounts which may be allocated by different allocators. The table also identifies the allocators utilized in the allocation of accounts in that balance sheet line item. A detailed listing of all asset, liability and retained earnings accounts in each balance sheet line item is provided in the Appendix together with the specific allocator utilized to allocate that account. In calculating the allocators applied in the calculations below, except where specifically indicated otherwise in the description of the allocator above, we have utilized and relied on the underlying data currently utilized by MPI in developing ratios they have applied, utilizing their current asset and liability methodology, to the allocation of their February 28, 2010 balance sheet. Consistent with MPI current practice, for accounting or financial reporting data utilized in the calculation of allocators, that data represents the actual amounts for the fiscal year ended February 28, MPI utilizes the prior year financial reporting data in the development of allocators as it allocates its balance sheet periodically throughout the current fiscal year and current year s financial reporting data is not complete until the end of the fiscal year. Deloitte & Touche LLP and affiliated entities. Asset and liability allocation methodology 31

40 Stage II Allocation (all amounts in thousands of dollars) Balance sheet line item Amounts subject to allocation Basic LOB Amounts allocated Ext. LOB SRE LOB NonIns COB Allocators utilized Cash and investments 2,205,388 1,917, , ,759 (12,058) EDR, IR, PLR,, PWFC EXSRE, PWFCF Accounts receivable 282, ,006 66,767 1,584 2,803 EDR, EDR EXNI, FPER, IR,, PWFC EXSRE, PWFCF, SARR, SBRR Prepaid expenses EDR Property and equipment 134,649 93,771 13,844 4,990 22,044 ITCR, PCR, Deferred development costs 11,540 8,565 1, ,725 EDREXSRE, ITCR Due to other insurance companies 21,584 19,061 2,523 CPWR Accounts payable and accrued liabilities 36,185 27,322 4,309 1,331 3,223 CWR, EDR, EDREXNI, FPER, PCR, PLR, Unearned premiums 32,525 27,512 5,013 PWFCF, PWREXSRE Provision for employee current benefits 15,666 11,366 1, ,070 Provision for employee future benefits 226, ,582 23,938 8,347 29,967 Accumulated other comprehensive income (loss) 39,724 34,569 3,135 2,264 (244) IR Deloitte & Touche LLP and affiliated entities. Asset and liability allocation methodology 32

41 5.5.3 Summary of final results The following table provides a summary of the final results of the entire proposed methodology, applied to all GL accounts. These results are determined by combining assigned and allocated amounts by balance sheet line item for each insurance LOB and the noninsurance COB. Summary (all amounts in thousands of dollars) Balance sheet line item Basic LOB Ext. LOB SRE LOB NonIns COB Total Cash and investments 1,917, , ,818 (12,054) 2,206,451 Due from other insurance companies 9, ,656 Accounts receivable 211,494 66,767 8,280 3, ,711 Prepaid expenses Deferred policy acquisition costs 28,194 13,243 1,706 43,143 Reinsurers share of unearned premiums 9,019 1,162 1,672 11,853 Reinsurers share of unpaid claims 41, ,506 59,489 Property and equipment 93,771 13,844 4,990 22, ,649 Deferred development costs 31,197 1, ,171 34,618 2,343, , ,174 15,567 2,791,551 Due to other insurance companies 19,061 2,523 1,802 23,386 Accounts payable and accrued liabilities 31,642 4,966 1,426 11,448 49,482 Unearned premiums 368,108 61,968 19, ,554 Provision for employee current benefits 11,366 1, ,070 15,666 Provision for employee future benefits 164,582 23,938 8,347 29, ,834 Provision for unpaid claims 1,489,170 48,390 90,968 1,628,528 2,083, , ,594 43,489 2,393,450 Rate stabilzation reserve 224, ,709 development fund 48,279 48,279 Retained earnings 76,751 36,316 (27,678) 85, , ,030 36,316 (27,678) 358,377 Accumulated other comprehensive income (loss) 34,569 3,135 2,264 (244) 39,724 2,343, , ,174 15,567 2,791,551 Deloitte & Touche LLP and affiliated entities. Asset and liability allocation methodology 33

42 5.6 Summary comments Overview of the allocation methodology This report outlines the Allocation Methodology in detail, including the nature of the assignments and allocations that occur at Stages I and II. In these summary comments, we wish to provide a concluding overview to assist in providing a clear understanding of the conceptual accounting underpinnings of the methodology. Stage I assignment The accounts assigned at this stage are indeed accounts that relate directly and exclusively to the one LOB or the noninsurance COB. These accounts include the retained earnings and rate stabilization reserve accounts. These accounts, too, relate entirely to one LOB or the noninsurance COB. The determination of these retained earnings and rate stabilization reserve amounts bears some additional explanation. The yearend closing GL balance for these accounts has been calculated. It is calculated as the sum of the balance at the conclusion of the preceding fiscal year plus income allocated to that LOB for the year, less expenses allocated to that LOB for the year. This calculation is consistent with the requirements of generally accepted accounting principles (GAAP). The remaining accounts assigned at Stage I are simply the concluding year end GL account balances resulting from the normal conduct of business. Stage II allocation At this stage, all GL accounts requiring allocation, except those related to investment and investmentrelated accounts (comprising some cash and some accounts receivable accounts), are allocated based on the application of their assigned allocator. These allocations are calculated independent of any other allocations, based solely on their respective assigned allocators. The allocation of investments and investment related accounts, while still an allocation, is done differently because it is the last allocation made. As the final allocation, this allocation must be done in a way so that the individual LOB and noninsurance COB balance sheets balance. This is so that the GAAP requirement that Assets = Liabilities + Equity is maintained for each LOB and COB. Therefore the allocation of investments is done in a way that results in each of the respective LOB and COB balance sheets balancing. As a result, this allocation must be done last, and is by definition dependent on all of the other allocations. This is how the IR ratio described in Section is determined. This balancing allocation, sometimes also referred to as a balancing adjustment, is consistent with other balance sheet allocation methodologies that we reviewed and summarized in Section of this report Concluding remarks Reflecting on the asset and liability assignment and allocation process we note the following comments: As noted earlier, the current MPI asset and liability allocation methodology appears sound and is based on the same principle that we advocate. The methodology proposed incorporates much of the existing methodology and many of the existing allocators. For the vast majority of the accounts which required allocation, there was a readily identifiable allocator which would reasonably allocate the account balance across two or more LOBs and/or COB. For certain accounts which can be viewed as enterprise wide working capital accounts, such as corporate cash and miscellaneous receivable accounts, the expense distribution ratio was adopted consistently as it reflects general overall operating activities. Deloitte & Touche LLP and affiliated entities. Asset and liability allocation methodology 34

43 Appendix Schedule of Asset and Liability Accounts by Balance Sheet Line Balance sheet line item GL acct. number Account name Account description Status Allocation method Cash and Investments Corporate deposit Bank Corporate operating Bank Automobile claims Bank Automobile claims draft Bank General corporate bank account used for deposits General corporate bank account for expense payments EDR EDR Insurance claim payments PLR Insurance claim payments PLR US IRP Royal Bank International Registration Program payments and deposits USD US $ Deposits Bank General insurance claim Bank General corporate bank account for expense payments USD Non Insurance Discontinued line of general insurance payments SRE Refunds Bank Basic and premium and registration fee refunds Returned items Preauth EDR PWFC EXSRE Preauthorized payments returned items PWFCF Payroll Bank Payroll processing MPI app bank fee Alternative payment plan deposits PWFCF Imprest cash Petty cash EDR Trust deposit fronting Trust deposit with Societe Generale SRE Equity investments Equity investments IR Shortterm investments Cash on hand Investment fund managers Equity investments US Cash on hand RT US LT Investments Bonds BV Shortterm investments IR Investment fund manager cash account IR US equity investments IR Investment fund manager cash account USD IR Long term bond holdings IR LT Real Estate Investment in real estate IR Deloitte & Touche LLP and affiliated entities. Asset and liability allocation methodology 35

44 Balance sheet line item GL acct. number Account name Account description Status Allocation method LT Venture Capital Venture capital investments IR Due from other insurance companies Accounts receivable Due from other Ins Co Extn Due from other Ins Co SRE Due from other Ins Co Bas Due from other Ins Co Bas Exps Due from other Ins Co Clearing A/R Staff Temporary insurance amounts due from other insurance companies SRE insurance amounts due from other insurance companies Basic insurance amounts due from other insurance companies Basic insurance expense amounts due from other insurance companies Clearing account for amounts due from other insurance companies Amounts receivable from staff for staff programs (Advances, education, computer purchases) A/R Staff Amounts receivable from staff for staff programs (Advances, education, computer purchases) A/R Staff Clearing Account Clearing account for the amounts receivable for staff programs (Advances, education, computer purchases) A/R Brokers SRE Amounts receivable from brokers related to SRE customer payments received by brokers A/R Brokers AOL Payments A/R Royal Bank AOL Amounts receivable from brokers related to Basic, and noninsurance customer payments received by brokers Amounts receivable for customer payments made by credit card A/R Customers Amounts receivable from customers for time payments for premiums and fees A/R Broker Advances A/R Fleet Surcharges Amounts receivable from brokers related to broker advances. Account is no longer in use. Amounts receivable from Basic and fleet customers for surcharges A/R Salvage Amounts receivable from purchasers of vehicles sold at the salvage auction A/R Subrogation Amounts receivable related to claims made prior to A/R Subrogation Clearing A/R Pymts Received Not applied Clearing account for the accounts receivable subrogation account. Temporary holding account for payments received but not applied, primarily related to subrogation, SRE broker payments and fleet payments SRE Basic Basic Basic SRE A/R Temp EIC Amounts receivable for enhanced identity cards. Noninsurance A/R New Immobilizer Program Amounts receivable related to the immobilizer program Basic PWFC EXSRE PWFCF PWFCF PWFC EXSRE FPER SARR SBRR SBRR EDREXNI Deloitte & Touche LLP and affiliated entities. Asset and liability allocation methodology 36

45 Balance sheet line item GL acct. number Account name Account description Status Allocation method A/R NonPlcy Fin Arrs Loan Bas A/R NonPlcy Fin Arrs Loan Ext A/R NonPlcy Fin Arrs Loan Ded A/R NonPlcy Fin Arrs Dvs Lic A/R Prov MB Control A/R Prov MB Recoveries A/R Prov MB Reclass/AP A/R Prov MB Hybrid Program A/R Prov MB Clearing Clearing account for arrears amounts receivable related to nonpolicy financing for Basic insurance Clearing account for arrears amounts receivable related to nonpolicy financing for insurance Clearing account for arrears amounts receivable related to financing for insurance deductibles Clearing account for arrears amounts receivable related to financing for driver licence fees Amounts receivable from the Province of Manitoba Manitoba Health overpayments Amounts receivable from the Province of Manitoba Manitoba hybrid program Account used to net the accounts payable and receivable for the Province of Manitoba Amounts receivable from the Province of Manitoba Manitoba hybrid program Investment clearing account with the Province of Manitoba A/R Chargebacks Chargebacks relating to the accounts receivable from customers A/R Cityplace Prop Mgmt A/R IIF Quality Control A/R Accrued Interest A/R Royal Trust Clr A/R Acc Int V.S. SRE Amounts receivable from Red Cliff Property Management for the payments collected from tenants of City Place Amounts receivable from the advances paid to the immobilizer installers. Basic Basic Noninsurance Noninsurance Basic Accrued interest on the investment accounts IR Investment clearing account with Royal Trust IR Interest recievable on US deposits for SRE SRE A/R Other Accrual/clearing account for miscellaneous transactions prior to invoicing A/R Sundry Deposits A/R NSF CK Clearing Amounts receivable related to a variety of deposits, payments and foreign exchange on deposits EDR IR PWFCF IR EDR EDR Clearing account for NSF cheques EDR Salvage Inventory Vehicle salvage inventory for the weekly salvage auction Salvage Inventory Contra Allow for D/A Subrogation Allow for D/A Other Provision or contra account against salvage inventory Allowance for doubtful accounts receivable subrogation account Allowance for doubtful accounts receivable other account SARR SARR SBRR EDR Deloitte & Touche LLP and affiliated entities. Asset and liability allocation methodology 37

46 Balance sheet line item GL acct. number Account name Account description Status Allocation method Prepaid expenses Deferred policy acquistion costs Allow for D/A Customers Allow for D/A Fleets Allowance for doubtful accounts receivable customers Allowance for doubtful accounts receivable fleet surcharge account Prepaid Expenses Prepaid rent for leased space EDR Prepaid Expenses MVSA Stores Inventory Purchases Stores Inventory Usage Stores Inv. Inv. Cost Var Stores Inv. P.I. Variance Comm Written Bas MV Comm Expensed Bas MV Comm Written Bas DR Comm Expensed Bas DR Comm Written Ext MV Comm Expensed Ext MV Comm Written SRE Comm Expensed SRE Def Prem Tax Basic Prem Tax Expd Basic Prepaid expenses relating to the interface with Manitoba Vital Statistics Inventory account for office supplies and stationery Noninsurance PWFCF FPER EDR Account used to track the usage of the inventory EDR Account used to adjust the inventory balance EDR Account used to adjust the inventory balance EDR Commissions written for Basic motor vehcile insurance Commissions expensed for Basic motor vehcile insurance Commissions written for Basic driver licence insurance Commissions expensed for Basic driver licence insurance Commissions written for motor vehcile insurance Commissions expensed for motor vehcile insurance Basic Basic Basic Basic Commissions written for SRE insurance SRE Commissions expensed for SRE insurance SRE Deferred Basic insurance premium taxes Basic Expensed Basic insurance premium taxes Basic Def Prem Tax Ext Deferred insurance premium taxes Prem Tax Expd Ext Def Prem Tax SRE Prem Tax Expd SRE DPAC Write Down Bas DPAC Write Down SRE Expensed insurance premium taxes Deferred SRE insurance premium taxes SRE Expensed SRE insurance premium taxes SRE Write down of deferred policy acquisition costs for Basic insurance Write down of deferred policy acquisition costs for SRE insurance Basic SRE Deloitte & Touche LLP and affiliated entities. Asset and liability allocation methodology 38

47 Balance sheet line item GL acct. number Account name Account description Status Allocation method Reinsurers share of unearned premiums Reinsurers share of unpaid claims Property and equipment Unearned Premiums R/C Bas Unearned Premiums R/C Ext Unearned Premiums R/C SRE Unpaid Clms R/C Bas PIPP Unpaid Clms R/C Bas CAT R/C BAS IBNR CAT Unpaid Clms R/C Bas IBNR Unpaid Clms R/C Ext TPL PIPP Unpd Clms R/C Ext CAT R/C Ext IBNR CAT Unpd Clms R/C SRE LB Unpd Clms R/C SRE PD Unpd Clms R/C SRE LB IBNR Unpd Clms R/C SRE PD IBNR Reinsurance ceded unearned premiums for Basic insurance Reinsurance ceded unearned premiums for insurance Reinsurance ceded unearned premiums for SRE insurance Reinsurance company unpaid claims for Basic insurance PIPP Reinsurance company unpaid claims for Basic insurance catastrophic events Reinsurance company incurred but not reported claims for Basic insurance catastrophic events Reinsurance company incurred but not reported claims for Basic insurance Reinsurance company unpaid claims for insurance third party liability Reinsurance company unpaid claims for insurance catastrophic events Reinsurance company incurred but not reported claims for insurance catastrophic events Reinsurance company unpaid liability claims for SRE insurance Reinsurance company unpaid physical damage claims for SRE insurance Reinsurance company incurred but not reported liability claims for SRE insurance Reinsurance company incurred but not reported physical damage claims for SRE insurance Land Cost of land other than as noted in and Basic SRE Basic Basic Basic Basic SRE SRE SRE SRE Land DVL Ops Cost of land at 1075 Portage Ave. PCR Land Cityplace Cost of land at Cityplace PCR Land Improvements Cost Land Improvements Accum Amort Property Additions Clearing Cost of land improvements such as parking lots and landscaping at service and claim centres Accumulated amortization on improvements such as parking lots and landscaping at service and claim centres PCR PCR PCR Clearing account used new property additions PCR Buildings Cost Cost of buildings owned and used by MPI, except 1075 Portage Ave. and Cityplace PCR Deloitte & Touche LLP and affiliated entities. Asset and liability allocation methodology 39

48 Balance sheet line item GL acct. number Account name Account description Status Allocation method Buildings Accum Amort Building Cost DVL Ops Building DVL Ops Acc Amort Building Cityplace Building Cityplace Acc Amort Accumulated amortization of buildings owned and used by MPI, except 1075 Portage Ave. and Cityplace PCR Cost of the building at 1075 Portage Ave PCR Accumulated amortization of the building at 1075 Portage Ave. PCR Cost of the Cityplace building PCR Accumulated amortization of the Cityplace building Automobiles Cost Cost of MPI vehicles except former DVA operations vehicles Automobiles Accum Amort Automobiles Cost DVL Ops Automobiles DVL Ops Acc Amort Systems Furniture Cost Systems Furniture Acc Amort Sys Furniture Cost DVL Ops Sys Furn DVL Ops Acc Amort Accumulated amortization of MPI vehicles, except former DVA operations vehicles Cost of former DVA operations vehicles Accumulated amortization of former DVA operations vehicles Cost of office furniture systems, except former DVA operations furniture systems Accumulated amortization of office furniture systems, except former DVA operations furniture systems Cost of former DVA furniture systems Accumulated amortization of former DVA furniture systems Elevators Cost Cost of elevator component of Cityplace building PCR Elevators Acc Amort Accumulated amortization of the elevator component of Cityplace building Escalators Cost Cost of escalator component of Cityplace building Escalators Acc Amort HVAC Systems Cost HVAC Systems Acc Amort Furn and Equip Control Cost Autos/Equip Additions Clearing Furn and Equip Accum Amort Accumulated amortization of the escalator component of Cityplace building PCR PCR PCR PCR Cost of HVAC component of Cityplace building PCR Accumulated amortization of the HVAC component of Cityplace building Cost of furniture and equipment, except former DVA operations furniture and equipment Clearing account for vehicle and equipment assets acquired but not yet allocated. Accumulated amortization of furniture and equipment, except former DVA operations furniture and equipment PCR Deloitte & Touche LLP and affiliated entities. Asset and liability allocation methodology 40

49 Balance sheet line item GL acct. number Account name Account description Status Allocation method Furn and Equip Cost DVL Ops Cost of former DVA furniture and equipment Furn and Equip DVL Ops Acc Amort Accumulated amortization of former DVA furniture and equipment Data Proc Equip DVL Ops Cost of former DVA data processing equipment ITCR Deferred development costs Due to other insurance companies Accounts payable and accrued liabilities Data Proc Eq DVL Acc Amort Data Proc Equip Control Cost Data Proc Equip Accum Amort Lshld Improvements Cost Lshld Improvements Accum Amort Def Dev Cost Dr Safety Rate Def Dev Cost New PIPP Def Dev Cost Streamlined Renew Def Dev Cost Ent Data Warehouse Def Dev Cost Ent Arch Portal Def Dev Cost New Call Mgmt Def Dev Cost Business Proc Review A/P R/C Premium Bas/Ext A/P R/C Coll Dep Bas/Ext A/P R/C Premium SRE Accumulated amortization of former DVA data processing equipment Cost of data processing equipment such as mice, computers, etc. except for former DVA data processing equipment Accumulated amortization of data processing equipment such as mice, computers, etc. except for former DVA data processing equipment Cost of lease hold improvements made at leased locations such as Kennedy St., Winkler and Ellice Ave. Accumulated amortization of lease hold improvements made at leased locations such as Kennedy St., Winkler and Ellice Ave. Deferred information technology development costs related to the Driver Safety Rating initiative Deferred information technology development costs related to the new PIPP Fineos system Deferred information technology development costs related to the streamlined renewal initiative Deferred information technology development costs related to the enterprise data warehouse initiative Deferred information technology development costs related to the enterprise architecture portal initiative Deferred information technology development costs related to the new call management initiative Deferred information technology development costs related to the business process review initiative Basic and insurance amounts due to reinsurance companies Basic and insurance amounts due to reinsurance companies for collateral deposits SRE insurance amounts due to reinsurance companies A/P PM Other Account used to net the accounts payable and receivable for the Province of Manitoba A/P PM Registration Fees Amounts payable to the Province of Manitoba for vehicle registration fees collected Basic Basic Noninsurance SRE Noninsurance ITCR ITCR ITCR PCR PCR EDREXSRE EDREXSRE ITCR ITCR CPWR CPWR EDR Deloitte & Touche LLP and affiliated entities. Asset and liability allocation methodology 41

50 Balance sheet line item GL acct. number Account name Account description Status Allocation method A/P PM Invest Fees A/P PM Drivers License Prem A/P Broker Commissions Provision Fleet Rebates Amounts payable to the Province of Manitoba for investment management fees Amounts payable to the Province of Manitoba for driver license fees collected Amounts payable to brokers for commissions earned Provision for the rebates owed to fleet customers if their loss ratio is lower than expected. Noninsurance EDREXNI CWR FPER A/P Actuary Fees Accrued amounts payable for actuarial fees EDREXNI Provision Workers Comp A/P General Rec d not Inv PO A/P General Audit Fees A/P General Other A/P General Special Services A/P General Const Holdback A/P IIF Quality Control Provision for estimated worker s compensation liabilities Amounts payable for goods and services received but not yet invoiced EDR Accured amounts payable for audit fees EDR General amounts payable for supplies, travel expenses, staff training, etc. Accounts payable accounts clear to this account, with cheques being written from this account. Accrued amounts payable for special services such as IFRS analysis, career management services, coaching services and pandemic preparedness services. Accrued amounts payable for the construction holdbacks on current Service Centre projects. Amounts payable related to the Immobilizer Incentive Fund program Amounts have been transferred to accounts receivable account # A/P General PST Amounts payable to the Province of Manitoba for retail sales tax primarily collected by brokers but also from MPI salvage auctions A/P General GST Amounts payable to the Government of Canada for goods and services taxes primarily collected from salvage auctions but also Redcliffe for Cityplace rents A/P General Grants in Lieu A/P General Accruals A/P General A/R Overpayments A/P IRP Deposits CDN A/P IRP Deposits USD Accrued amounts payable for property taxes and business taxes on physical property owned or leased by MPI General accrued amounts payable set up at the end of the fiscal periods Amounts payable from overpayments of accounts receivable Amounts payable related to permits to cross Canadian provinces International Registration Plan Amounts payable related to permits to cross the US border International Registration Plan Basic Noninsurance Noninsurance Noninsurance EDR EDR PCR PLR PCR EDR EDR Deloitte & Touche LLP and affiliated entities. Asset and liability allocation methodology 42

51 Balance sheet line item GL acct. number Account name Account description Status Allocation method A/P US IRP CDN Clearing A/P IIF Product Purchase Plan A/P Error Suspense AP A/P Snowman Pass Foreign exchange clearing account for the amounts payable related to permits to cross the US border International Registration Plan Amounts payable related to the purchase of supplies for the Immobilizer Incentive Fund Purchase Plan Temporary account for amounts payable due to errors and other reconciling items Amounts payable to Snowman for the proceeds of snowmobile trail permits sold by MPI on behalf of Snowman A/P Transit Pass Amounts payable to Winnipeg Transit for transit passes sold to MPI employees A/P Payroll Ded Group Ins A/P Payroll Ded Dep Ins A/P Payroll Ded United Appeal A/P Payroll Ded CPP A/P Payroll Ded Income Tax A/P Payroll Ded LTD A/P Payroll Ded UIC A/P Payroll Ded ADD A/P Payroll Ded Superannuation A/P Payroll Ded Other A/P Payroll Ded Trvl Insurance A/P Accrued Payroll Prov For Prem Tax Bas Pymts Prem Tax Bas Prov For Prem Tax Ext Pymts Prem Tax Ext Prov For Prem Tax SRE Amounts payable related to employee payroll deductions Amounts payable related to employee payroll deductions Amounts payable related to employee payroll deductions Amounts payable related to employee payroll deductions Amounts payable related to employee payroll deductions Amounts payable related to employee payroll deductions Amounts payable related to employee payroll deductions Amounts payable related to employee payroll deductions Amounts payable related to employee payroll deductions Amounts payable related to employee payroll deductions Amounts payable related to employee payroll deductions Noninsurance Basic Noninsurance Accrued amounts payable for payroll Provision for premium taxes payable for Basic insurance Basic Payments of premium taxes for Basic insurance Basic Provision for premium taxes payable for insurance Payments of premium taxes for insurance Provision for premium taxes payable for SRE insurance SRE EDR Deloitte & Touche LLP and affiliated entities. Asset and liability allocation methodology 43

52 Balance sheet line item GL acct. number Account name Account description Status Allocation method Pymts Prem Tax SRE Payments of premium taxes for SRE insurance SRE Unearned premiums Provision for employee current benefits Provision for employee future benefits Provision for unpaid claims Prov For UE Premiums Basic Prov For UE Premiums EXT Prov For UE Premiums SRE Provision for unearned premiums for Basic insurance Provision for unearned premiums for insurance Provision for unearned premiums for SRE insurance Prov for UE Qrt Int Provision for unearned quarterly interest relating to the quarterly time payments Prov for UE Mth Int Provision for unearned monthly interest relating to the monthly time payments Prov for UE Non Policy Interest Prepaid EIA Charge Prepaid Policy Income Provision Banked Vacation Provision Accrued Vacation Prov Post Retirement Ext Health Provision Retirement Allowance Provision for pension ProvUPDPreAC Ben Provision for unearned interest on nonpolicy items such as the financing of deductibles, sales tax and drivers license fees Prepaid application fees for Enhanced Identity products Unearned premiums from early payment of policy renewals Provision for banked vacation time for employees Provision for accrued vacation time for employees Provision for the expected cost of post retirement extended health coverage Provision for the expected cost of retirement allowances for employees Basic SRE Provision for pension costs for MPI employees Provision for unpaid accident benefits claims pre March ProvUPDPreTPL Provision for unpaid third party liability claims pre March Prov For Unpd Bas PIPP Prov For Unpd Bas OOP Prov For Unpd Bas Coll Prov For Unpd Bas Comp Prov For Unpd Bas Pty Dge Prov Unpd Ext AB Basic Basic Provision for unpaid Basic PIPP claims Basic Provision for unpaid Basic out of province claims Basic Provision for unpaid Basic collision claims Basic Provision for unpaid Basic comprehensive claims Provision for unpaid Basic property damage claims Provision for unpaid accident benefit claims Basic Basic PWFCF PWFCF Noninsurance PWR EXSRE Deloitte & Touche LLP and affiliated entities. Asset and liability allocation methodology 44

53 Balance sheet line item GL acct. number Account name Account description Status Allocation method Prov Unpd Ext TPL Pre Prov Unpd Ext TPL PIPP Prov for Unpd Ext Coll Prov for Unpd Ext Comp Prov for Unpd Ext Pty Dge Prov for Unpd Clms SRE PL Prov for Unpd Clms SRE PD Prov ICAC Bas AB Pre Prov ICAC Bas TPL Pre Prov ICAC Bas PIPP Post Prov ICAC Bas OOP Post Prov ICAC Bas Coll Prov ICAC Bas Comp Prov ICAC Bas Pty Dge Prov ICAC Ext PL Pre Prov ICAC Ext PL PIPP Prov ICAC Ext Coll Prov ICAC Ext Comp Prov ICAC Ext Pty Dge Prov ICAC SRE PD Prov ICAC SRE PL Prov IBNR Bas Pre AB Prov IBNR Bas Pre TPL Provision for unpaid third party liability claims pre March 1994 Provision for unpaid third party liability out of province claims Provision for unpaid collision claims Provision for unpaid comprehensive claims Provision for unpaid property damage claims Provision for unpaid SRE public liabilty claims SRE Provision for unpaid SRE property damage claims Provision for internal claims adjusting cost for Basic accident benefits claims pre March 1994 Provision for internal claims adjusting cost for Basic third party liability claims pre March 1994 Provision for internal claims adjusting cost for Basic PIPP claims Provision for internal claims adjusting cost for Basic out of province claims Provision for internal claims adjusting cost for Basic collision claims Provision for internal claims adjusting cost for Basic comprehensive claims Provision for internal claims adjusting cost for Basic property damage claims Provision for internal claims adjusting cost for public liability claims pre March 1994 Provision for internal claims adjusting cost for public liability out of province claims Provision for internal claims adjusting cost for collision claims Provision for internal claims adjusting cost for incurred but not reported comprehensive claims Provision for internal claims adjusting cost for property damage claims Provision for internal claims adjusting cost for SRE property damage claims Provision for internal claims adjusting cost for SRE public liabilty claims Provision for incurred but not reported Basic accident benefits claims pre March 1994 Provision for incurred but not reported Basic third party liability claims pre March 1994 SRE Basic Basic Basic Basic Basic Basic Basic SRE SRE Basic Basic Deloitte & Touche LLP and affiliated entities. Asset and liability allocation methodology 45

54 Balance sheet line item GL acct. number Account name Account description Status Allocation method Basic insurance Retained earnings Competitive lines Retained Earnings Accumulated other comprehensive income Prov IBNR Bas PIPP Post Prov IBNR Bas OOP Post Prov IBNR Bas Coll Prov IBNR Bas Comp Prov IBNR Bas Pty Dge Prov IBNR Ext PL Pre PIPP Prov IBNR Ext PL PIPP Prov IBNR Ext Coll Prov IBNR EXT Comp Prov IBNR Ext Pty Dge Prov Unreported Clms SRE PD Prov Unreported Clms SRE PL Prov Unpaid Claims CL Provision for incurred but not reported Basic PIPP claims Provision for incurred but not reported Basic out of province claims Provision for incurred but not reported Basic collision claims Provision for incurred but not reported Basic comprehensive claims Provision for incurred but not reported Basic property damage claims Provision for incurred but not reported public liability claims pre March 1994 Provision for incurred but not reported public liability out of province claims Provision for incurred but not reported collision claims Provision for incurred but not reported comprehensive claims Provision for incurred but not reported property damage claims Provision for incurred but not reported SRE property damage claims Provision for incurred but not reported SRE public liabilty claims Provision for unpaid claims for the commercial lines Prov ICAC CL Provision for internal claims adjusting cost for incurred but not reported claims for the commercial lines Prov IBNR CL Provision for incurred but not reported claims for the commercial lines Immobilizer Incentive Fund Reserve for Rate Stabilization Development Fund Undistributed Ret Earnings Funds remaining in the fund established for the Immobilizer Incentive program Basic insurance accummulated excess of revenues over expenses insurance accumulated excess of revenues over expenses set aside for specific initiatives, SRE and noninsurance annual excess of revenues over expenses Retained Earnings, SRE and noninsurance accumulated excess of revenues over expenses Other Comprehensive Income Reclassify From OCI to Inv Inc Basic Basic Basic Basic Basic SRE SRE SRE SRE SRE Basic Basic Other comprehensive income IR Account used to reclassify other comprehensive income to investment income IR Deloitte & Touche LLP and affiliated entities. Asset and liability allocation methodology 46

55 Deloitte, one of Canada's leading professional services firms, provides audit, tax, consulting, and financial advisory services through more than 7,700 people in 57 offices. Deloitte operates in Québec as Samson Bélair/Deloitte & Touche s.e.n.c.r.l. Deloitte is the Canadian member firm of Deloitte Touche Tohmatsu. Deloitte refers to one or more of Deloitte Touche Tohmatsu, a Swiss Verein, and its network of member firms, each of which is a legally separate and independent entity. Please see for a detailed description of the legal structure of Deloitte Touche Tohmatsu and its member firms. Deloitte & Touche LLP and affiliated entities. TM 2006, VANOC.