MANITOBA PUBLIC INSURANCE

Transcription

1 MANITOBA PUBLIC INSURANCE TESTIMONY OF HEATHER REICHERT VICE-PRESIDENT, FINANCE AND CHIEF FINANCIAL OFFICER Good morning, Mr. Chairman, members of the Board, ladies and gentlemen. My name is Heather Reichert. I am Vice-President, Finance and Chief Financial Officer for the Manitoba Public Insurance Corporation. I am a Chartered Accountant with over 25 years of finance experience and have been with the Corporation since January. Prior to January, I was with the Province of Manitoba for approximately ten years. As Vice-President, my responsibilities include all aspects of financial management and control for the Corporation; treasury, budgeting, reporting and pricing and economics. Mr. Johnston, the Chief Actuary, reports to me as does the Corporation s Investment Department. At this time, I would like to provide a brief overview of the financial performance of the Corporation during the previous fiscal year. In addition, I will review forecasted financial results for the fiscal year ending February 28, 2013 and the projected financial results for the fiscal year ending February 28, Financial results for the Basic Insurance Program on a fiscal year basis for 2011/12 through to 2016/17 are shown in Sections TI.11, TI.12, TI.13, and TI.15 For the 2011/12 fiscal year, as shown in Section TI.11, the Basic Insurance Program recorded a net income from operations of $18.6 million for rate setting purposes. This compares to the 2012 GRA forecasted net income from operations for 2011/12 of $16.0 million, an improvement of $2.6 million. The reason for the improvement in net income was due to higher revenue as a result of a greater than anticipated upgrade factor combined with higher bond values as a result of lower interest rates. Page 1

2 These increases were offset by increased claims incurred due to actuarial reserve adjustments which were also the result of the lower interest rates. For the 2012/13 fiscal year, as shown in Section TI.12, total earned revenues for the Basic Insurance Program are forecasted to be $779.0 million, an increase of $7.4 million (less than 1%) from last year s projection. Claims incurred, claims expenses, and road safety/loss prevention expenses are forecasted to be $739.8 million, an increase of $10.1 million compared to last year s projection. The increase is primarily due to higher claims expenses, an increase of $7.1 million due to various factors such as data centre costs, employee benefits and depreciation. Investment income is forecasted to be $80.0 million. This is an increase of $2.0 million from the previous year s projection mainly due to an increase in the total value of the Corporation s investment portfolio. For the 2012/13 fiscal year, the net loss from operations and for rating purposes is forecast to be $4.7 million. The financial statements for the 2013/14 fiscal year, as shown in Section TI.13, forecast a net loss of $5.6 million. Total earned revenues are projected to be $793.2 million compared to $779.0 million in 2012/13, an increase of $14.3 million. The increase is mainly due to a vehicle upgrade factor assumption of 2.50% and a growth in the number of vehicles insured (volume) assumption of 1.75%, and premium increase related to the Driver Safety Rating. Service fees are expected to be $21.1 million, an increase of $3.3 million compared to the 2012/13 forecast. Claims incurred, claims expenses, and road safety/loss prevention expenses are expected to increase to $766.6 million compared to $739.8 million for the 2012/13 forecast, an increase of $26.8 million. The net increase is due to normal expected increases in the cost of claims. Page 2

3 Other expenses are expected to decrease to $120.5 million compared to $123.9 million for the 2012/13 forecast, a decrease of $3.4 million. The net decrease is due to decreased commission expense as per the Agent Commissions Regulation, partially offset by inflationary increases in other expenses. Investment Income is projected to increase to $88.2 million compared to $80.0 million in 2012/13, an increase of $8.2 million primarily due to an increase in the size of the investment portfolio. Details of the investment income forecast are found in TI.18, Revenue Forecast. The financial statements filed have been prepared based on the International Financial Reporting Standards (IFRS) policies as approved by the Manitoba Public Insurance Board of Directors. The adoption of IFRS policies as expected did not impact the net income on the statement of operations, but did have a one-time net impact on the Rate Stabilization Reserve (RSR) of $12.6 million. On adoption of IFRS, the Corporation chose to designate all Available-For-Sale bonds as Held-For- Trading, which will result in a onetime transfer of Accumulated Other Comprehensive Income, associated with these bonds, to the RSR. This one-time transfer is the only material financial impact that the Corporation experienced as a result of the policies and elections it has made under IFRS. There are no other material financial impacts as a result of non-discretionary IFRS standards. The International Accounting Standards Board issued Exposure Draft ED/2010/8 Insurance Contracts on July 30, The Exposure Draft proposes a new standard on accounting for insurance contracts, which would replace IFRS 4 Insurance Contracts. The proposals represent the first comprehensive IFRS accounting model for insurance contracts and are expected to have a significant impact on the financial reporting of insurers. The International Accounting Standards Board is now aiming to either re-expose the draft insurance contracts standard, or issue a staff draft of the new standard, in the second half of 2012 with a target of issuing a final standard to replace current IFRS 4 Page 3

4 in It is unlikely that the new standard would be mandatorily effective before The forecasted financial results for 2013/14 and onward continue to use the old cost allocation methodology, whereas the 2011/12 audited financial statements use the new methodology developed by Deloitte and endorsed by the Public Utilities Board in the 2011 GRA, but not approved. The Corporation engaged Deloitte again in 2012 to specifically look at the year over year volatility of the main allocators used. AI.16 contains our recommendations and rationale for the use of the updated cost allocation method. There is a great deal of information about the development of the proposed allocation methodology contained in AI.16. I would particularly ask that the Board review the Deloitte report dated June 1, 2012, included as Attachment D to AI.16. It provides an overview of the work done in 2009 as well as reports on the work specifically undertaken to support our recommendations to the Board. As shown in Attachment B of AI.16 the impact of adopting this methodology for the 2013 rate is 0.075%. We believe only one methodology should be used for both financial reporting and rate setting. The recommended updated methodology is objective, fair and reasonable and should be the Public Utilities Board s approved methodology for rate setting going forward. TI.14 is the Statement of Basic Insurance Retained Earnings. This statement has two main components: The Basic Insurance Rate Stabilization Reserve (RSR) Other Retained Earnings The Basic Insurance Rate Stabilization Reserve is intended to protect motorists from rate increases made necessary by unexpected events and losses arising from nonrecurring events or factors. Total Retained Earnings is expected to be $205.3 million as at February 28, 2013, under IFRS. This includes the projected loss from operations of $4.7 million. Page 4

5 Depending on the agreed method for determining an appropriate Rate Stabilization Reserve, other retained earnings amount to $54.2 million (PUB basis) or $15.3 million (MPI DCAT basis). The Corporation continues to support the use of the DCAT methodology to determine the RSR target amount. Of the three methods the Board asked us to look at in this year s Rate Application, the DCAT is, in the Corporation s view, substantially more appropriate and meaningful and most directly related to the stated purpose of the RSR. As discussed in the Corporation s Annual Report, during 2011/12, the Corporation s Board of Director s agreed to transfer the $65 million in Basic s IT Optimization fund back to retained earnings. Since establishing the fund in 2010/11, the Corporation has determined that the optimal risk mitigation approaches will require far less capital resources. For this reason, and because the Public Utilities Board did not support funding the IT Optimization projects through retained earnings, the special allocation was discontinued. The need for less capital resources for IT Optimization is discussed in AI.12. A recurring information request is to to review material financial or operational changes within the Corporation that have occurred or are expected to occur in the present or future fiscal years. Other than the above noted changes to the IT Optimization strategy, there are no material financial or operational changes that have occurred since March 1, 2011 or are planned. Any material changes that would impact forecasted revenue or claims would be disclosed in TI.17 or TI.18, the Claims and Revenue forecasting books. I confirm that the written material referred to in my testimony was prepared under my control and is accurate to the best of my knowledge and belief. That concludes my direct testimony. Page 5