FACILITY ASSOCIATION RESIDUAL MARKET SEGMENT

Transcription

1 Financial Statements of FACILITY ASSOCIATION

2 Deloitte & Touche LLP Brookfield Place 181 Bay Street Suite 1400 Toronto ON M5J 2V1 Canada Tel: Fax: Auditors Report To the Members of Facility Association Residual Market Segment We have audited the balance sheet of Facility Association - Residual Market Segment as at October 31, 2007 and the statements of operations, of amounts due to/(from) members, of comprehensive income and of cash flows for the year then ended. These financial statements are the responsibility of the management of Facility Association. Our responsibility is to express an opinion on these financial statements based on our audit. Except as explained in the paragraph below, we conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. As explained in Note 16, it has proven impracticable for management to establish a reliable estimate of the increased claims exposure arising from a recent decision of the Queen's Bench of Alberta. Accordingly, we are unable to determine the extent to which the provision for unpaid and unreported claims may be understated in respect of such increased claims exposure. In our opinion, except for the effect of adjustments, if any, which we might have determined to be necessary had we been able to satisfy ourselves with respect to any additions to the provision for unpaid and unreported claims, as described in the preceding paragraph, these financial statements present fairly, in all material respects, the financial position of Facility Association Residual Market Segment as at October 31, 2007 and the results of its operations and its cash flows for the year then ended in accordance with Canadian generally accepted accounting principles. Chartered Accountants Licensed Public Accountants February 28, 2008

3 ACTUARY S REPORT To the Members of Facility Association Residual Market Segment I have valued the policy liabilities of Facility Association Residual Market for its balance sheet as at 31 October 2007, and their changes in its statement of operations for the year then ended, in accordance with accepted actuarial practice, including selection of appropriate assumptions and methods, except as described in the following two paragraphs. The Residual Market faces a potentially material claims cost exposure arising from an event that occurred subsequent to the fiscal year end. That event was a decision made by the Court of Queen s Bench of Alberta to strike down the Alberta regulation that imposes a cap on non-pecuniary damages with respect to minor injuries arising from the use or operation of a motor vehicle. In accepted actuarial practice in Canada, an event that retroactively makes the entity different at the calculation date is to be considered to have the same effect as if it had occurred on or before the calculation date, which in this case is 31 October In order to properly estimate the potential effect of this event, it would be necessary to assess a number of legal, regulatory and claims settlement uncertainties, including consideration of information that may be forthcoming upon request from Servicing Carriers. In my opinion, the information currently available is not sufficient for this purpose. Accordingly, my valuation excludes consideration of this event. In my opinion, the amount of the policy liabilities makes appropriate provision for all policyholder obligations, except as noted in the previous two paragraphs, and the financial statements fairly present the results of the valuation. Toronto, Ontario 28 February 2008 Cynthia M. Potts Fellow, Canadian Institute of Actuaries

4 Table of Contents Balance Sheet 1 Statement of Operations 2 Statement of Amounts Due to/(from) Members & Statement of Comprehensive Income 3 Statement of Cash Flows

5 Balance Sheet As at October 31,2007 ($OOO's) ASSETS 1,538,558 1,572,394 66,144 78,242 $ $ 100,977 1,299, ,004 16,615 $ 1,299,666 78,460 80,365 12, Cash and cash equivalents LIABILITIES AND ACCUMULATED OTHER COMPREHENSIVE LOSS Servicing carrier operating fees payable and other liabilities Unearned premiums Provision for unpaid and unreported claims (Notes 9 and 16) Amounts due to members (Note 6) Accumulated other comprehensive loss (Note 13) $ 27, , , ,192 (521) $ 1,538,558 $ 24, , , ,144 $ 1,572,394 The attached notes form an integral part of these financial statements. Page 1 of 22

6 Statement of Operations Year ended ($000's) UNDERWRITING REVENUE Premiums written $ 334,695 $ 403,976 Change in unearned premiums 35,501 66,148 PREMIUMS EARNED 370, ,124 UNDERWRITING EXPENSES Claims and claims expenses incurred (Notes 9 and 16) 290, ,361 Servicing carrier operating fees 35,219 42,550 Commissions 28,625 33,948 Change in deferred premium acquisition expenses 3,687 1,013 Motor vehicle reports 4,051 5,219 Bad and doubtful accounts (net of recoveries) (Note 10) 536 (41) TOTAL UNDERWRITING EXPENSES 362, ,050 NET UNDERWRITING GAIN 7, ,074 ADMINISTRATIVE EXPENSES 3,420 2,615 EXCESS OF REVENUE OVER EXPENSES BEFORE NET INVESTMENT INCOME 4, ,459 INVESTMENT INCOME 6,080 5,159 LESS INVESTMENT EXPENSES NET INVESTMENT INCOME 5,976 5,035 EXCESS OF REVENUE OVER EXPENSES FOR THE YEAR (Note 6) $ 10,048 $ 212,494 The attached notes form an integral part of these financial statements. Page 2 of 22

7 Statement of Amounts Due to/(from) Members Year ended ($000's) BALANCE, BEGINNING OF YEAR $ 388,144 $ 220,916 EXCESS OF REVENUE OVER EXPENSES FOR THE YEAR 10, ,494 PAYMENTS FROM/(TO) MEMBERS, NET - (45,266) BALANCE, END OF YEAR (Note 6) $ 398,192 $ 388,144 Statement of Comprehensive Income Year ended 2007 EXCESS OF REVENUE OVER EXPENSES FOR THE YEAR $ 10,048 OTHER COMPREHENSIVE INCOME (LOSS): UNREALIZED GAINS AND LOSSES ON AVAILABLE FOR SALE FINANCIAL ASSETS HELD AT END OF YEAR (778) RECLASSIFICATION ADJUSTMENT FOR GAINS AND LOSSES INCLUDED IN EXCESS OF REVENUE OVER EXPENSES 140 OTHER COMPREHENSIVE INCOME (LOSS) (Note 13) (638) COMPREHENSIVE INCOME $ 9,410 The attached notes form an integral part of these financial statements. Page 3 of 22

8 Statement of Cash Flows Year ended ($000's) OPERATING Net result from the statement of operations $ 10,048 $ 212,494 Changes in items not affecting cash Funds held by members - (201,421) Premiums and other receivables 20,612 50,568 Deferred premium acquisition costs 3,687 1,013 Accrued investment income (105) 1,119 Servicing carrier operating fees payable and other liabilities 2,604 (6,652) Unearned premiums (35,501) (66,148) Provision for unpaid and unreported claims (10,466) (139,584) (9,121) (148,611) FINANCING Payments from/(to) members, net - (45,266) INVESTING Dispositions 28, ,407 Purchases 31, ,434 (Increase)/decrease in bonds (2,977) 58,973 NET INCREASE/(DECREASE) IN CASH DURING THE YEAR (12,098) (134,904) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 78, ,146 CASH AND CASH EQUIVALENTS, END OF YEAR $ 66,144 $ 78,242 Cash consists of: Cash $ 66,144 $ 78,005 Cash equivalents $ 66,144 $ 78,242 The attached notes form an integral part of these financial statements. Page 4 of 22

9 1. NATURE OF THE FACILITY ASSOCIATION The Residual Market Segment is managed by the Facility Association ( the Association ). The Association is an unincorporated non-profit association created on June 28, The Association manages and accounts for the operations of certain insurance pools on behalf of member insurance companies. The results of the operations of these insurance pools, including administration costs incurred by the Association and investment income earned on assets invested by the Association, are all allocated to members, who account for their shares of insurance pool operations in their own financial statements. The insurance pool operations do not encompass all costs and revenues related to underwriting the underlying insurance business. Various related costs and revenues are not accounted for within the insurance pools but rather, are incurred by members directly and recorded only in each member s own financial statements. The Association administers the sharing between members of the results of operations ( experience ) of the insurance pools and periodically assesses members to fund operating deficits or pays excess funds to members, all in accordance with the Association s Plan of Operation. Amounts due to and from members do not bear interest. The related costs and revenues not accounted for in these financial statements are described in Note 2. The Association s generation of revenue from underwriting automobile risks is impacted by regulation of automobile premium rates by provincial government regulatory authorities. Provincial government rate regulatory approval processes can result in the prescription of premium rates at levels other than those the Association deems appropriate for the risks to be underwritten by it. Further, to the extent that insurance companies regard premium rates in the general insurance marketplace to be inadequate there will tend to be increased usage of the Association s pools. The Association s claim costs are also influenced by provincial government actions to the extent legislation or regulations are passed that specify the nature and extent of benefits and other requirements that impact claims costs and the settlement process. The impact of such government regulation on the results and financial position of the Association s insurance pools is not determinable. Page 5 of 22

10 2. BASIS OF FINANCIAL STATEMENT PRESENTATION The Association manages the following insurance pools: The Residual Market Segment, which provides a residual automobile insurance market for owners and operators of personal and commercial motor vehicles, who may otherwise have difficulty in obtaining such insurance, in the following provinces and territories: Alberta, Ontario, Nova Scotia, Prince Edward Island, New Brunswick, Newfoundland and Labrador, Yukon, Northwest Territories, Nunavut. The Uninsured Automobile Funds for New Brunswick, Newfoundland and Labrador, Nova Scotia and P.E.I., which fund claims for damages made by persons who cannot obtain satisfaction for damages under a contract of automobile insurance and where there is no other insurance or where other insurance is inadequate with respect to the damages claimed. Risk sharing pools, operating in Ontario, Alberta (two pools), New Brunswick and Nova Scotia which provide a means for individual automobile insurance underwriters to transfer certain of the personal use automobile insurance exposures they underwrite in the respective province that may be deemed of higher risk but which do not qualify for the Residual Market Segment. The Ontario Risk Sharing Pool has operated since January 1, The two Alberta Risk Sharing Pools commenced operations as at October 1, A Grid Pool provides a means for Alberta automobile insurance underwriters to transfer personal use automobile insurance exposures that are subject to the statutory maximum premium. A Non- Grid Pool provides a means for individual Alberta automobile insurance underwriters to transfer certain of the personal use automobile insurance exposures they underwrite that may be deemed to be of higher risk but do not qualify for the Residual Market Segment. The New Brunswick First Chance Risk Sharing Pool commenced operations January 1, The First Chance Pool provides a means for individual New Brunswick automobile insurance underwriters to transfer certain of the personal use automobile insurance policies they underwrite that are eligible for the First Chance discount in that province. The Nova Scotia Inexperienced Drivers Risk Sharing Pool commenced operations January 1, The Inexperienced Drivers Pool provides a means for individual Nova Scotia automobile insurance writers to transfer certain of the personal use automobile insurance policies they underwrite for inexperienced drivers in that province. Its first statutory financial statements were for the ten month period ended. The financial statements contained herein are for the Residual Market Segment operations and for the Uninsured Automobile Funds of the Association. Separate financial statements are prepared for each of the risk sharing pools. Page 6 of 22

11 2. BASIS OF FINANCIAL STATEMENT PRESENTATION (continued) All of the premiums of the Residual Market Segment are allocated to member companies who are required by regulation to record these premiums in their financial records as direct written premiums. Member companies pay premium taxes and health levies directly to the provinces based on their direct written premiums. Members also incur other costs, such as association dues to industry organizations which are also based on direct written premiums. Accordingly, these costs are not recorded in these financial statements. Investment income earned by members on amounts due to the Association and certain premium levies charged to members in respect of uninsured automobile exposures are also not reflected in these financial statements. No provision for income taxes is recorded in these financial statements. The results of operations of the insurance pools, including administrative expenses incurred by the Association and investment income earned on insurance pool assets invested by the Association, are included in the members income for tax assessment purposes. 3. FORMATION AND OPERATION OF THE Legislation enabling operations of the Residual Market Segment came into effect as follows: October 1, 1979 in Alberta under The Alberta Insurance Act; December 1, 1979 in Ontario under An Act to Provide for Compulsory Automobile Insurance; July 1, 1981 in Nova Scotia under The Nova Scotia Insurance Act; September 1, 1982 in Prince Edward Island under The Prince Edward Island Insurance Act; July 1, 1983 in New Brunswick under The New Brunswick Insurance Act; November 1, 1985 in Newfoundland and Labrador under The Newfoundland Insurance Act; April 30, 1986 in the Yukon under The Insurance Act of the Yukon; December 1, 1986 in the Northwest Territories under The Northwest Territories Insurance Act; and on April 1, 1999 in Nunavut under The Nunavut Act. The Uninsured Automobile Funds commenced as follows: March 1, 1990 in New Brunswick; July 1, 1994 for Newfoundland and Labrador; July 14, 1994 for P.E.I.; and July 1, 1996 for Nova Scotia. The operations of the Association are conducted in accordance with the Plan of Operation (the Plan ) approved by the member automobile insurance underwriters. Within each of the jurisdictions noted above, every insurer licensed to write automobile liability insurance is a member of the Association. Risks cannot be underwritten in the Residual Market Segment unless they qualify as a residual market risk as defined in the Plan. All underwriting and claims settlement are conducted by a small number of members designated as servicing carriers. The Servicing Carrier who issues the initial policy remains responsible for servicing the policy including any settlement of claims which may arise from the policy. Servicing carriers are compensated through operating fees, in respect of their underwriting and general administrative services, and claims servicing fees. Members share in the experience of the Residual Market Segment in accordance with their participation ratio, reflecting their share of the market by province. Page 7 of 22

12 3. FORMATION AND OPERATION OF THE (continued) The Uninsured Automobile Funds are governed by the respective Provincial Insurance Acts. The responsibilities of the Association are to manage claims recording, adjustment and payment processes, allocate to members their share of experience and to assess members to fund underwriting deficits. 4. CHANGES IN ACCOUNTING POLICIES AND THEIR IMPACT Effective November 1, 2006, the Association adopted Canadian Institute of Chartered Accountants ( CICA ) accounting standards related to Comprehensive Income (Section 1530), Equity (Section 3251), Financial Instruments - Recognition and Measurement (Section 3855), Financial Instruments - Disclosure and Presentation (Section 3861) and Hedges (Section 3865), collectively (the Standards ). In accordance with the transitional provisions, the Standards have been adopted retrospectively, without restatement. Comprehensive Income and Equity The Association has added a new Statement of Comprehensive Income to its set of financial statements and has established accumulated other comprehensive income ( AOCI ) as a separate balance in the Balance Sheet. Comprehensive Income includes net income and other comprehensive income ( OCI ). OCI includes unrealized gains and losses from available for sale financial assets, the effective portion of the changes in fair value of derivatives designated as cash flow hedges and unrealized gains and losses on the translation of self-sustaining foreign operations. Initial Adoption of Standards With the adoption of the Standards, the Association has recorded $117 as accumulated other comprehensive income ( AOCI ) as at November 1, The AOCI balance at November 1, 2006 represents unrealized gains on investments classified as available for sale. The total impact on the balance sheet as at November 1, 2006 was as follows: Account Debit / (Credit) Investments 117 Accumulated other comprehensive income (117) The change to fair value for investments had a minimal impact on the discount rate applied in computing the provision for unpaid and unreported claims and accordingly, the rate was not adjusted in respect of that change. Section 3855 requires embedded derivatives be recognized by separating them from their host contracts and measuring them on the balance sheet at fair value. Changes in fair value are recognized in net income. The Association has not identified any significant embedded derivatives that require separate accounting treatment in the financial statements. Page 8 of 22

13 5. SIGNIFICANT ACCOUNTING POLICIES The accompanying financial statements have been prepared by management in accordance with Canadian generally accepted accounting principles, the most significant of which are summarized below: Premiums earned Premiums are included in revenue on a monthly pro rata basis over the terms of the policies. Provision for unpaid and unreported claims An estimate of the amount required to pay all incurred claims relating to the Residual Market Segment is included in these financial statements. The provision is determined by the Association's actuary (the Actuary ), using accepted actuarial estimation techniques. These techniques take into consideration prior claims experience and estimates of future trends in the severity of claims settlements. The estimates are periodically reviewed and, as adjustments to these liabilities become necessary, they are reflected in current operations. Claims related balances are carried on a discounted basis in accordance with accepted actuarial practice in Canada. Servicing carriers' fees In accordance with the Association's Plan, servicing carriers are reimbursed on a formula basis for their operating and claims adjusting costs. Operating fees relate to underwriting and are charged to operations when the premiums are written. Claims adjusting costs are determined based on the loss ratio experienced in each policy year and are expensed on an ongoing basis. Additional claims adjusting fees are paid based on emerging loss experience. The additional fees are calculated annually and expensed in the year of calculation. Financial Instruments In accordance with CICA Handbook Section 3855, all financial assets are classified as either loans and receivables, held to maturity, held for trading or available for sale. Loans and receivables are measured at amortized cost using the effective interest method. The Association has classified the following financial assets as loans and receivables: funds held by members, premiums receivable and other receivables. Held to maturity assets are also measured at amortized cost using the effective interest method. The Association has not classified any financial assets as held to maturity. Held for trading instruments are measured at fair value with gains and losses recognized in the excess/deficiency of revenue over expenses for the year. The Association s cash and cash equivalents have been classified as held for trading. Available for sale financial assets are measured at fair value with unrealized gains and losses recognized in OCI. When gains and losses are realized, related amounts are transferred from OCI to the Statement of Operations. The amount of any other than temporary impairment of an investment is also transferred from OCI to the Statement of Operations. The Association has classified their investments as available for sale. Page 9 of 22

14 5. SIGNIFICANT ACCOUNTING POLICIES (continued) Financial liabilities are classified as either held for trading or other. Held for trading financial instruments are measured at fair value with gains and losses recognized in net income. Financial liabilities classified as other are measured at amortized cost using the effective interest method. Gains and losses are reported in net income in the period that the liability is derecognized. The Association has classified the following financial liabilities as other liabilities: servicing carrier operating fees payable and other liabilities and amounts due to members. Fair value represents the amount of the consideration that would be agreed upon in an arm s length transaction between knowledgeable, willing parties who are under no compulsion to act. Quoted market prices are the most reliable source of fair value for actively traded securities. Where market prices are unavailable, management s best estimate based on a range of methodologies and assumptions may be used. Since these estimates involve uncertainties, the fair values may not reflect the amount realized for an immediate settlement of the instruments. Transaction costs are added to the carrying amount of the financial instrument. Regular-way purchases or sales, which are those that are not net-settled, of financial assets or financial liabilities are recognized on trade date. Deferred premium acquisition costs Deferred premium acquisition costs are primarily commissions related to the acquisition of Residual Market Segment business. The costs are deferred in relation to the unexpired portion of policies in force, subject to a test of recoverability. Premium tax is not a deferrable expense for the purpose of the Association s financial statements because premium tax is assessed on and paid by individual member companies on the basis of their direct written premiums, which include their share of the Association s written premiums. Premium deficiency reserve A premium deficiency reserve is recorded to the extent of any excess of the value of estimated losses and expenses, relating to the unexpired portion of policies in force, over the value of unearned premiums carried for these policies. 6. AMOUNTS DUE TO/(FROM) MEMBERS Members of the Association share in the excess of revenue over expenses for the year in accordance with their participation ratios. Page 10 of 22

15 6. AMOUNTS DUE TO/(FROM) MEMBERS (continued) The balance of amounts due to/(from) members at is comprised of the following: (Payments to)/ Due to/(from) Operating Assessments from Members Fiscal Year (Loss)/Surplus Members, Net Total 1980 to 1998 $ 596,731 $ (90,008) $ 506, ,219 (378,718) (318,499) ,743 (168,282) (153,539) 2001 (5,783) (12,824) (18,607) 2002 (101,046) 9,055 (91,991) 2003 (491,265) 126,220 (365,045) ,761 1, , ,766 (7,715) 254, ,494 (45,266) 167, ,048-10,048 $ 964,668 $ (566,476) $ 398,192 The accumulated other comprehensive loss is also attributable to the members, but is recorded separately in the balance sheet and has not been included in the periodic payments to and assessments from members. Fair Values Funds held by members and other amounts due to and from members are due on demand and accordingly, are recorded at their face amount. 7. ROLE OF THE ACTUARY The actuary is appointed by the Board of Directors of the Association. With respect to the preparation of these financial statements, the actuary is required to carry out a valuation of the policy liabilities and report thereon to the members. The valuation is carried out in accordance with accepted actuarial practice. The scope of the valuation encompasses only the policy liabilities. The policy liabilities consist of a provision for unpaid claims and adjustment expenses on the expired portion of policies and of future obligations on the unexpired portion of policies. In performing the valuation of the liabilities for these future events, which are by their very nature inherently variable, the actuary makes assumptions as to future rates of claim frequency and severity, inflation, expenses and other matters, taking into consideration the circumstances of the Association and the nature of the insurance policies. Procedures are put in place by the actuary to ensure that the data used in the valuation is sufficient and reliable for the valuation of policy liabilities. The actuary also makes use of the management information provided by the Association and uses the work of the auditors with respect to the verification of the underlying data used in the valuation. The valuation is necessarily based on estimates and consequently, the final values may vary significantly from those estimates. Page 11 of 22

16 8. INVESTMENTS The amortized cost and fair value of investments are summarized as follows: Amortized Fair Amortized Fair Cost Value Cost Value Bonds Canadian provincial, and public authorities Due in 1 year or less $ - $ - $ 11,470 $ 11,470 1 year to 5 years 5,219 5,255 35,097 35,314 Canadian corporate Due in 1 year or less 5,524 5,521 4,293 4,268 1 year to 5 years 61,754 61,314 14,839 14,766 After 5 years 6,484 6,370 10,305 10,303 Total Investments $ 78,981 $ 78,460 $ 76,004 $ 76,121 Details of significant terms, conditions, and the credit quality of investments are as follows: (i) Short-term investments These investments have an average interest rate of 5.30% ( %). The Association limits its short term investments to securities issued by the Government of Canada, a Canadian province or a Canadian municipality of public authority having a rating of A or better, or a Canadian chartered bank having a rating of R-1 or better. (ii) Bonds These investments have an average interest rate of 5.16% ( %). The Association limits its long term investments to securities issued or guaranteed by the Government of Canada, any province or municipality or public authority of Canada having a rating of A or better, and corporations having a rating of A or better. The Association engages periodically in securities lending, in accordance with criteria set out in its investment policies. As at, securities lent amounted to $6,234 ( $2,061) and $6,653 ( $2,220) of collateral was held. Fair Values The fair values of the Association s investments are based upon the latest market bid prices as reported by the investment custodian. Page 12 of 22

17 9. PROVISION FOR UNPAID AND UNREPORTED CLAIMS The provision for unpaid claims consists of estimates of the costs of claims reported but not yet settled. These estimates are established on a case basis by the claims adjusters of servicing carriers. The provision for unreported claims, which is determined by the Association s actuary, consists of: an estimate to allow for future loss development on reported claims, taking into account past claims experience and current trends in claims costs; and an estimate for claims incurred but not yet reported (IBNR). (a) Nature of unpaid and unreported claims/measurement uncertainty The establishment of the provision for unpaid and unreported claims is based on both known facts and the interpretation of current and anticipated circumstances. It is a complex and dynamic process influenced by a large variety of factors. These factors include the experience of the Association and the experience of the voluntary market involving claim payment patterns, loss payments, pending levels of unpaid claims, claims severity and claim frequency patterns. Other factors include the continually evolving and changing regulatory and legal environment, actuarial studies, professional experience and expertise of the Association s members retained to handle individual claims, the quality of the data used for projection purposes, existing claims management practices including claims handling and settlement practices, the effect of inflationary trends on future claims settlement costs, court decisions, economic conditions and public attitudes. In addition, time can be a critical part of the provision determination, since the longer the span between the incidence of a loss and the payment or settlement of the claims, the more variable the ultimate settlement amount can be. Consequently, the establishment of the provision for unpaid and unreported claims process relies on the judgement and opinions of a large number of individuals, on historical precedent and trends, on prevailing legal, economic, social and regulatory trends and on expectations as to future developments. The process of determining the provision necessarily involves risks that the actual results will deviate, perhaps substantially, from the best estimates made. (b) Structured settlements In the normal course of claims settlements, the Association s servicing carriers will, where appropriate, purchase annuities from life insurers to provide for fixed and recurring payments Page 13 of 22

18 9. PROVISION FOR UNPAID AND UNREPORTED CLAIMS (continued) to claimants. The related claims provisions are removed from the balance sheet when an annuity is purchased. As a result of these arrangements, the Association is exposed to credit risk to the extent that the life insurers fail to fulfill their obligations. The risk is managed by acquiring annuities from life insurers with proven financial stability. The maximum exposure is for the discounted value of the payments outstanding on such annuities that are still in force. The Association does not have an estimate of the undiscounted outstanding payments. The servicing carriers estimate of the original purchase value of annuities in force is $ 111,000 ( $91,000). The Association believes the potential exposure to any defaults by life insurers, taken together with the coverage provided by the life insurance industry s consumer protection plan, can currently be assessed as minimal. (c) Composition of provision for unpaid and unreported claims Case reserves $ 659,101 $ 637,860 Claims fee provision 56,882 32,740 IBNR & development provision 232, ,743 $ 948,877 $ 959,343 (d) Activity in provision for unpaid and unreported claims Provision for unpaid and unreported claims, beginning of year $ 959,343 $ 1,098,927 Incurred for: Current year claims 278, ,492 Prior years claims 12,360 (150,131) Payments attributable to: Current year claims (121,933) (147,449) Prior years claims (179,119) (169,496) Provision for unpaid and unreported claims, end of year $ 948,877 $ 959,343 The accident periods are the 12 month periods ending October 31 st. Page 14 of 22

19 9. PROVISION FOR UNPAID AND UNREPORTED CLAIMS (continued) (e) Computation of the discounted provision for unpaid and unreported claims The discounted year end provision is comprised of the application of a 0.36% ( %) discount rate to the undiscounted estimate of $ 863,569 ( $869,464) and the addition of provisions for adverse deviation in future interest rates and in claim settlement amounts. The discount rate reflects the transfer to members of the majority of previously invested funds (Note 11). (f) Fair values The fair values of the provision for unpaid and unreported claims and of other policy liabilities are not readily determinable given the absence of any regular market for such liabilities. Further, this fair value would be impacted by the income generation potential of related invested premiums. A significant proportion of those investment amounts are held by members, not by the Residual Market Segment. 10. FUNDING OF LIQUIDATIONS (a) Maplex General Insurance Company The Facility Association, with the approval of its members, entered into an agreement with the Liquidator of Maplex General Insurance Company to fund the Statutory Accident Benefit Claims arising out of the liquidation of that company. The Association retains a right of subrogation against the estate. The total net funding liability will be assessed to the members. To date, the total amount of funding, paid and accrued by the Association, is $13,206 ( $12,455). To date, $4,358 of this amount has been charged to bad debts, of which $248 was charged to bad debts in 2007 and $1,485 was a bad debts recovery in The balance of $8,848, which is recorded with premiums receivable, is believed to be recoverable from the estate. (b) Markham General Insurance Company The Facility Association, with the approval of its members, entered into an agreement with the Liquidator of Markham General Insurance Company to fund the Statutory Accident Benefit Claims arising out of the liquidation of that company. The Association retains a right of subrogation against the estate. The total net funding liability will be assessed to the members. To date, the total amount of funding, paid and accrued by the Association, is $10,874 ( $10,632). To date, $10,342 of this amount has been charged to bad debts, of which $217 was charged in 2007 ( $1,681). The balance of $532, which is recorded with premiums receivable, is believed to be recoverable from the estate. Page 15 of 22

20 11. FUNDS HELD BY MEMBERS During the year $0 ( $201,421) of funds were transferred from the Residual Market Segment to member companies to allow such member companies to invest the funds utilizing their own investment policies and practices. The funds are allocated to individual member companies based on their shares of unearned premiums and the provision for unpaid and unreported claims. This transfer of funds does not change the member companies obligations to the Residual Market Segment. The funds are due on demand and are free of interest. In November 2007, a further $ 100,000 of funds were transferred to member companies. Fair Values Funds held by members and other amounts due to and from members are due on demand and accordingly, are recorded at their face amount. 12. FUTURE CHANGES IN ACCOUNTING POLICIES Two new CICA Handbook sections are effective for the Association s 2008 fiscal year in relation to financial instruments: Financial Instruments Disclosures (section 3862) and Financial Instruments Presentation (section 3863). The Association has not yet completed its review of these new standards, but they will likely result in increased disclosures regarding financial instruments. 13. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) The balance in accumulated other comprehensive loss consists of the following: 2007 Balance, beginning of year $ - Change in accounting policy (Note 4) 117 Other comprehensive loss (638) Balance, end of year $ (521) 14. FAIR VALUES The recording of fair values for investments, unpaid and unreported claims, funds held by members and due to and from members is as disclosed in the respective notes above. Other payable and receivable amounts are short-term and their recorded amounts approximate their fair value. Page 16 of 22

21 15. RISKS AND RISK MANAGEMENT The Association pools are subject to various risks and manages such risks as described below: (a) Investments are subject to interest rate and credit risks that are managed through coordinating with and performance monitoring of the external investment managers, appointed by the Association, all in accordance with the Association s investment policy. (b) Funds held by members and amounts due to and from members are subject to credit risk arising from the failure of a member or members to respond to a cash call or assessment by the Association. This exposure is mitigated through such obligations being joint and several on all members. (c) Various underwriting and claims-related amounts are subject to risks of incorrect processing that could cause financial statement misstatements or operational difficulties, including requirements to correct amounts previously received from or paid to insureds. These risks are managed through the Association conducting periodic audits at servicing carriers and ceding companies. 16. SUBSEQUENT EVENT The Association has an additional claims cost exposure, that management believes could prove material, arising from the decision made subsequent to the year end by the Court of Queen s Bench of Alberta. The Court decision was that, on constitutional grounds, a government regulation that imposed a $4,000 cap on non-pecuniary damages with respect to minor injuries was struck down and rendered of no force or effect. The Association s exposure arises, in part, from the consequential potential for such damages being awarded for amounts in excess of amounts currently provided for in the provision for unpaid and unreported claims and in unearned premiums. Amounts currently provided were computed based on the assumption the $4,000 cap would remain in force. There is also potential for claims being made in respect of prior events in addition to those currently recognized as unpaid and unrecorded claims. The Court s decision is being appealed. The outcome of such an appeal and of any subsequent appeal is inherently uncertain. Further, it is not known whether the Alberta Government will introduce amended legislation on non-pecuniary damages. To date, the measurement of the potential quantum of the Association s additional exposure with any reasonable degree of reliability has proven impracticable, given the circumstances. These circumstances include ongoing legal, regulatory, claim and settlement uncertainties. A circumstance particular to the Association is the impracticality, in the time available, of obtaining detailed information on potential exposures and on how they are being assessed by Servicing Carriers. Page 17 of 22

22 16. SUBSEQUENT EVENT (continued) In the absence of detailed claims data from Servicing Carriers, management considered recording a general bulk provision for the exposure. Management believes that the estimation of any such provision for the Association, at this time, would involve a level of measurement uncertainty that was unacceptable relative to the results and financial position of the Association. Accordingly, no such provision has been made. Page 18 of 22

23 17. GEOGRAPHIC SEGMENTATION OF OPERATIONS Facility Association Residual Market Segment Ontario NS PEI NB NL Alberta Yukon NWT Nunavut Total (Note 16) (Note 16) Underwriting Premiums earned $ 142,284 $ 59,645 $ 6,096 $ 32,246 $ 14,250 $ 102,732 $ 3,181 $ 7,537 $ 733 $ 368,704 Underwriting expenses 196,334 50,629 4,251 18,910 7,886 73,447 3,441 6, ,699 Underwriting gain (loss) $ (54,050) $ 9,016 $ 1,845 $ 13,336 $ 6,364 $ 29,285 $ (260) $ 1,117 $ 352 $ 7, Administrative expenses 1, ,200 Excess (deficiency) of revenue over expenses before net investment income $ (55,111) $ 8,541 $ 1,738 $ 13,041 $ 6,173 $ 28,444 $ (332) $ 1,013 $ 298 $ 3,805 Net investment income 3, , ,976 Excess (deficiency) of revenue over expenses for the year $ (51,968) $ 9,313 $ 1,842 $ 13,556 $ 6,360 $ 29,591 $ (306) $ 1,084 $ 309 $ 9,781 Note: Abbreviations are used above for Nova Scotia (NS); Prince Edward Island (PEI); New Brunswick (NB); Newfoundland and Labrador (NL); and the Northwest Territories (NWT). Page 19 of 22

24 17. GEOGRAPHIC SEGMENTATION OF OPERATIONS (continued) 2007 Ontario N.S. P.E.I. N.B. NL Alberta Yukon NWT Nunavut Total Total brought forward $ (51,968) $ 9,313 $ 1,842 $ 13,556 $ 6,360 $ 29,591 $ (306) $ 1,084 $ 309 $ 9,781 Uninsured Automobile Funds Underwriting Premiums earned $ - $ 526 $ 62 $ 418 $ 486 $ - $ - $ - $ - $ 1,492 Underwriting expenses ,005 Underwriting gain (loss) $ - $ (9) $ (4) $ 260 $ 240 $ - $ - $ - $ - $ 487 Administrative expenses Excess (deficiency) of revenue over expenses for the year $ - $ (64) $ (59) $ 205 $ 185 $ - $ - $ - $ - $ 267 Total excess (deficiency) of revenue over expenses for the year $ (51,968) $ 9,249 $ 1,783 $ 13,761 $ 6,545 $ 29,591 $ (306) $ 1,084 $ 309 $ 10,048 Page 20 of 22

25 17. GEOGRAPHIC SEGMENTATION OF OPERATIONS (continued) 2006 Facility Association Residual Market Segment Ontario N.S. P.E.I. N.B. Nfld & Labrador Alberta & Territories * Total Underwriting Premiums earned $ 214,769 $ 62,862 $ 8,206 $ 39,216 $ 18,990 $ 124,876 $ 468,919 Underwriting expenses 91,101 45,439 3,914 21,250 7,929 86, ,576 Underwriting gain $ 123,668 $ 17,423 $ 4,292 $ 17,966 $ 11,061 $ 37,933 $ 212,343 Administrative expenses 1, ,604 Excess of revenue over expenses before net investment income $ 122,643 $ 17,060 $ 4,195 $ 17,750 $ 10,924 $ 37,167 $ 209,739 Net investment income 2, ,070 5,035 Excess of revenue over expenses for the year $ 125,351 $ 4,281 $ 18,199 $ 11,111 $ 214,774 * Territories include amounts for Yukon, Northwest Territories & Nunavut Page 21 of 22

26 October 31, GEOGRAPHIC SEGMENTATION OF OPERATIONS (continued) 2006 Ontario N.S. P.E.I. N.B. Nfld & Labrador Alberta & Territories* Total Total brought forward $ 125,351 $ 17,595 $ 4,281 $ 18,199 $ 11,111 $ 38,237 $ 214,774 Uninsured Automobile Funds Underwriting Premiums earned $ - $ 272 $ 67 $ 485 $ 381 $ - $ 1,205 Underwriting expenses 1, , ,474 Underwriting gain (loss) $ - $ (1,041) $ (40) $ (975) $ (213) $ - $ (2,269) Administrative expenses Excess (deficiency) of revenue over expenses for the year $ - $ (1,041) $ (40) $ (986) $ (213) $ - $ (2,280) Total excess of revenue over expenses for the year $ 125,351 $ 4,241 $ 17,213 $ 10,898 $ 212,494 * Territories include amounts for Yukon, Northwest Territories & Nunavut Page 22 of 22