BRITISH CAYMANIAN INSURANCE COMPANY LIMITED. Financial Statements (With Independent Auditor s Report Thereon) Year ended December 31, 2013

Transcription

1 Financial Statements (With Independent Auditor s Report Thereon) Year ended

2 INDEPENDENT AUDITOR S REPORT To the Board of Directors on behalf of British Caymanian Insurance Company Limited We have audited the accompanying financial statements of British Caymanian Insurance Company Limited, which comprise the statement of financial position as at and the statements of comprehensive income, changes in shareholder s equity and cash flows for the year then ended, and notes, comprising a summary of significant accounting policies and other explanatory information. Management s responsibility for the financial statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of British Caymanian Insurance Company Limited as at, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards. April 30, 2014 PricewaterhouseCoopers, 5 th Floor Strathvale House, P.O. Box 258, Grand Cayman, KY1-1104, Cayman Islands T: +1 (345) , F: +1 (345) , 1

3 Statement of Financial Position December 31, December 31, Notes Assets Cash and cash equivalents 5(i), 14,15 $ 8,827,657 $ 7,937,869 Financial assets at fair value through profit or loss 5(ii), 9 (d)(f)(h),14 13,459,125 13,301,567 Financial assets, held-to-maturity 5(ii), 9(f), 14,15 2,370,358 2,396,110 Insurance balances receivable 3(t),14,15 5,373,309 5,256,214 Reinsurance balances receivable 3(t),4, 14,15 362,057 1,643,172 Prepaid reinsurance premiums 10,112,114 10,092,509 Losses recoverable from reinsurers 4, 8, 14 1,353,916 1,299,552 Deferred acquisition expenses 840, ,482 Amounts due from related parties 9(a), 14,15 5,689,317 6,083,671 Property, plant and equipment 6 709, ,451 Prepaid expenses 257, ,164 Intangible assets 7 1,620,402 1,492,299 Other assets and receivables 3(t),14,15 1,509,963 1,423,982 Total assets $ 52,486,511 $ 52,423,042 Liabilities Outstanding losses and loss expenses 8, 14 $ 4,490,187 $ 4,033,895 Unearned premiums 15,793,035 15,675,136 Deferred commission income 2,000,177 1,996,081 Reinsurance balances payable 3(t),14,15 3,487,215 3,255,468 Amounts due to related parties 9(a), 14,15 476, ,773 Other liabilities 14,15 654, ,365 Total liabilities 26,901,683 26,308,718 Shareholder s equity Share capital 10 3,000,000 3,000,000 Share premium 11 26,550,000 26,550,000 Accumulated deficit (3,965,172) (3,435,676) Total equity attributable to the equity holder of the Company 25,584,828 26,114,324 Total liabilities and shareholder s equity $52,486,511 $52,423,042 Approved for issuance on behalf of British Caymanian Insurance Company Limited s Board of Directors by: Martin Kenny.... Director, Date: April 9, 2014 John Michael Foster.... Director, Date: April 9, 2014 The accompanying notes are an integral part of these financial statements 2

4 Statement of Comprehensive Income December 31, December 31, Notes Premiums written 9(b) $ 35,537,842 $ 35,069,502 Change in unearned premiums (117,899) (1,097,138) Premiums earned 35,419,943 33,972,364 Reinsurance premiums ceded 4,9(m) 27,933,062 27,054,824 Change in prepaid reinsurance premiums (19,605) (1,416,683) Premiums ceded 27,913,457 25,638,141 Net premiums earned 7,506,486 8,334,223 Claims paid 8,9(b)(j) (3,510,860) (6,600,030) Change in outstanding loss provisions 8 (456,292) 83,695 Claims recovered and recoverable from reinsurers 4, 8 698,996 2,871,663 Net claims incurred (3,268,156) (3,644,672) Commission income 5,532,517 5,126,470 Commission expense (1,877,215) (1,820,912) Other underwriting income - 11,699 Net underwriting income 7,893,632 8,006,808 Net investment income 5(iv), 9(a)(f) 642, ,469 General and administrative expenses 12 (6,065,536) (5,540,755) Net income and comprehensive income for the year (all attributable to the owner of the Company) $ 2,470,504 $ 3,167,522 The accompanying notes are an integral part of these financial statements 3

5 Statement of Changes in Shareholder s Equity Total equity attributable to the Share Share Accumulated equity holder of Note capital premium deficit the Company Balance at December 31, ,000,000 26,550,000 (3,596,532) 25,953,468 Dividends 9(p) - - (3,006,666) (3,006,666) Net income and comprehensive income for the year - - 3,167,522 3,167,522 Balance at December 31, ,000,000 26,550,000 (3,435,676) 26,114,324 Dividends 9(p) - - (3,000,000) (3,000,000) Net income and comprehensive income for the year - - 2,470,504 2,470,504 Balance at $ 3,000,000 $26,550,000 $ (3,965,172) $25,584,828 The accompanying notes are an integral part of these financial statements 4

6 Statement of Cash Flows December 31, December 31, Notes Cash flows from operating activities Net income $ 2,470,504 $ 3,167,522 Adjustments for: Depreciation and amortization 6, 7 146, ,655 Dividend and interest income, net of amortization 5, 9(a) (588,913) (679,608) Net realized and unrealized gains on investments 5 (229,871) (143,287) Operating cash flow before changes in non-cash operating 1,798,353 2,485,282 working capital Change in non-cash operating working capital 17 (349,456) (260,450) Net cash provided by operating activities *, ** 1,448,897 2,224,832 Cash flows from investing activities Proceeds on the sale/maturity of financial assets at fair value through profit or loss 12,402,355 9,757,835 Purchases of financial assets at fair value through profit or loss (12,330,044) (10,029,186) Interest and dividends received 614, ,326 Net purchase of property, plant and equipment and intangible assets 6, 7 (496,087) (153,622) Net cash provided by/(used in) investing activities ** 190,891 (280,353) Cash flows from financing activities Dividends paid (750,000) (751,666) Net cash used in financing activities * (750,000) (751,666) Increase in cash and cash equivalents 889,788 1,753,519 Cash and cash equivalents at beginning of year 7,937,869 6,184,350 Cash and cash equivalents at end of year $ 8,827,657 $ 7,937,869 Net cash provided by operating activities includes: Interest received $ 454,137 $ 395,214 Dividends received $ 160,530 $ 310,112 * Dividends declared include $2,250,000 (2012 -$2,255,000) that was settled by way of offset against inter-company accounts. ** Proceeds on the sale on intangible assets of $nil ( $753,518) were settled by way of offset against inter-company accounts. The accompanying notes are an integral part of these financial statements 5

7 1. General British Caymanian Insurance Company Limited (the Company ), incorporated in the Cayman Islands on December 20, 1984, carries on business as an insurance company and was granted a Class A license under the Cayman Islands Insurance Law (Revised) on December 24, The Company is a wholly owned subsidiary of British Caymanian Holdings Limited (the Parent ), an entity domiciled in the Cayman Islands. The principal activity of the parent is to act as a holding company. The registered office and principal place of business of the Company and the Parent is BritCay House, P.O. Box 74, George Town, Grand Cayman, Cayman Islands, B.W.I. The Company s parent is 75% owned by Colonial Group International Limited, an entity domiciled in Bermuda, whose principal activity is to act as a holding company. Colonial Group International Limited is fully owned by Edmund Gibbons Limited (the Ultimate Parent ), an entity domiciled in Bermuda. The principal activity of the ultimate parent is to act as a holding company The Company writes property, marine, automobile physical damage and liability risks, and other general risks in the Cayman Islands. Prior to February 1, 2009, the Company also acted as a distributor and administrator for a pension product. Effective February 1, 2009, the operations of the pensions division are being carried out by a fellow subsidiary, British Caymanian Insurance Agencies Limited ( Britcay Agency ). Prior to September 1, 2007, the Company also wrote medical, dental, group life, and accidental death and dismemberment business which was 100% reinsured with a related party, Colonial Medical Insurance Company Limited ( Colonial Medical ). Since September 1, 2007, such medical business has been written directly by Colonial Medical with Britcay Agency administering the medical business for which it receives commissions which were previously earned by the Company. The Company buys reinsurance which reduces the Company s retained exposure per occurrence and in the aggregate as further described in Note Basis of presentation (a) Statement of Compliance These financial statements are prepared in accordance with International Financial Reporting Standards ( IFRS ) (b) Basis of measurement The financial statements are prepared on the historical cost basis, except for financial assets at fair value through profit or loss, which are stated at fair value, and financial assets held-to-maturity, which are carried at amortized cost. The methods used to measure fair value are discussed further in Notes 3, 5 and 14. (c) Functional and presentation currency The financial statements are presented in Cayman Islands dollars, the Company s functional currency. 6

8 2. Basis of preparation (continued) (d) Use of estimates and judgments The preparation of financial statements in conformity with IFRS requires management to make judgments, estimates, and assumptions that affect: the application of accounting policies; the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of income and expenses during the year. The estimates and associated assumptions are based on historical experience and expectations of future events that are believed to be reasonable under the circumstances and the results of which form the basis of making the judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from those estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. estimates are recognized in the period in which the estimate is revised. Revisions to accounting The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are: - Financial assets at fair value through profit or loss (see Notes 3(a) and 14) - Outstanding losses and loss expenses (see Notes 8 and 14) - Impairment of financial and non-financial assets (see Notes 3(c) and 14) 3. Summary of significant accounting policies The principal accounting polices applied in the presentation of these financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. (a) Investments Investments are comprised of: managed funds; corporate and government bonds; common equity securities and preferred shares. Investments are accounted for on the trade date (the date the Company enters into a commitment to buy or sell the investment). The Company classifies its investments as fair value through profit or loss, or held-to-maturity. Investments intended to be held for an indefinite period of time and which may be sold in response to liquidity needs or changes in interest rates, exchange rates or equity prices are classified as financial assets at fair value through profit or loss. Investments with a fixed maturity, where management has both the intent and the ability to hold the financial asset to maturity, are classified as financial assets, held-tomaturity. Management determines the appropriate classification of its investments at the time of purchase. Investments classified as financial assets at fair value through profit or loss are initially recognized at cost in the Statement of Financial Position (transaction costs are expensed in the Statement of Comprehensive Income), and are subsequently re-measured at fair value based upon market quotations or counterparty prices. Investments in unquoted funds are typically valued using the net asset values obtained from the administrators of the respective investment entities. These investment entities generally carry their investments at fair value as determined by their respective investment managers or independent administrators. For the underlying securities in the investment entities which are not actively traded, fair values are estimated by using values from independent pricing services or based on manager valuations. Due to the inherent uncertainty of such valuation, the value of investments in unquoted funds held by the Company may differ significantly from the values that would have been used had a ready market value for the investments existed, and such differences could be material. 7

9 3. Summary of significant accounting policies (continued) (a) Investments (continued) Unrealized gains and losses on financial assets at fair value through profit or loss are included in the determination of net income and comprehensive income in the year in which they arise. Financial assets held-to-maturity are carried at amortized cost. Premiums and discounts on acquisition are amortized over the periods remaining to maturity using the straight-line method, which approximates the effective yield method, and the amortization is included as an adjustment to interest income. Realized gains and losses on the sale of investments are calculated on the average cost basis. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value of financial assets and liabilities traded in active markets (such as publicly traded derivatives and trading securities) are based on quoted market prices at the close of trading on the reporting date. Structured entities: A structured entity is an entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity, such as when any voting rights relate to administrative tasks only and the relevant activities are directed by means of contractual arrangements. A structured entity often has some or all of the following features or attributes; (a) restricted activities, (b) a narrow and well-defined objective, such as to provide investment opportunities for investors by passing on risks and rewards associated with the assets of the structured entity to investors, (c) insufficient equity to permit the structured entity to finance its activities without subordinated financial support and (d) financing in the form of multiple contractually linked instruments to investors that create concentrations of credit or other risks (tranches). The Company considers all of its investments in managed funds ( Investment Funds ) to be investments in unconsolidated structured entities. The Investment Funds are managed by unrelated asset managers and apply various investment strategies to accomplish their respective investment objectives. The Investment Funds finance their operations by issuing redeemable shares which are puttable at the holder s option and entitles the holder to a proportional stake in the respective fund s net assets. The Company holds redeemable shares in each of their Investment Funds. The change in fair value of each Investment Fund is included in the statement of comprehensive income in net unrealized (loss) / gain in investments at fair value through profit in loss within net investment income. The Company s investments in Investment Funds are subject to the terms and conditions of the respective Investment Fund s offering documentation and are susceptible to market price risk arising from uncertainties about future values of those Investment Funds. All of the Investment Funds in the investment portfolio are managed by portfolio managers who are compensated by the respective Investment Funds for their services. Such compensation generally consists of an asset based fee and a performance based incentive fee and is reflected in the valuation of the Fund s investment in each of the Investee Funds. Typically, the right of the Company to request redemption of its investments in Investment Funds ranges in frequency from daily to 70 days. The Company s holding in a third party investment fund, as a percentage of the investment fund's total net asset value, will vary from time to time dependant on the volume of subscriptions and redemptions at the investment fund level. 8

10 3. Summary of significant accounting policies (continued) (a) Investments (continued) The Company s maximum exposure to loss from its interests in Investment funds is equal to the total fair value of its investments in investment funds. Once the Company has disposed of its shares in an investment fund the Company ceases to be exposed to any risk from that investment fund. (b) Depreciation of property, plant and equipment Property, plant and equipment are recorded at cost less accumulated depreciation. Depreciation is charged to net income or loss in the Statement of Comprehensive Income on a straight-line basis over the estimated useful life of the asset. The estimated useful lives are as follows: Computer hardware Office equipment Automobile Leasehold improvements Machinery and equipment 5 years 5 years 5 years 5-10 years 15 years The assets residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period. (c) Impairment Financial assets (including receivables) The Company assesses at each Statement of Financial Position date whether there is objective evidence that a financial asset, or group of financial assets, is impaired. A financial asset, or group of financial assets, is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that have occurred after the initial recognition of the asset (a loss event ) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset, or group of financial assets, that can be reliably estimated. Objective evidence that a financial asset, or group of financial assets, is impaired includes observable data that comes to the attention of the Company about the following events: (i) Significant financial difficulty of the issuer or debtor; (ii) A breach of contract, such as a default or delinquency in payments; (iii) It becoming probable that the issuer or debtor will enter bankruptcy or other financial reorganization; (iv) The disappearance of an active market for that financial asset because of financial difficulties; or (v) Observable data indicating that there is a measurable decrease in the estimated future cash flow from a group of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified to the individual financial assets in the Company, including adverse changes in the payment status of issuers or debtors in the Company and national or local economic conditions that correlate with defaults on the assets in the Company. The Company first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant. If the Company determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. 9

11 3. Summary of significant accounting policies (continued) (c) Impairment (continued) Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognized are not included in a collective assessment of impairment. If there is objective evidence that an impairment loss has been incurred on loans and receivables or held-tomaturity investments carried at amortized cost, the amount of the loss is measured as the difference between the asset s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have been incurred), discounted at the financial asset s original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account, and the amount of the loss is recognized in the Statement of Comprehensive Income. If a held-to-maturity investment has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. As a practical expedient, the Company may measure impairment on the basis of an instrument s fair value using an observable market price. For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics (i.e. on the basis of the Company s grading process that considers asset type, industry, geographical location, past-due status and other relevant factors). Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the issuer s ability to pay all amounts due under the contractual terms of the financial instrument being evaluated. If in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized (such as improved credit rating), the previously recognized impairment loss is reversed by adjusting the allowance account. The amount of the reversal is recognized in the Statement of Comprehensive Income. Non-financial assets Assets that have an indefinite useful life are not subject to amortization and are tested annually for impairment. Assets that are subject to depreciation and amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows. (d) Share capital Ordinary shares are classified as equity. (e) Insurance contracts i) Classification The Company classifies its insurance contracts as short-term insurance contracts. Short-term insurance contracts primarily include property insurance underwritten by reference to the commercial value of the properties and contents insured and motor insurance comprising auto physical damage and personal liability. The Company also writes marine cover, directors and officers liabilities cover and professional indemnity, but these lines are generally not significant to the Company. 10

12 3. Summary of significant accounting policies (continued) (e) Insurance contracts (continued) ii) Recognition and measurement Premiums written and ceded are recognized in the Statement of Comprehensive Income proportionally over the period of coverage. Generally, premiums are written on an annual basis. The portion of premiums written relating to in-force contracts that relates to unexpired risks at the Statement of Financial Position date is reported as unearned premiums. Similarly, the portion of premiums ceded relating to in-force contracts that relates to unexpired risks at the Statement of Financial Position date is reported as prepaid reinsurance premiums. Claims and loss adjustment expenses are charged to income as incurred based on the estimated liability for compensation owed to contract holders or third parties damaged by contract holders. They include direct and indirect claims settlement costs and arise from events that have occurred up to the end of the reporting period even if they have not yet been reported to the Company. The Company does not discount its liabilities for unpaid claims. Liabilities for unpaid claims are estimated using the input of assessments of individual cases reported to the Company and actuarial analysis for claims incurred but not reported ( IBNR ). Where applicable, reports from independent claims adjusters and legal advisors are also considered. iii) Reinsurance contracts held Contracts entered into by the Company with reinsurers under which the Company is compensated for losses on one or more contracts issued by the Company, and that meet the classification requirements for insurance contracts, are classified as reinsurance contracts held. The benefits to which the Company is entitled under its reinsurance contracts are included in losses recoverable from reinsurers. Amounts recorded as due from reinsurers comprise claims submitted to reinsurers and the reinsured portion of the reserves for losses on policies issued by the Company. The reinsured portion of the reserves for losses is estimated in a manner consistent with the estimation of reserves for losses on the policies issued by the Company. The Company assesses amounts due from reinsurers for any indication of impairment on a quarterly basis. As at, management is of the opinion that all amounts due from reinsurers are recoverable and there is no indication of impairment. Reinsurance profit commission is calculated based on past underwriting results and in accordance with the terms of the reinsurance contracts, and is received from the reinsurers. The reinsurance profit commission is recorded on an accruals basis. iv) Premiums receivable and payable related to insurance contracts Premiums receivable and payable are recognized when due. insurance contract holders, brokers and agents. These include amounts due to and from 11

13 3. Summary of significant accounting policies (continued) (f) Foreign exchange Monetary assets and liabilities denominated in foreign currencies are translated at exchange rates in effect at the Statement of Financial Position date. Income and expenses are translated at the rates in effect at the date of the transaction and exchange gains and losses are included within net investment income in the Statement of Comprehensive Income. (g) Commission, interest and other expenses Commission expenses, interest income and expenses, and other expenses are recorded on an accruals basis. Acquisition costs, mainly commissions and brokerage, related to unearned premiums are deferred and amortized to income over the period in which premiums are earned. The method followed in determining deferred acquisition costs limits the amount of the deferral to its realizable value by giving consideration to losses and expenses. (h) Defined contribution plan Contributions to the defined contribution plan are recognized as an expense in net income or loss in the Statement of Comprehensive Income as incurred. A defined contribution plan is a pension plan under which the Company pays fixed contributions into a separate entity. The Company has no legal or constructive obligations to pay further contributions if the fund does not hold sufficient funds to pay all employees the benefits relating to employee service in current and prior periods. (i) Taxation Under the current laws of the Cayman Islands, the Company is not required to pay any income, estate, sales or other taxes in the Cayman Islands and management believes the Company is not liable to pay tax in any other jurisdiction. (j) Related parties Related parties include the ultimate parent company and related companies, being fellow subsidiaries or companies under common control. Also included are directors and key management personnel who have the authority and responsibility for planning, directing and controlling the activities of the Company. (k) Provisions A provision is recognized if, as a result of a past event, the Company has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. (l) Intangible assets Intangible assets relate to a book of business of a Cayman Islands insurance agency (see Note 7) and computer software. The book of business acquired carries similar risks to those already underwritten by the Company. 12

14 3. Summary of significant accounting policies (continued) (l) Intangible assets (continued) Acquisition of book of business: The acquired book of business of a Cayman Islands insurance agency is capitalized on the basis of the costs incurred to acquire. Management is unable to estimate the life of the book of business and it has therefore been classified as having an indefinite life. Asset with indefinite lives are not subject to amortization but are tested annually for impairment. Computer software: Costs associated with maintaining computer software programs are recognized as an expense as incurred. Development costs that are directly attributable to the design and testing of identifiable and unique software products are recognized as intangible assets when the following criteria are met: a) It is technically feasible to complete the software product so that it will be available for use: b) Management intends to complete the software product and use it or sell it; c) It can be demonstrated that the software product will generate probable future economic benefits; d) Adequate technical, financial and other resources to complete the development and to use or sell the software product are available; and e) The expenditure attributable to the software product during its development can be reliably measured. The Company has classified the software costs as intangible assets if they are not an integral part of the computer equipment. Other development expenditures that do not meet these criteria are recognized as an expense as incurred. Development costs previously recognized as an expense are not recognized as an asset in a subsequent period. Computer software intangible assets are recorded at cost less accumulated amortization. Amortization is provided for on a straight line basis over the estimated useful life of 5 to 7 years. (m) Changes in accounting policy and disclosure (a) Standards and amendments to existing standards effective January 1, 2013 IFRS 10, Consolidated financial statements, effective for annual periods beginning on or after January 1, 2013, builds on existing principles by identifying the concept of control as the determining factor in whether an entity should be included within the consolidated financial statements of the parent company. The standard provides additional guidance to assist in the determination of control where this is difficult to assess. The new standard did not have any impact on the Company s financial position or performance. IFRS 12, Disclosures of interests in other entities, effective for annual periods beginning on or after January 1, 2013, includes the disclosure requirements for all forms of interests in other entities, including joint arrangements, associates, special purpose vehicles and other structured entities. Although the new standard required additional disclosures (see Notes 3(a) and 5), the new standard did not have any impact on the Company s financial position or performance. 13

15 3. Summary of significant accounting policies (continued) (m) Changes in accounting policy and disclosure (continued) IFRS 13, Fair value measurement, effective for annual periods beginning on or after January 1, The standard improves consistency and reduces complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across IFRSs. The requirements do not extend the use of fair value accounting but provide guidance on how it should be applied where its use is already required or permitted by other standards within IFRS. If an asset or a liability measured at fair value has a bid price and an ask price, the standard requires valuation to be based on a price within the bid-ask spread that is most representative of fair value and allows the use of midmarket pricing or other pricing conventions that are used by market participants as a practical expedient for fair value measurement within a bid-ask spread. Although, the adoption of the standard required additional disclosures (see Notes 5 and 15), the new standard did not have a significant impact on the Company s valuation of its fair valued assets and/or liabilities. IFRS 7, Financial instruments: Disclosures amendment effective for annual periods beginning on or after January 1, 2013, and has been retrospectively applied. These new IFRS 7 disclosures are intended to facilitate certain comparisons between IFRS and US GAAP (accounting principles generally accepted in the United States of America) preparers. The disclosures focus on quantitative information about recognized financial instruments that are offset in the statement of financial position, as well as those recognized financial instruments that are subject to master netting or similar arrangements irrespective of whether they are offset. Although the new standard required additional disclosures (see Note 2(t)), the new standard did not have any impact on the Company s financial position or performance. Amendment to IAS 1, Financial statement presentation regarding other comprehensive income, effective for annual periods beginning on or after July 1, The main change resulting from this amendment is a requirement for entities to group items presented in other comprehensive income (OCI) on the basis of whether they are potentially reclassifiable to profit or loss subsequently (reclassification adjustments). The amendments do not address which items are presented in OCI. The amendment did not have any impact on the Company s financial position, performance or disclosures. There are no other standards, interpretations or amendments to existing standards that are not yet effective that would be expected to have a significant impact on the Company. (b) New standards, amendments and interpretations issued but not effective for the financial year beginning January 1, 2013 and not early adopted IFRS 9, Financial instruments, specifies how an entity should classify and measure financial assets and liabilities, including some hybrid contracts, along with providing amended guidance for hedge accounting. The standard improves and simplifies the approach for classification and measurement of financial assets compared with the requirements of IAS 39. The standard applies a consistent approach to classifying financial assets and replaces the numerous categories of financial assets in IAS 39, each of which had its own classification criteria. The Company is yet to assess IFRS 9 s full impact and intends to adopt IFRS 9 upon the standard s mandatory effective date. The effective date for IFRS 9 is for periods beginning January 1, 2018, as the standard setters continue to work on other phases of IFRS 9, including new expected guidance for impairment accounting. There were no other such standards, interpretations or amendments to existing standards that are expected to have a significant impact on the Company. 14

16 3. Summary of significant accounting policies (continued) (n) Liability Adequacy test At each reporting period, liability adequacy tests are performed to ensure the adequacy of the contract liabilities net of related deferred acquisition expense assets. In performing these tests, current best estimates of future contractual cash flows and claims handling and administration expenses, as well as investment income from the assets backing such liabilities, are used. Any deficiency is immediately charged to profit or loss initially by writing off deferred acquisition expenses and subsequently by establishing a provision for losses arising from the liability adequacy test (the unexpired risk provision). Any deferred acquisition expense assets that are written off as a result cannot subsequently be reinstated. (o) Profit-sharing and bonus plans The Company recognizes a liability and an expense for bonuses and profit-sharing, based on a formula that takes into consideration the profit attributable to the Company s shareholder after certain adjustments. The Company recognizes a provision where contractually obligated or where there is past practice that created a constructive obligation. (p) Dividend distribution Dividend distribution to the Company s shareholder is recognized as a liability in the Company s financial statements in the period in which the dividends are approved by the Company s Board of Directors. (q) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market other than those that the Company intends to sell in the short-term or that is designated as at fair value through profit or loss or available for sale. Receivables arising from insurance contracts are also classified in this category and are reviewed for impairment as part of the impairment review of loans and receivables. (r) Cash and cash equivalents For the purposes of the Statement of Cash Flows, cash and cash equivalents comprise cash and bank balances held on demand or on deposit with original maturities of less than three months, net of short-term overdrafts, if any. (s) Leases Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under to operating leases are charged to the Statement of Income and Comprehensive Income on a straight line basis over the period of the lease. 15

17 3. Summary of significant accounting policies (continued) (t) Financial Instruments Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis or realise the asset and settle the liability simultaneously. The Company offsets commissions due to brokers within insurance balances receivable on the statement of financial position. The following table analyses the amounts offset in the statement of financial position as at December 31, 2013: Description Gross amounts of recognized assets /liabilities Gross amounts of recognized financial liabilities /asset setoff in the statement of financial position Net amount of assets /liabilities presented in the statement of financial position Related amounts not setoff in the statement of financial position Financial instruments Cash collateral received Net Amount Financial Assets Insurance balance receivable $ 5,680,413 $ 307,104 $ 5,373,309 $ - $ - $5,373,309 Other and receivables ** assets 1,509,963-1,509,963 (1,509,963) - - Reinsurance balances receivable 362, ,057 (59,338) - 302,719* Financial Liabilities Due to brokers (307,104) 307, Reinsurance balances payable (3,487,215) - (3,487,215) 1,569,301 - (1,917,914) *While the reinsurance agreements with certain reinsurers includes a clause to offset any balances due to and from the between the contracted parties, the Company has no intent to settle specific reinsurance balances receivable of $302,719, net of reinsurance balances payable. ** This balance comprises amounts to from reinsurers in respect of reinsurance and profit commission on reinsurance agreements in force at year end. 16

18 3. Summary of significant accounting policies (continued) (t) Financial Instruments (continued) The following table analyses the amounts offset in the statement of financial position as at December 31, 2012: Description Gross amounts of recognized assets /liabilities Gross amounts of recognized financial liabilities /asset set-off in the statement of financial position Net amount of assets /liabilities presented in the statement of financial position Related amounts not setoff in the statement of financial position Financial instruments Cash collateral received Net Amount Financial Assets Insurance balance receivable $ 5,458,795 $ 202,581 $ 5,256,214 $ - $ - $5,256,214 Other assets and receivables ** 1,423,982-1,423,982 (1,423,982) - - Reinsurance balances receivable 1,643,172-1,643,172 (96,492) - 1,546,680* Financial Liabilities Due to brokers (202,581) 202, Reinsurance balances payable (3,255,468) - (3,255,468) 1,520,474-1,734,994 *While the reinsurance agreements with certain reinsurers includes a clause to offset any balances due to and from the between the contracted parties, the Company has no intent to settle specific reinsurance balances receivable of $1,546,680, net of reinsurance balances payable. ** This balance comprises amounts to from reinsurers in respect of reinsurance and profit commission on reinsurance agreements in force at year end. 17

19 4. Underwriting policies and reinsurance agreements The Company reinsures its property risks under a property quota share treaty whereby 82.5% ( %) of each risk up to $5 million ( $5 million) is ceded to reinsurers. The event limit is $310.2 million ( $ million). For larger individual property risks, the Company provides coverage by way of prearranged facilities and facultative reinsurance. The Company also purchases property reinsurance for per occurrence exposures in excess of US$2,500,000 (2012 US$2,500,000) up to a maximum of US$102,500,000 (2012- US$102,500,000). A company under common control provides cover to reduce the US$2,500,000 treaty deductible down to US$1,500,000 (see Note 9). In addition, the Company purchases excess of loss reinsurance protection for the motor and general liability program. Purchased reinsurance limits losses to $500,000 (2012-$500,000) per occurrence. The Company purchases reinsurance for marine risks under a risk and excess of loss treaty with a deductible of $250,000 ( $250,000). The reinsurance of contracts does not relieve the Company of its primary obligation to the policyholders. In the event that the reinsurers are unable to meet their obligations under the reinsurance agreements, the Company would also be liable for the reinsured amount. The Company evaluates the financial condition of its reinsurers and monitors the credit risk of the reinsurers to minimize its exposure to significant losses from reinsurer insolvency. 5. Investments (i) Cash and cash equivalents represent current accounts, demand deposit, and short-term deposit balances, with 38% ( %) held by a Bermuda-based bank related by common control and 62% ( %) held with unrelated banks in the Cayman Islands, of which approximately $198,000 ( $4 million) is with banks with an A S&P or equivalent rating or above, approximately $4.8 million ( nil) is with banks with a BBB S&P or equivalent rating and the balance is placed with banks that management believe are of sound credit quality. (ii) Financial assets at fair value through profit or loss comprise the following: December 31, 2012 Fair Fair value Cost value Cost Managed funds 11,659,491 11,452,081 11,640,137 11,267,620 Corporate bonds 590, , Common equity securities 956,487 3,240, ,865 3,240,575 Preferred shares 252, , , ,536 Total $ 13,459,125 $ 15,563,309 $ 13,301,567 $ 15,288,731 18

20 5. Investments (continued) Financial assets held-to-maturity are carried at amortized cost and comprise preferred shares maturing in 2019 of $1,865,024 ( $1,890,776) and a Government debt instrument maturing in 2020 of $505,334 ( $505,334) which have coupon rates of 8% and 5.6% respectively. The fair value of the investments at the Statement of Financial Position date are $2,037,342 ( $2,094,223) and $531,621 ( $579,023) respectively. The preferred shares are issued by a Bermuda-based bank and are guaranteed by the Government of Bermuda which has a credit rating of AA-. The managed funds owned by the Company invest in a number of different types of investments which may include: large cap, small cap and emerging market equity, U.S. bonds, high yield bonds, and alternative investments which can include private equity. These investments are subject to the conditions and restrictions as further defined in the terms of the offering of each fund, which are usually contained in a formal Offering Memoranda. Such Offering Memoranda generally define the nature and types of investments in which a managed fund can invest and provide for specified procedures regarding further investment and redemption from the particular fund. Whilst investments in managed investment funds can achieve investment diversification, these investments can also subject the Company to a concentration of risk in one company or investment strategy. Because the investments in managed investment funds can only be redeemed or transferred in accordance with the terms of the offering of the particular fund, generally weekly, monthly, or quarterly, the ability of the Company to realize such investments may be restricted. For equity securities, the Company s largest concentration in any one investee is 2% of total investments (2012-3%). For managed funds, the Company s largest concentration in any one investee is 24% ( %) of total investments. The Company s holding in managed funds, as a percentage of the managed fund's total net asset value for the share class held by the Company, by strategy, ranges as follows: - Global debt securities : 1.26% - United States of America debt securities: 0.08% - Short term debt securities : 20.32% - Preferred and exchange traded debt securities: 3.92% - Fund-of-funds multi-strategy : 1.31% % For preferred shares, the Company s largest investment in any one investee is 12% ( %) of total investments. Preferred shares have a coupon rate between 6.45% and 8.75% and mature between 2013 and For corporate and government bonds, the Company s largest concentration in any one investee is 3% of total investments (2012-3%). This government bond has an interest rate of 5.6%, matures in 2020 and has an AA rating. The investment portfolio is monitored by the Ultimate Parent s Investment Committee and is subject to investment guidelines approved by the Company s Board of Directors. 19

21 5. Investments (continued) (iii) Fair value of investments The Company measures fair value using the following fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to fair values derived from unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below: Level 1 Quoted prices for identical instruments in active markets. Level 2 Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. The fair value of corporate bonds is estimated using recently executed transactions, market price quotations (where observable) and bonds spreads. The spread data used is for the same maturity of the bond. Level 3 Model derived valuations in which one or more significant inputs or significant value drivers are unobservable. These measurements include circumstances in which there is little, if any, market activity for the asset or liability. In making the assessment, the Company considers factors specific to the asset or liability and such an assessment will involve significant management judgment. Because of the inherent uncertainty in the valuation of these Level 3 investments, fair values of such investments may differ from the values that would have been used had a ready market for these investments existed, and the differences could be material. Level 3 investments comprise mainly managed funds. Managed funds fair values are based on the Net Asset Values of the underlying investment funds as reported by the investment managers or their independent administrators. The Company s Investment Committee reports to the Board of Directors and monitors the Net Asset Values through review of audited financial statements and consistency with benchmarks. The level in the fair value hierarchy within which the fair value measurement in its entirety falls shall be determined based on the lowest level input that is significant to the fair value measurement in its entirety. Fair values of the Company s interests in managed fund investments are based upon the Net Asset Values of the underlying investment funds as reported by the investment managers, or their independent administrators. Depending on the Company s ability to redeem its managed fund investments at the reported net asset value per share (or its equivalent) within a reasonable period of time, the managed fund investment will be categorized within Level 2 or Level 3 of the fair value hierarchy. The Company s exchange traded funds are categorized within Level 1 of the fair value hierarchy. A review of the fair value hierarchy classifications is conducted on an ongoing basis. Changes in the observation of valuation inputs may result in a reclassification for certain financial assets and liabilities. Transfers between levels of the fair value hierarchy are deemed to have occurred at the end of the reporting period. There were no transfers between levels during the year. 20