Norfolk Mutual Insurance Company. Financial Statements December 31, 2016

Transcription

1 Financial Statements December 31, 2016

2 Index to Financial Statements December 31, 2016 MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING 1 Page INDEPENDENT AUDITORS' REPORT 2 FINANCIAL STATEMENTS Statement of Financial Position 3 Statement of Policyholders' Equity 4 Statement of Comprehensive Income 5 Schedule of General Expenses 6 Statement of Cash Flow

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4 INDEPENDENT AUDITORS' REPORT To the Members of Norfolk Mutual Insurance Company We have audited the accompanying financial statements of Norfolk Mutual Insurance Company, which comprise the statement of financial position as at December 31, 2016 and the statements of comprehensive income, policyholders' equity and cash flow for the year then ended, and 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. Auditors' Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. 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 auditors' 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 Norfolk Mutual Insurance Company as at December 31, 2016 and its financial performance and its cash flow for the year then ended in accordance with International Financial Reporting Standards. February 16, 2017 Simcoe, Ontario Chartered Professional Accountants Licensed Public Accountants 2

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6 Statement of Policyholders' Equity Policyholders' equity - beginning of year $ 13,141,225 $ 12,072,238 Comprehensive income for the year 1,065,560 1,068,987 POLICYHOLDERS' EQUITY - END OF YEAR $ 14,206,785 $ 13,141,225 See accompanying notes 4

7 Statement of Comprehensive Income UNDERWRITING OPERATIONS Gross premiums written $ 9,619,453 $ 8,441,915 Deduct: reinsurance ceded (1,730,259) (1,497,332) Net premiums written 7,889,194 6,944,583 Increase in unearned premiums (561,917) (603,825) Net premiums earned 7,327,277 6,340,758 Service charges 144,553 99,845 7,471,830 6,440,603 Expenses Net claims and adjustment expenses incurred (Note 12) 3,237,222 2,740,570 Commissions 1,662,239 1,384,116 General expenses (see schedule on page 6) 1,857,337 1,577,283 6,756,798 5,701,969 Underwriting income 715, ,634 Investment income (Note 14) 690, ,054 Income before income taxes 1,405,765 1,394,688 Income taxes (Note 15) Current 327, ,601 Deferred 12,300 (5,900) 340, ,701 COMPREHENSIVE INCOME FOR THE YEAR $ 1,065,560 $ 1,068,987 See accompanying notes 5

8 Schedule of General Expenses Year Ended December 31, Advertising $ 73,183 $ 70,944 Automobile and travel 103,210 79,336 Bad debts 2,816 4,112 Interest and bank charges 4,843 5,222 Bureaus and associations 28,465 38,896 Computer expense 234, ,222 Consulting fees 101,098 72,245 Directors' remuneration 64,100 58,750 Furniture and equipment 54,400 65,332 Inspections 6,773 8,143 Insurance 17,753 22,810 Occupancy cost 69,931 75,069 Postage 19,087 21,390 Printing and stationery 25,135 24,849 Premium taxes 26,359 22,747 Professional fees 45,661 57,345 Regulatory expense 6,073 5,672 Salaries and benefits 778, ,387 Pension deficit contribution (Note 16) 184,952 - Telephone 10,340 10,812 $ 1,857,337 $ 1,577,283 See accompanying notes 6

9 Statement of Cash Flow OPERATING ACTIVITIES Comprehensive income for the year $ 1,065,560 $ 1,068,987 Items not affecting cash: Amortization of property and equipment 60,256 64,460 Deferred income taxes 12,300 (5,900) Unrealized (loss) gain on investments (184,460) 192,461 Realized gain on sale of investments (42,508) (158,457) 911,148 1,161,551 Changes in non-cash working capital: Investment income accrued (3,147) 354 Amounts due from policyholders, agents and brokers (606,334) (332,801) Miscellaneous receivables (4,365) (14,695) Deferred policy acquisition expenses (151,124) (126,234) Amounts due from reinsurer (2,139) 6,243 Reinsurance recoverable on unpaid claims 72, ,487 Accounts payable 42,524 (77,118) Amounts due to other insurance companies 49, ,392 Income taxes payable (10,663) (48,404) Unearned premiums 561, ,825 Provision for unpaid claims and adjustment expenses (925,142) 576,132 (976,484) 1,395,181 Cash flow from (used by) operating activities (65,336) 2,556,732 INVESTING ACTIVITIES Purchase of property and equipment (64,025) (290,517) Purchase of investments (4,651,258) (3,471,061) Proceeds on sale of investments 3,727,130 2,817,002 Cash flow used by investing activities (988,153) (944,576) INCREASE (DECREASE) IN CASH (1,053,489) 1,612,156 Cash - beginning of year 2,432, ,010 CASH - END OF YEAR $ 1,378,677 $ 2,432,166 See accompanying notes 7

10 1. NATURE OF BUSINESS Norfolk Mutual Insurance Company Norfolk Mutual Insurance Company (The Company) is a mutual insurance company and is owned by the member policyholders. The Company was incorporated in 1881 under the laws of Ontario and is subject to the Insurance Act of Ontario. It is licensed to write property, liability, automobile, hail, and certain types of accident and sickness insurance in Ontario, Canada. The Company is located in Simcoe, Ontario. The Company is subject to rate regulation in the automobile business it writes. Before automobile insurance rates can be changed, a rate filing is prepared as a combined filing for most Ontario Farm Mutuals by the Ontario Mutuals' Auto Rate Filing Committee. The rate filing must include actuarial justification for rate increases or decreases. All rate filings are approved or denied by the Financial Services Commission of Ontario. Rate regulation may affect the automobile revenues that are earned by the Company. The actual impact of rate regulation would depend on the competitive environment at that time. These financial statements have been authorized for issue by the Board of Directors on February 16, SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of presentation These financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board and comply with the requirements for filing with the Financial Services Commission of Ontario. These financial statements were prepared on a historical cost basis except for those financial assets that have been measured at fair value. The Company's functional and presentation currency is the Canadian dollar. statements are presented in Canadian dollars. The financial The notes to the financial statements were ordered so that the most relevant information was presented earlier in the notes and the disclosures that were deemed to be immaterial were excluded from the notes to the financial statements. The determination of the relevance and materiality of disclosures involved significant judgment. Insurance contracts In accordance with IFRS 4, Insurance Contracts, the Company has continued to apply the accounting policies it applied in accordance with pre-changeover Canadian GAAP. Balances arising from insurance contracts primarily include unearned premiums, provisions for unpaid claims and adjustment expenses, the reinsurers' share of unpaid claims and adjustment expenses, deferred policy acquisition expenses. (continues) 8

11 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Insurance contracts (continued) Premiums and unearned premiums The Company earns premium income over the term of the insurance policy on a pro rata basis. The portion of the premium related to the unexpired portion of the policy at the end of the fiscal year is reflected in unearned premiums. Premiums receivable are recorded at amounts due less any required provision of doubtful amounts. Reinsurance Reinsurance premiums ceded and reinsurance recoveries on losses incurred are recorded as reductions of the respective income and expense accounts. Deferred policy acquisition expenses Acquisition costs are comprised of brokers' commissions, premium taxes, and other expenses which relate directly to the acquisition of premiums, including salaries for underwriting personnel and inspection fees. These costs are deferred and amortized over the terms of the related policies to the extent that they are considered to be recoverable from unearned premiums, after considering the related anticipated claims and expenses and investment income. Provisions for unpaid claims and adjustment expenses Individual loss estimates are provided on each claim reported. In addition, provisions are made for adjustment expenses, changes in reported claims and for claims incurred but not reported, based on past experience and business in force. The estimates are regularly reviewed and updated, and any resulting adjustments are included in current income. Liability adequacy test At each reporting date the Company performs a liability adequacy test on its insurance liabilities less deferred policy acquisition expenses to ensure the carrying value is adequate, using current estimates of future cash flows, taking into account the relevant investment return. If that assessment shows that the carrying amount of the liabilities is inadequate, any deficiency is recognized as an expense to the statement of comprehensive income initially by writing off the deferred policy acquisition expense and subsequently by recognizing an additional claims liability for claims provisions. Reinsurance recoverable on unpaid claims Incurred reinsurance recoveries are recorded as reductions of the claims incurred accounts. Expected reinsurance recoveries on unpaid claims and adjustment expenses are recognized as assets at the same time and using principles consistent with the Company's method for establishing the related liability. A contingent liability exists with respect to reinsurance ceded which could become a liability of the Company in the event that the reinsurer might be unable to meet its obligations under the reinsurance agreements. (continues) 9

12 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Property and equipment Property and equipment is initially recorded at cost and subsequently measured at cost less accumulated amortization and accumulated impairment losses, with the exception of land which is not amortized. Amortization is recognized in comprehensive income and is provided on a straightline basis over the estimated useful life of the assets as follows: Building Office equipment Computer equipment 40 years 10 years 5 years Amortization methods, useful lives and residual values are reviewed annually and adjusted if necessary. Income taxes Income tax expense comprises of current and deferred tax. Current and deferred tax are recognized in net income except to the extent that it relates to a business combination, or items recognized directly in equity or in other comprehensive income. Current income taxes are recognized for the estimated income taxes payable or receivable on taxable income or loss for the current year and any adjustment to income taxes payable in respect of previous years. Current income taxes are determined using tax rates and tax laws that have been enacted or substantively enacted by the year-end date. Deferred tax assets and liabilities are recognized where the carrying amount of an asset or liability differs from its tax base, except for taxable temporary differences arising on the initial recognition of goodwill and temporary differences arising on the initial recognition of an asset or liability in a transaction which is not a business combination and at the time of the transaction affects neither accounting or taxable profit or loss. Recognition of deferred tax assets for unused tax losses, tax credits and deductible temporary differences is restricted to those instances where it is probably that future taxable profit will be available against which the deferred tax asset can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized. The amount of the deferred tax asset or liability is measured at the amount expected to be recovered from or paid to the taxation authorities. This amount is determined using tax rates and tax laws that have been enacted or substantively enacted by the year-end date and are expected to apply when liabilities/(assets) are settled/(recovered). Financial instruments The Company classifies its financial instruments into one of the following categories based on the characteristics of the financial instruments and management's choices and intentions, all transactions related to financial instruments are recorded on a trade date basis: (continues) 10

13 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Financial instruments (continued) Financial assets at fair value through profit or loss A financial asset is classified at fair value through profit or loss if it is classified as held-for-trading or is designated as such upon initial recognition. Financial assets are designated as fair value through profit or loss if the Company manages such investments and makes purchases and sale decisions based on their fair value in accordance with the Company's documented risk management or investment strategy. Upon initial recognition, attributable transaction costs are recognized in profit or loss as incurred. Financial assets at fair value through profit or loss are measured at fair value, and changes therein are recognized in profit or loss. Held-to-maturity financial assets If the Company has the positive intent and ability to hold debt securities to maturity, then such financial assets are classified as held-to-maturity. Held-to-maturity financial assets are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition held-to-maturity financial assets are measured at amortized cost using the effective interest method, less any impairment losses. Any sale or reclassification of a more than insignificant amount of heldto-maturity investments not close to their maturity would result in the reclassification of all held-tomaturity investments as fair value through profit and loss, and prevent the Company from classifying investment securities as held-to-maturity for current and the following two financial years. Loans and receivables These comprise of investment income accrued, amounts due from policyholders, agents and brokers and miscellaneous receivables. These assets are non-derivative financial assets resulting from the delivery of cash or other assets by a lender to a borrower in return for a promise to repay on a specified date or dates, or on demand. They are initially recognized at fair value plus transaction costs that are directly attributable to their acquisition or issue and subsequently carried at amortized cost, less any impairment losses. Impairments are recognized when there is objective evidence that the Company will be unable to collect all of the amounts due under the terms receivable. On confirmation that the amounts receivable will not be collectable, the gross carrying value of the asset is written off and the loss is recognized in comprehensive income. Other financial liabilities Other financial liabilities include all financial liabilities and comprise of accounts payable and amounts due to other insurance companies. These liabilities are initially recognized at fair value net of any transaction costs directly attributable to the issuance of the instrument and subsequently carried at amortized cost. (continues) 11

14 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Standards, amendments and interpretations not yet effective New standards, interpretations and amendments effective from January 1, 2016 There are no new standards, interpretations and amendments, effective for the first time from January 1, 2016 that have had a material effect on the financial statements. Standards, amendments and interpretations not yet effective A new standard, amendment and interpretation has been published that is mandatory for the Company's accounting periods beginning on or after January 1, 2016 that the Company has decided not to early adopt. The standard, amendment and interpretation that will be relevant to the Company is: IFRS 9 Financial Instruments replaces IAS 39 Financial Instruments: Measurement Recognition and IFRS 9 amends the requirements for classification and measurement of financial assets, impairment, and hedge accounting. IFRS 9 introduces an expected loss model of impairment and retains but simplifies the mixed measurement model and establishes three primary measurement categories for financial assets; amortized cost, fair value through profit or loss, and fair value through other comprehensive income. The basis of classification depends on the entity's business model and the contractual cash flow characteristics of the financial asset. The effective date for IFRS 9 is January 1, The Company is in the process of evaluating the impact of the new standard. IFRS 15 Revenue from Contracts with Customers IFRS 15 is based on the core principles to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. IFRS 15 focuses on the transfer of control. IFRS 15 replaces all of the revenue guidance that previously existed in IFRSs. The effective date for IFRS 15 is January 1, The Company is in the process of evaluating the impact of the new standard. 12

15 3. ACCOUNTING ESTIMATES AND JUDGMENTS The Company makes estimates and assumptions about the future that affect the reported amounts of assets and liabilities. Estimates and judgments are continually evaluated and based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. In the future, actual experience may differ from these estimates and assumptions. The effect of a change in an accounting estimate is recognized prospectively by including it in comprehensive income in the period of the change, if the change affects that period only; or in the period of the change and future periods, if the change affects both. See notes 11 and 13 Provision for Unpaid Claims and Adjustment Expenses and Insurance Contracts for estimates and assumptions that have a significant risk of causing material adjustment to the carrying amounts of assets and liabilities within the next financial year. 13

16 4. INVESTMENTS The book and fair values of investments at December 31 are shown as follows: Book Value Fair Value Book Value Fair Value Held-to-Maturity GIC's 1,234,132 1,239,295 1,234,132 1,239,680 Fire Mutuals Guarantee Fund 17,325 17,168 17,048 17,029 1,251,457 1,256,463 1,251,180 1,256,709 Held-for-Trading Fixed Income Pooled Funds 9,442,673 9,442,673 8,527,701 8,527,701 Canadian Equity Pooled Funds 2,077,705 2,077,705 2,108,265 2,108,265 Global Equity Pooled Funds 2,556,249 2,556,249 2,451,343 2,451,343 Canadian Infrastructure Pooled Funds 200, , , ,841 Canadian Real Estate Pooled Funds 328, , , ,420 Canadian Multi Strategy Pooled Funds 677, , , ,137 Canadian Equity Investments ,284,433 15,284,433 14,133,612 14,133,612 16,535,890 16,540,896 15,384,792 15,390,321 The maximum exposure to credit risk would be the fair value as shown above. Maturity profile of held-to-maturity financial assets held is as follows: Within 2 to 5 6 to 10 Over 10 Book 1 year years years years Value December 31, , ,632-17,325 1,251,457 Percent of Total 29% 70% 0% 1% 100% December 31, , ,632-17,048 1,251,180 Percent of Total 29% 70% 0% 1% 100% 14

17 5. DEFERRED POLICY ACQUISITION EXPENSES The continuity of deferred policy acquisition expenses are as follows: $ $ Balance, beginning of year 838, ,587 Acquisition costs incurred 2,208,996 1,829,968 Expense recognized as a result of liability adequacy tests - - Expensed during the year (2,057,872) (1,703,734) Balance, end of year 989, ,821 Deferred policy acquisition expenses will be recognized as an expense within one year. 6. AMOUNTS DUE FROM REINSURER The continuity of amounts due from reinsurer on paid claims are as follows: $ $ Balance, beginning of year 3,393 9,636 Submitted to reinsurer 482,896 1,010,319 Received from reinsurer (480,757) (1,016,562) Balance, end of year 5,532 3,393 At year-end, the Company reviewed the amounts owing from its reinsurer and determined that no allowance is necessary. All amounts are expected to be received within one year. 7. REINSURERS RECOVERABLE ON UNPAID CLAIMS The continuity of reinsurers recoverable on unpaid claims are as follows: $ $ Balance, beginning of year 1,696,996 2,370,483 New claims reserve 919, ,262 Change in prior years' reserve (508,584) (285,430) Submitted to reinsurer (482,896) (1,010,319) Balance, end of year 1,624,626 1,696,996 Expected settlement Within one year 219,838 72,482 More than one year 1,404,788 1,624,514 1,624,626 1,696,996 15

18 8. DEFERRED INCOME TAX Norfolk Mutual Insurance Company The movement in 2016 deferred tax liabilities and assets are: Opening Recognized in Closing balance at net income balance at Jan 1, 2016 Dec 31, 2016 $ $ $ Deferred tax liabilities Property and equipment (16,500) (1,100) (17,600) Deferred tax assets Claims liabilities 58,100 (11,200) 46,900 41,600 (12,300) 29,300 The movement in 2015 deferred tax liabilities and assets are: Opening Recognized in Closing balance at net income balance at Jan 1, 2015 Dec 31, 2015 $ $ $ Deferred tax liabilities Property and equipment (5,900) (10,600) (16,500) Deferred tax assets Claims liabilities 41,600 16,500 58,100 35,700 5,900 41,600 16

19 9. PROPERTY AND EQUIPMENT Norfolk Mutual Insurance Company Office Computer Land Building Equipment Equipment Total Cost $ $ $ $ $ Balance at December 31, , , , ,429 1,276,599 Additions - 36,900 9,873 17,252 64,025 Disposals Balance on December 31, , , , ,681 1,340,624 Accumulated Amortization Balance at December 31, ,309 61, , ,088 Amortization expense - 23,026 15,764 21,466 60,256 Disposals Balance on December 31, ,335 76, , ,344 Net Book Value December 31, , ,800 95,481 52, ,511 December 31, , ,674 89,590 48, ,280 17

20 10. UNEARNED PREMIUMS The continuity of unearned premiums are as follows: $ $ Balance, beginning of year 4,212,976 3,609,151 Premiums written 9,619,453 8,441,915 Premiums earned during year (9,057,536) (7,838,090) Increase (decrease) in reserve for unearned premiums 561, ,825 Balance, end of year 4,774,893 4,212, PROVISION FOR UNPAID CLAIMS AND ADJUSTMENT EXPENSES Changes in claim liabilities recorded in the statement of financial position for the years ended December 31, 2016 and 2015 and their impact on claims and adjustment expenses are as follows: $ $ Balance, beginning of year 6,086,963 5,510,831 New claims reserve 5,025,379 4,067,255 Change in prior years reserve (1,377,632) (989,852) Paid claims Current year (2,083,376) (1,510,851) Prior year (2,489,513) (990,420) Balance, end of year 5,161,821 6,086,963 Expected settlement Within one year 1,143,643 1,796,140 More than one year 4,018,178 4,290,823 5,161,821 6,086,963 The determination of the provision for unpaid claims and adjustment expenses and the related reinsurers' share requires the estimation of reinsurance recoveries and future development of claims. The provision for unpaid claims and adjustment expenses and related reinsurers' share are estimates subject to variability, and the variability could be material in the near term. (continues) 18

21 11. PROVISION FOR UNPAID CLAIMS AND ADJUSTMENT EXPENSES (continued) The variability arises because all events affecting the ultimate settlement of claims have not taken place and may not take place for some time. Variability can be caused by receipt of additional claim information, changes in judicial interpretation of contracts, or significant changes in severity or frequency of claims from historical trends. The estimates are principally based on the Company's historical experience. Methods of estimation have been used which the Company believes produce reasonable results given current information. The Company must participate in industry automobile residual pools of business, and recognizes a share of this business based on its automobile market share. The Company records its shares of the liabilities provided by the actuaries of the pools. An actuary is retained to review the policy liabilities of the Company. The actuary's responsibility is to carry out a valuation of the Company's policy liabilities in accordance with accepted actuarial practices and report thereon to the Company. In performing the valuation, the actuary makes assumptions as to the future loss ratios, trends, future rates of claims frequency and severity, inflation and both internal and external adjustment expenses, taking into consideration the circumstances of the Company. The actuary also makes use of the work of the external auditor in verifying the underlying data used in the valuation. The actuary's report outlines the scope of work performed and recommendation. Insurance Contract Provisions and Related Reinsurance Assets The following is a summary of the insurance contract provisions and related reinsurance assets Gross Reinsurance Net December 31, 2016 $ $ $ Outstanding claims provision Property 933, , ,398 Automobile 1,337,505 39,193 1,298,312 Liability 137, ,157 Facility Association and other residual pools 227, ,328 Provisions for claims incurred but not reported 2,526,000 1,346,000 1,180,000 Balance, end of year 5,161,821 1,624,626 3,537,195 Gross Reinsurance Net December 31, 2015 $ $ $ Outstanding claims provision Property 1,153, , ,610 Automobile 2,052, ,166 1,927,650 Liability 97,789-97,789 Facility Association and other residual pools 256, ,918 Provisions for claims incurred but not reported 2,526,000 1,346,000 1,180,000 Balance, end of year 6,086,963 1,696,996 4,389,967 19

22 12. NET CLAIMS AND ADJUSTMENT EXPENSES INCURRED During the year, the Company reinsured most of its contracts of insurance to limit, in the main, its liability to a maximum indemnity amount on any one loss. All reinsurance is placed with Farm Mutual Reinsurance Plan Inc.(FMRP). The following table sets out the effect of reinsurance on claims incurred by line of business: Gross Claims Reinsurance Recovered Property $ 1,879,917 $ 463,011 $ 1,416,906 Automobile 1,580,501 (52,486) 1,632,987 Liability 187, ,329 $ 3,647,747 $ 410,525 $ 3,237, Property $ 1,586,549 $ 83,004 $ 1,503,545 Automotive 1,590, ,670 1,243,478 Liability (99,295) (92,842) (6,453) $ 3,077,402 $ 336,832 $ 2,740, INSURANCE CONTRACTS Claim development The estimation of claim development involves assessing the future behaviour of claims, taking into consideration the consistency of the Company's claim handling procedures, the amount of information available, the characteristics of the line of business from which the claim arises and historical delays in reporting claims. In general, the longer the term required for the settlement of a group of claims the more variable the estimates. The tables that follow present the development of claims payments and the estimated ultimate cost of claims for the claim years 2007 to The upper half of the tables shows the cumulative amounts paid or estimated to be paid during successive years related to each claim year. The original estimates will be increased or decreased, as more information becomes known about the original claims and overall claim frequency and severity. In 2011, the year of adoption of IFRS, only information from periods beginning on or after January 1, 2007 is required to be disclosed. This is being increased in each succeeding additional year, until ten years of information is included. (continues) 20

23 13. Insurance Contracts (continued) Gross claims Total $ $ $ $ $ $ $ $ $ $ $ Gross estimate of cumulative claims cost End of year claim 2,032,664 4,344,623 3,423,829 3,297,191 3,349,294 3,157,515 2,813,416 2,733,568 4,067,252 5,025,375 One year later 2,009,400 3,555,304 3,715,519 4,478,698 3,255,903 3,266,688 2,588,895 2,245,022 4,003,394 Two years later 2,099,555 4,277,624 3,892,935 5,771,151 3,374,611 3,250,668 2,815,719 2,180,095 Three years later 2,603,979 4,331,544 3,843,437 6,692,103 3,168,552 3,159,067 2,815,694 Four years later 2,566,349 4,980,409 3,332,613 7,628,958 3,116,985 3,052,467 Five years later 2,720,286 4,904,662 3,277,479 7,418,248 3,134,983 Six years later 2,391,836 4,527,044 3,193,323 6,314,825 Seven years later 2,391,836 4,369,834 3,193,671 Eight years later 2,391,836 4,369,834 Nine years later 2,391,836 Current estimate of cumulative claims cost 2,391,836 4,369,834 3,193,671 6,314,825 3,134,983 3,052,467 2,815,694 2,180,095 4,003,394 5,025,375 36,482,174 Cumulative payments 2,391,836 4,369,834 3,131,328 6,095,277 3,115,357 3,020,519 2,357,527 2,132,941 2,622,361 2,083,373 31,320,353 Outstanding claims , ,548 19,626 31, ,167 47,154 1,381,033 2,942,002 5,161,821 Outstanding claims 2006 and prior - Provision for unpaid claims and adjustment expenses 5,161,821 21

24 13. Insurance Contracts (continued) Net claims after reinsurance Total $ $ $ $ $ $ $ $ $ $ $ Net estimate of cumulative claims cost End of year claim 1,962,214 3,105,969 2,453,568 2,533,117 3,063,734 2,660,968 2,183,866 2,602,138 3,444,989 4,106,265 One year later 1,865,933 2,722,960 2,367,174 3,053,549 2,946,139 2,714,906 2,086,647 2,213,459 3,189,843 Two years later 1,927,161 2,967,806 2,449,915 3,156,741 2,997,572 2,664,729 2,239,664 2,180,095 Three years later 2,024,760 3,003,548 2,473,418 3,554,503 2,854,127 2,585,934 2,244,951 Four years later 1,990,622 3,189,760 2,339,424 3,758,502 2,818,822 2,554,870 Five years later 2,073,060 3,170,404 2,318,447 3,624,020 2,836,820 Six years later 1,877,018 3,000,071 2,239,287 3,098,315 Seven years later 1,877,018 2,917,995 2,249,380 Eight years later 1,877,018 2,917,995 Nine years later 1,877,018 Current estimate of cumulative claims cost 1,877,018 2,917,995 2,249,380 3,098,315 2,836,820 2,554,870 2,244,951 2,180,095 3,189,843 4,106,265 27,255,552 Cumulative payments 1,877,018 2,917,995 2,234,021 2,948,958 2,817,194 2,522,922 1,913,158 2,132,941 2,270,778 2,083,372 23,718,357 Outstanding claims , ,357 19,626 31, ,793 47, ,065 2,022,893 3,537,195 Outstanding claims 2006 and prior - Total net provision for unpaid claims and adjustment expenses 3,537,195 22

25 14. INVESTMENT INCOME Norfolk Mutual Insurance Company The average yield rate for GIC's was 2.0% ( %). Investment income was derived from the following: Interest income $ 509,224 $ 732,090 Dividend income 49,631 52,391 Gain on sale of investments 42, ,457 Market value adjustments 184,460 (192,461) Investment fees (95,090) (94,423) $ 690,733 $ 656, INCOME TAXES Reasons for the difference between tax expense for the year and the expected income taxes based on the statutory tax rate of 26.5% (26.5% in 2015) are as follows: $ $ Income before income taxes 1,405,765 1,394,688 Expected taxes based on the statutory rate of 26.5% 372, ,592 Small business deduction of 11.5% (Federal 4.5%, Provincial 7%) (19,330) (30,874) Non-taxable dividends (13,152) (13,884) Non-deductible portion of claims liabilities (11,299) 16,557 Capital cost allowance in excess of amortization (1,048) (10,656) Other Current tax expense 327, ,601 Deferred tax Origination and reversal of temporary differences 12,300 (5,900) 23

26 16. PENSION PLAN The Company makes contributions on behalf of its employees to The Retirement Annuity Plan for Employees of the Ontario Mutual Insurance Association and Member Companies. This pension plan is being accounted for as a multi-employer pension plan as defined by IAS 19 Employee Benefits. Each member company has signed an Ontario Mutual Insurance Association Pension Plan Agreement. Eligible employees participate in the defined benefit plan or the defined contribution plan based on their date of hire. The defined benefit plan specifies the amount of the retirement benefit to be received by the employee based on the number of years the employee has contributed and his/her final average earnings. The plan is accounted for as a defined contribution plan as insufficient information is available to account for the plan as a defined benefit plan. The Company is one of a number of employers that participates in the plan and the financial information provided to the Company on the basis of the contractual agreements is insufficient to reliably measure the Company s proportionate share in the plan assets and liabilities on defined benefit accounting requirements. The Company matches the employee contributions and funds the excess defined benefit based on the Company s percentage of pensionable earnings as calculated by the Pension Plan actuaries. The Pension Plan agreement states that the Company is responsible for its share of any deficit as a result of any actuarial valuation or cost certificate. The minimum funding requirement is the solvency valuation amount determined by the Pension Plan actuary on the valuation dates prescribed by the Pensions Benefit Act. In the event of a wind-up, voluntary withdrawal or bankruptcy, either by the Company or the group as a whole, the Company is responsible for its portion of all expenses and deficit related to such. According to the most recent actuarial estimate as of June 30, 2016, the going concern valuation for the defined benefit plan shows an expected deficit. Based on this report, OMIA has approved an additional payment to prefund the anticipated deficit. The Company's share of this additional payment amounted to $184,952, which was paid during the year. This lump sum contribution has been recorded as an expense for The next actuarial valuation to be filed under the Pension Benefit Act is as of December 31, 2016, which is not expected to be completed until mid The defined plan has been closed to eligible employees hired on or after July 1, The Company and all current employees who were accruing benefits under the defined benefit plan continue to contribute to the defined benefit plan according to the existing terms of the agreement. Eligible employees hired on or after July 1, 2013 are enrolled in the defined contribution plan. The Company's obligation with respect to this plan is to make specified monthly contributions based on a percentage of the employee's eligible earnings. The amount contributed to the plans for 2016 was $107,820 ( $91,208). The contributions were made for current service and these have been recognized in comprehensive income. An additional lump sum payment for 2016 was $184,952 ( NIL) as discussed above. The Company had a 1.50% ( %) share of the total contributions to the defined benefit plan in The expected contributions to the plans for 2017 is approximately $118,

27 17. RELATED PARTY TRANSACTIONS Norfolk Mutual Insurance Company The Company entered into the following transactions with key management personnel, which are defined by IAS 24, Related Party Disclosures, as those persons having authority and responsibility for planning, directing and controlling the activities of the Company, including directors and management: Compensation Salaries, benefits and directors fees $ 283,768 $ 275,130 Pension benefits 30,895 26,007 $ 314,663 $ 301,137 Premiums for key management personnel during the year amounted to $34,916 ( $36,239). Claims paid to key management personnel during the year was $113 ( $25,789). 18. REGULATORY REQUIREMENTS The Company is subject to certain requirements and restrictions contained in the Ontario Insurance Act and administered by the Financial Services Commission of Ontario. As well, the Company submits to the solvency protection requirements of The Fire Mutuals Guarantee Fund. The Company is in compliance with all material requirements of the Act and The Fire Mutuals Guarantee Funds' financial review process. 19. FINANCIAL INSTRUMENTS AND INSURANCE RISK MANAGEMENT Insurance risk management The principal risk the Company faces under insurance contracts is that the actual claims and benefit payments or the timing thereof, differ from expectations. This is influenced by the frequency of claims, severity of claims, actual benefits paid and subsequent development of long-term claims. Therefore, the objective of the Company is to ensure that sufficient reserves are available to cover these liabilities. The above risk exposure is mitigated by diversification across a large portfolio of insurance. The variability of risks is also improved by careful selection and implementation of underwriting strategy guidelines, as well as the use of reinsurance arrangements. The Company purchases reinsurance as part of its risk mitigation program. Retention limits for the excess-of-loss reinsurance vary by product line. Amounts recoverable from reinsurers are estimated in a manner consistent with the outstanding claims provision and are in accordance with the reinsurance contracts. Although the Company has reinsurance arrangements, it is not relieved of its direct obligations to its policyholders and thus a credit exposure exists with respect to ceded insurance, to the extent that any reinsurer is unable to meet its obligations assumed under such reinsurance agreements. (continues) 25

28 19. FINANCIAL INSTRUMENTS AND INSURANCE RISK MANAGEMENT (continued) The Company writes insurance primarily over a twelve month duration. The most significant risks arise through high severity, low frequency events such as natural disasters or catastrophes. A concentration of risk may arise from insurance contracts issued in a specific geographic location since all insurance contracts are written in Ontario. The Company manages this risk via its underwriting and reinsurance strategy within an overall risk management framework. Exposures are limited by having documented underwriting limits and criteria. Pricing of property and liability policies are based on assumptions in regard to trends and past experience, in an attempt to correctly match policy revenue with exposed risk. Automobile premiums are subject to approval by the Financial Services Commission of Ontario and therefore may result in a delay in adjusting the pricing to exposed risk. Reinsurance is purchased to mitigate the effect of the potential loss to the Company. Reinsurance is placed with Farm Mutual Reinsurance Plan Inc. (FMRP), a Canadian registered reinsurer. The Company follows a policy of underwriting and reinsuring contracts of insurance which, in the main, limit the liability of the Company to an amount on any one claim of $300,000 in the event of a property claim, an amount of $300,000 in the event of an automobile claim, an amount of $300,000 in the event of a liability claim and $900,000 in the event of a catastrophe. The Company is exposed to a pricing risk to the extent that unearned premiums are insufficient to meet the related future policy costs. Evaluation is performed regularly to estimate future claims costs, related expenses and expected profit in relation to unearned premiums. There was no premium deficiency at December 31, 2016 and The risks associated with insurance contracts are complex and subject to a number of variables which complicate quantitative sensitivity analysis. The Company uses various techniques based on past claims development experience to quantify these sensitivities. This includes indicators such as average claim cost, amount of claims occurrence, expected loss ratios and claims development as described in note 13. The table found at the end of note 11, Insurance Contract Provisions and Related Reinsurance Assets, sets out the concentration of unpaid claims and adjustment expenses by class of insurance. A sensitivity analysis is based on the claims loss ratio which is calculated by taking net claims incurred including adjustment expenses over net premiums earned. A 5% movement in the current year claims loss ratio would impact the statement of comprehensive income by approximately $353,000 ( $303,000) before tax. There have been no significant changes from the previous year in the exposure to risk or policies, procedures and methods used to measure the risk. (continues) 26

29 19. FINANCIAL INSTRUMENTS AND INSURANCE RISK MANAGEMENT (continued) Fair value The Company has categorized its assets that are carried at fair value on a recurring basis, based on priority of the inputs to valuation techniques used to measure fair value, into a three level fair value hierarchy. Financial assets measured at fair value are categorized as follows: Level 1: Fair value is based on unadjusted quoted prices for identical assets or liabilities in an active market. Level 2: Fair value is based on quoted prices for similar assets or liabilities in active markets, valuation that is based on significant observable inputs or inputs that are derived principally for or corroborated with observable market data through correlation or other means. Level 3: Fair value is based on valuation techniques that require one or more significant unobservable inputs or the use of broker quotes. These unobservable inputs reflect the Company's assumptions about the assumptions market participants would use in pricing the assets or liabilities. The Company does not have any amounts classified as Level 3. Level 1 Level 2 Total December 31, 2016 $ $ $ Cash 1,378,677-1,378,677 Pooled funds - 15,283,528 15,283,528 Equity investments Total assets measured at fair value 1,378,677 15,284,433 16,663,110 Level 1 Level 2 Total December 31, 2015 $ $ $ Cash 2,432,166-2,432,166 Pooled funds - 14,132,707 14,132,707 Equity investments Total assets measured at fair value 2,432,166 14,133,612 16,565,778 There were no reclassifications between Level 1 and Level 2 for the years ended December 31, 2015 and (continues) 27

30 19. FINANCIAL INSTRUMENTS AND INSURANCE RISK MANAGEMENT (continued) Credit risk Credit risk is the risk of financial loss to the Company if a debtor fails to make payments of interest and principal when due. The Company is exposed to this risk relating to its debt holdings in its investment portfolio and the reliance on reinsurers to make payment when certain loss conditions are met. The Company s investment policy puts limits on the bond portfolio including portfolio composition limits, issuer type limits, bond quality limits, aggregate issuer limits, corporate sector limits and general guidelines for geographic exposure. All fixed income portfolios are measured for performance on a quarterly basis and monitored by management on a monthly basis. The maximum exposure to credit risk and concentration of this risk is outlined in note 4. Reinsurance is placed with Farm Mutual Reinsurance Plan Inc. (FMRP), a Canadian registered reinsurer. Management monitors the creditworthiness of FMRP by reviewing their annual financial statements and through ongoing communications. Reinsurance treaties are reviewed annually by management prior to renewal of the reinsurance contract. Amounts receivable are short-term in nature and are not subject to material credit risk. There have been no significant changes from the previous period in the exposure to risk or policies procedures and methods used to measure the risk Market risk Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate as a result of market factors. Market factors include three types of risk: currency risk, interest rate risk, and equity risk. The Company s investment policy operates within the guidelines of the Insurance Act. An investment policy is in place and its application is monitored by the Investment Committee and the Board of Directors. Diversification techniques are utilized to minimize risk. Currency risk Currency risk is the risk that fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange values. The Company is exposed to currency risk through its holdings in global equity and fixed income investments. Management monitors its foreign currency exposure regularly and adjusts holdings when deemed necessary. As at December 31, 2016, a 1% change in value of foreign currency would impact the value of the global equity and fixed income investments of approximately $25,000. (continues) 28

31 19. FINANCIAL INSTRUMENTS AND INSURANCE RISK MANAGEMENT (continued) Interest rate risk Interest rate risk is the potential for financial loss caused by fluctuations in fair value or future cash flows of financial instruments because of changes in market interest rates. The Company is exposed to this risk through its interest bearing investments that include term deposits and bonds. Historical data and current information is used to profile the ultimate claims settlement pattern by class of insurance, which is then used in a broad sense to develop an investment policy and strategy. However, because a significant portion of the Company s assets relate to its capital rather than liabilities, the value of its interest rate based assets exceeds its interest rate based liabilities. As a result, generally, the Company s investment income will move with interest rates over the medium to long-term. There are no occurrences where interest would be charged on liabilities, therefore, little protection is needed to ensure the fair market value of assets will be offset by a similar change in liabilities due to an interest rate change. The objective and policies and procedures for managing interest rate risk is to diversify the bond portfolio in such a way that the bond portfolio is laddered over a number of years. A portion of the bond portfolio would come due each year and be reinvested. This protects the Company from fluctuations in the interest rates. As at December 31, 2016, a 1% move in interest rates, with all other variables held constant, could impact the market value of term deposits by approximately $578,100. There have been no significant changes from the previous period in the exposure to risk or policies, procedures and methods used to measure the risk. Equity risk Equity risk is the uncertainty associated with the valuation of assets arising from changes in equity markets. The Company is exposed to this risk through its equity holdings within its investment portfolio. The Company s portfolio includes equity and fixed investment with fair values that fluctuate with the stock markets. As at December 31, 2016, a 10% movement in the stock markets would have an estimated affect on the fair values of approximately $457,800. For stocks that the Company did not sell during the period, the change would be recognized in the asset value and in net income. For stocks that the Company did sell during the period, the change during the period and changes prior to the period would be recognized as net realized gains in income during the period. (continues) 29

32 19. FINANCIAL INSTRUMENTS AND INSURANCE RISK MANAGEMENT (continued) Liquidity risk Liquidity risk is the risk that the Company will not be able to meet all cash outflow obligations as they come due. The Company mitigates this risk by monitoring cash activities and expected outflows. The current liabilities arise as claims are made. There are no material liabilities that can be called unexpectedly at the demand of a lender or client. There are no material commitments for capital expenditures and there is no need for such expenditures in the normal course of business. Claim payments are funded by current operating cash flow including investment income. There have been no significant changes from the previous period in the exposure to risk or policies. 20. CAPITAL MANAGEMENT The Company's objectives with respect to capital management are to maintain a capital base that is structured to exceed regulatory requirements and to best utilize capital allocations. The regulators measure the financial strength of property and casualty insurers using a minimum capital test (MCT). The regulators generally expect property and casualty companies to comply with capital adequacy requirements. This test compares a company's capital against the risk profile of the organization. The risk-based capital adequacy framework assesses the risk of assets, policy liabilities and other exposures by applying various factors. The regulator indicates that the Company should produce a minimum MCT of 150%. During the year, the Company has consistently exceeded this minimum. The regulator has the authority to request more extensive reporting and can place restrictions on the Company's operations if the Company falls below this requirement and deemed necessary. The MCT for the Company at December 31, 2016 was 478% ( %). For the purpose of capital management, the Company has defined capital as policyholders' equity. 30