Building a better working world. Colonial Medical Insurance Company Limited Year Ended December 31, 2015 With Independent Auditors' Report

Transcription

1 AUDITED FINANCIAL STATEMENTS Colonial Medical Insurance Company Limited Year Ended December 31, 2015 With Independent Auditors' Report Ernst & Young Ltd. ( Building a better working world

2 Audited Financial Statements Year Ended December 31, Contents Independent Auditors' Report I Audited Financial Statements Statement of Financial Position Statement of Comprehensive Income Statement of Changes in Shareholder' s Equity Statement of Cash Flows Notes to Financial Statements ?

3 Buil ding a better workinq wo rld Ernst & Young Ltd. 3 Bermudiana Road Hamilton HM 08, Bermuda P.O. Box 463 Hamilton HM BX, Ber muda Tel: Fax : The Shareholder Colonial Medical Insurance Company Limited Independent Auditors' Repmt We have audited the accompanying financial statements of Colonial Medical Insurance Company Limited, which comprise the statement of financial position as at December 31, 2015, and the statement of comprehensive income, statement of changes in shareholder's equity and statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory infmmation. 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 fi aud or ertor. Auditors' 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 perfmm the audit to obtain reasonable assurance about whether the fmancial 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 fmancial statements, whether due to fraud or error. In making those risk assessments, the auditors consider 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. A member firm of Ernst & Yount) Globdt limited

4 Building a better working world Opinion In our opinion, the fmancial statements present fairly, in all material respects, the financial position of Colonial Medical Insurance Company Limited as at December 31, 2015, and of its fmancial performance and its cash flows for the year then ended in accordance with Intemational Financial Reporting Standards. April27, A rnember trrm of Ernst & Young Global lirnfled

5 Statement of Financial Position Assets Cash and cash equivalents (Notes 3 and 11) Financial assets (Notes 4, 9 and 11) Accounts receivable and accrued interest Amounts due from related companies (Note 1 1) Insurance balances receivable (Note 5) Reinsurance balances receivable Losses recoverable from reinsurers (Note 6) Prepaids and other assets Funds withheld (Note 10) Deferred acquisition costs (Note 6) Property, plant and equipment (Note 7) Intangible assets (Note 8) Total assets December ,987,303 50,093, ,092 12,295,819 6,423,303 1,.681,273 2,318, ,197 2,500 16,445 1,500, ! ,430,127 12,169,195 55,059,427 14,210 14,223,034 2,360, ,582 3,013, ,954 2,500 10,223 1,875, ,099 89,828,512 ( Liabilities Bank overdraft (Note 3) Amounts due to related companies (Note I I) Reinsurance balances payable Outstanding losses and loss expenses (Notes 6, 10 and 11) Accounts payable and other liabilities Unearned premiums Total liabilities 1,172, ,413 1,678,688 13,710,918 6,274, ,963 24,003, ,559 1,106,377 1,766,070 13,517,793 2,499, ,533 19,983,319 Shareholder's equity Shat:e capital (Note 10) Contributed surplus (Note 10) Retained earnings Total equity attributable to the equity holder of the Company 2,000,000 1,500,000 75,926,471 79,426,471 2,000,000 1,500,000 66,345,193 69,845,193 Total liabilities and shareholder's equity 103,430,U7 89,828,51 2 See accompanying notes. On behalf of the Board; IlL Director ~ Director 3

6 Statement of Comprehensive Income Year Ended December Premiums written (Notes 10 and 11) 151,008, ,711,329 Reinsurance premiums assumed (Note 11) 8,616,755 7,802,967 Total premiums written 159,625, ,514,296 Change in unearned premiums written {104,430} {37,2362 Total premiums earned 159,521, ,477,060 Reinsurance premiums ceded (Notes 10 and 11) (6,922,072) {6,329,2532 Net premiums earned 152,599, ,147;807 ( Claims paid (Note 6) 111,594,885 99,257,546 Change in outstanding loss provisions (Note 6) 193, ,122 Claims recovered and recoverable from reinsurers (Note 6) {4,309,548} {2,051,331} Net claims incurred 107,478,462 98,010,337 Commission earned (incurred) on reinsurance (237,791) 227,450 Commission expense (Note 11) (11,574,044) (9,954,632) Other undetwriting expenses {5,140,429) { 4,920,0712 Net undetwtiting income 28,168,288 24,490,217 Net investment income (Note 4) 255,116 1,947,256 Administration fee income (Note 14) 597, ,077 Management fee income (Note 11) 2,961,561 2,811,315 General and administrative expenses (Notes 11 and 13) (16,900,9622 {16,248,975} Net income and comprehensive income for the year 15,081,278 13,905,890 See accompanying notes. 4

7 Statement of Changes in Shareholder's Equity Share Capital Contributed Surplus Retained Earnings Total Equity Attributable to the Equity Holder of the Company Balance at December 31, 2013 Net income for the year Dividends (Note 17) Balance at December 31, 2014 Net income for the year Dividends (Note 17) Balance at December 31, ,000,000 2,000,000 2,000,000 1,500,000 55,939,303 13,905,890 (3,500,000) 1,500,000 66,345,193 15,081,278 {5,500,000} 1,500,000 75,926,471 59,439,303 13,905,890 (3,500,000) 69,845,193 15,081,278 (5,500,000} 79,426,471 See accompanying notes. 5

8 Statement of Cash Flows Operating activities Net income Adjushnents for: Depreciation and amortization (Notes 7 and 8) Dividend and interest income Net umealized losses (gains) on investments Realized losses on sale of investments Amortization on investments Operating cash flow before changes in non-cash operating working capital Change in non-cash operating working capital (Note 16) Cash flows provided by operating activities Year Ended December ,081,278 13,905, , ,409 (1,048,120) (1,207,817) 180,729 (1,010,290) 607, ,978 4,873 4,873 15,429,277 12,555,043 (1!868,252) 4,002,527 13,561,025 16,557,570 ( Investing activities Proceeds from sale of inveshnents Purchase of investments Dividend and interest income received Amounts due from related company Purchase of plant, property and equipment (Note 7) Purchase of intangible assets (Note 8) Cash flows used in investing activities Financing activities Dividends paid (Note 17) Cash flows used in financing activities 29,008,002 12,545,430 (24,834,945) (31,864,645) 1,048,120 1,207,817 2,728,253 8,099,152 (114,617) (219,993) {369,079} (207,513) 7,465,734 (10,439,752) (5,500,000) (3,500,000) (5,500,000) (3,500,000) Increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Cash balances comprise Cash and cash equivalents Bank overdraft 15,526,759 2,617,818 11,287,636 8,669,818 26,814,395 11,287,636 27,987,303 12,169,195 (1,172,908) (881,559) 26,814,394 11,287,636 See accompanying notes. 6

9 Notes to Financial Statements December 31, Genet al Colonial Medical Insurance Company Limited (the Company) was incorporated in the Islands of Bermuda on August 9, 1990, and canies on business as an insurance company and holds a Class 3B license under the Insurance Act, 1978 ofbennuda and related regulations (the Insurance Act). The Company commenced writing business on January 1, The Company is a wholly owned subsidiary of Colonial Group Intemational Ltd. (CGI). CGI is fully owned by Edmund Gibbons Limited, an entity domiciled in Bemmda. The registered office and principal place of business of the Company is Jardine House, 33~35 Reid Street, Hamilton, Betmuda. The Company provides health insurance coverage in Bermuda, Cayman, the British Virgin Islands and the Turks & Caicos Islands for medical, dental, vision, long term disability, short tetm disability, group life and accidental death and dismembennent risks. The Company also offers international health insurance coverage for medical, dental, life, long te1m disability and accidental death and dismemberment risks for individuals and groups working outside their home country. The Company assumed and administered all of the group medical, dental, group life and accidental death and dismemberment business written by British Caymanian Insurance Company Limited, a company incorporated in the Cayman Islands and related through a common shareholder, up to August 31, As of September 1, 2007, the Company stmted writing business directly in Cayman. The coverage provided and reinsurance purchased since that date is substantially the same as the other business written by the Company. Effective Febmary 1, 2007, the Company assumed and administered all of the group medical, dental, group life and accidental death and dismemberment business written by Colonial Insurance (BVI) Limited, a company incorporated in the British Virgin Islands and related through a common shareholder. The coverage provided and reinsurance purchased is substantially the same as the other business written by the Company. The Company also provides administrative services to a number of self-insured programs, under which it assumes no net underwriting risk but receives an administration fee (Note 14). 7

10 2. Summary of Significant Accounting Policies Statement of Compliance These financial statements have been prepared in accordance with Intemational Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). The financial statements, including all notes, were authorized for issue by the Board of Directors on April 27, Basis of Measurement ( The financial statements have been compiled on the going concern basis and prepared on the historical cost basis, except for the 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 statement offmancial position is presented in order ofliquidity. Functional and Pnsentation Currency The financial statements are presented in Betmuda dollars, the Company's functional cmtency. Foreign Currency Translation Transactions involving cunencies other than the Be1muda dollar are translated at exchange rates ruling at the time of those transactions. All monetary assets and liabilities originating in such currencies are translated at the rates ruling at the statement of financial position date. Any profits or losses on exchange are included in the statement of comprehensive income. Use of Estimates and Judgments The preparation of the financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies, the repmied amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the fmancial statements and the repmied amounts of income and expenses during the year. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, 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. 8

11 Colonial Medical Insmance Company Limited 2. Summary of Significant Accounting Policies (continued) Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and f11ture periods if the revision affects both CUJTent and future periods. In particular, information about significant areas of estimation uncertainty and critical judgments in applying accounting policies that have the most significant effect on the amounts recognized in the fmancial statements are desctibed in the Notes 4, 6 and 10. Fair Value Measurement Fair value is determined based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Fair value is measured using the assumptions that market participants would use when p1icing an asset or liability. The Company determines fair value by using quoted prices in active markets for identical or similar assets or liabilities. When quoted prices in active markets are not available, fair value is determined using valuation techniques that maximize the use of observable inputs. When observable valuation inputs are not available, significant judgment is required to detennine fair value by assessing the valuation techniques and valuation inputs. The use of alternative valuation techniques or valuation inputs may result in a different fair value. A description of the fair value methodologies and assumptions by type of asset is included in Note 4. Cash and Cash Equivalents For the purposes of the statement of cash flows, the Company considers all cash on hand, time deposits with an miginal maturity of three months or less and money market funds which can be redeemed without penalty as equivalent to cash. Financial Assets The Company has the following fmancial assets: (i) financial assets at fair value through profit or loss and (ii) held-to-maturity frnancial assets. Management determines the classification at initial recognition and is dependent on the nature of the assets and the purpose for which the assets were acquired. 9

12 2. Summary of Significant Accounting Policies (continued) Initial Recognition and Measurement Financial assets are classified, at initial recognition, as fmancial assets at fair value through profit or loss, held-to-maturity investments as appropriate. All financial assets are recognized initially at fair value. In the case offmancial assets not recorded at fair value through profit or loss, transaction costs that are attributable to the acquisition of the financial asset. Purchases or sales of financial assets that require delivery of assets within a time frame established by regulation /or convention in the market place (regular way trades) are recognized on the trade date, i.e., the date that the Company commits to purchase or sell the asset. Subsequent Measurement For purposes of subsequent measurement, financial assets are classified as follows: Financial assets at fair value through profit or loss Held-to-maturity investments Financial Assets at Fair Value Through Profit or Loss Financial assets at fair value through profit or loss include financial assets held for trading and financial assets designated upon initial recognition at fair value through profit or loss. Financial assets are classified as held for trading if they are acquired for the purpose of selling or repurchasing in the near term or traded for the purposes of earning investment income. Financial assets at fair value through profit or loss are carried in the statement of fmancial position at fair value with net changes in fair value presented in investment income in the statement of income. Financial Assets Held-to-Maturity Investments with a fixed maturity, where management has both the intent and the ability to hold to maturity, are classified as held-to-maturity. After initial measurement, held to maturity investments are measured at amortized cost using the effective interest rate (EIR), less impairment. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortization is included as investment income in the statement of income. The losses arising from impaliment are recognized in the statement of income as deduction to investment income. 10

13 2. Summary of Significant Accounting Policies (continued) Derecognition A financial asset is derecognized when the Company's rights to contractual cash flows expire, when the Company transfers substantially all its risks and rewards of ownership or when the Company no longer retains control. Impairment of Financial Assets The Company reviews the carrying value of its fmancial assets, except those classified as fair value through profit and loss, at each period end for evidence of impairment and reversal of previously recognized impairment losses. These assets are considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset. Evidence of impainnent may include indications that the debtors or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganization and observable data indicating that there is a measurable decrease in the estimated future cash flows, such as changes in attears or economic conditions that con elate with defaults. Financial Assets Carried at Amortized Cost For financial assets carried at amortized cost, the Company first assesses whether impairment exists individually for fmancial assets that are individually significant or collectively for fmancial assets that are not 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 fmancial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impaitment and for which an impairment loss is, or continues to be, recognized are not included in a collective assessment of impairment. An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the original effective interest rate. Losses are recognized in income or loss and reflected in an allowance account against receivables. When a subsequent event causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through net income or loss in the statement of comprehensive income. 11

14 (Expressed in Bermuda Dollar~~ 2. Summary of Significant Accounting Policies (continued) Impairment of Non-Financial Assets The Company assesses, at each reporting date, whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, the Company estimates the asset's recoverable amount. An asset's recoverable amount is the higher of an asset's fair value less costs of disposal and its value in use. The recoverable amount is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. When the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discomtted to their present value using a discount rate that reflects cultent market assessments of the time value of money and the risks specific to the asset. The Company bases its impaitment calculation on detailed budgets and forecast calculations. Impairment losses are recognized in the statement of comprehensive income. Impainnent losses are reversed only to the extent that the asset's carrying amount does not exceed the canying amount that would have been determined, net of depreciation or ammtization, if no impairment loss had been recognized. Insurance Contracts Insurance contracts are those contracts where the Company has accepted significant insurance risk from the policyholders by agreeing to compensate the policyholders if a specified uncertain future event (the insured event) adversely affects the policyholders. Contracts under which the Company does not accept significant insurance risk are classified as either investment contracts or considered service contracts and are accounted for in accordance with las 39 "Financial lnsh1.rments: Recognition and Measurement" or las 18 "Revenue", respectively. Once a contract has been classified as an insurance contract, it remains an insurance contract for the remainder of its tetm, even if the insurance 1isk reduces significantly during this period, unless all rights and obligations are extinguished or expire. 12

15 (Expressed in Bermuda Dollarf>) 2. Summary of Significant Accounting Policies (continued) All Company's insurance contracts are classified as short-term and include health insurance and short-duration life insurance contracts. These contracts protect the Company's customers from the consequences of events such as death, disability and sickness. Guaranteed benefits paid on occurrence of the specified insurance event are either fixed or linked to the extent of the economic loss suffel'ed by the policyholder. There are no maturity or surrender benefits. Premiums The Company's insurance premiums are earned pro rata over the term of the applicable risk period specified in the insurance policy. The Company's insurance policies cover losses occurring or claims made during the term of the policy. Generally, the Company receives a fixed premium which is identified in the policy and is recorded on the inception date of the contract and earned evenly over the policy term. Net premiums represent gross premiums, net of the share ceded to reinsurers for insuring patt of the risk. Unearned premiums represent the portion of premiums written applicable to the unexpired tenns of policies in force. Receivable and Payable Related to Insurance Contracts Receivables and payables related to insurance contracts are recognized when due. These include amounts due to and from insurance contract holders, brokers and agents. Premiums receivable are recorded at amounts due less any allowance for estimated uncollectible premiums receivable. Deferred Acquisition Costs Defen ed acquisition costs represent the cost of acquiring new business, consisting of commission expenses, policy issuance and other costs which are directly related to the production of new business. Deferred acquisition costs on investment contracts are amortized over the expected average lives of the contracts as a constant percentage of the present value of estimated gross profits arising principally from investment results, mortality and expense margins and sun ender charges based on historical and anticipated future experience. Deferred acquisition costs on investment contracts are reviewed for recoverability from future income, including investment income. Amounts which are deemed unrecoverable are expensed in the period in which the detennination is made. Acquisition costs on insurance business are deferred and amortized to income over the period in which the premiums are earned. 13

16 2. Summary of Significant Accounting Policies (continued) Reinsurance Contracts Held The Company uses reinsurance in the nmmal course of business to manage its risk exposure. Insurance ceded to a reinsurer does not relieve the Company from its obligations to policyholders. The Company remains liable to its policyholders for the portion reinsured to the extent that any reinsurer does not meet its obligations for reinsurance ceded to it under the reinsurance agreements. Reinsurance assets represent the benefit derived from reinsurance agreements in force at the reporting date, taking into account the financial condition of the reinsurer. Amounts recoverable from reinsurers are estimated in accordance with the te1ms of the relevant reinsurance contract. Premiums ceded and claims reimbursed are presented on a gross basis in the statement of comprehensive income. Reinsurance assets are not offset against the related insurance contract liabilities and are presented separately in the statement of financial position. Reinsurance profit commission is calculated based on past underwriting results in accordance with the tetms of the reinsurance contracts and is received from the reinsurers. The reinsurance profit commission is recorded on an accrual basis. Outstanding Losses and Loss Expenses Unpaid losses and loss expenses in the statement of financial position include (i) reserves for repmted unpaid losses and (ii) loss expenses for losses incurred but not reported (refened to as "IBNR reserves). (i) Reserves for reported unpaid losses The reserve for reported unpaid losses and loss expenses is established for losses that have been reported but not yet paid. The reserve for reported unpaid losses and loss expenses is estimated based on claims reported from insureds or amounts reported from ceding companies and represent the estimated ultimate cost of events or conditions that have been reported to or specifically identified by the Company. 14

17 2. Summary of Significant Accounting Policies (continued) (ii) IBNR reserves IBNR reserves represent a provision for claims that have been incuned but not yet repmted to the Company as well as future loss development on losses already reported in excess of the reserve for reported unpaid losses and loss expenses. The Company Appointed Actumy is responsible for determining the amount of the IBNR reserves. The Company's Actuary employs a variety of generally accepted methodologies to determine estimated ultimate loss reserves, including the "Bornhuetter-Ferguson incuned loss method" and frequency and severity approaches. The Company's outstanding loss and loss expense reserves are reviewed regularly and adjushnents, if any, are reflected in earnings in the period in which they become known. The establishment of new loss and loss expense reserves or the adjustment of previously recorded loss and loss expense reserves could result in significant positive or negative changes to the Company's financial condition for any pmticular period. While management believes the Company's estimate of loss and loss expense reserves is reasonable, the ultimate loss experience may not be reliably predicted and it is possible losses and loss expenses may be materially different than the total reserve for losses and loss expenses recorded by the Company. Property, Plant and Equipment Property, plant and equipment are recorded at cost less accumulated depreciation and impaitment losses. The cost of replacing a component of an item of property or equipment is recognized in the carrying amount of the item if it is probable that the fuhtre economic benefits embodied within the part will flow to the Company and its cost can be measured reliably. The carrying amount of the replaced pmt is derecognized. The costs of the day-to-day servicing of property and equipment are recognized as incurred in general and administrative expenses in the statement of comprehensive mcome. Depreciation is charged to general and administrative expenses 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 Fumiture and office equipment Leasehold improvements 5 years 5 years 10 years 15

18 2. Summary of Significant Accounting Policies (continued) The residual values, useful lives and methods of depreciation of property, plant and equipment are reviewed at each frnancial year end and adjusted prospectively, if appropriate. Identifiable Intangible Assets Finite-life intangible assets are amortized on a straight-line basis over their useful life. The Company has classified software costs as intangible assets if they are not an integral part of the computer equipment. Finite intangible assets are recorded at cost less accumulated amortization. Amortization is provided for on a straight line basis over the following estimated useful lives. Computer software 5 years Commission Income Commission income represents reinsurance commission income and is recorded on an accrual basis when services are rendered. Investment Income Interest on cash and debt securities is recorded on an accrual basis. Dividend income is recognized when the right to receive it is established. For loans and receivables reported at amortized cost, interest income is calculated using the effective interest rate method and is reported in the income statement. Leases Those leases whereby all of the significant risks and rewards of ownership are transferred to the Company are classified as finance leases. At the commencement of the lease term, finance leases are recognized as assets and liabilities at the lower of the fair value of the asset and the present value of the minimum lease payments. The minimum lease payments are apportioned between finance charges and repayments of the outstanding liability. Finance charges are charged to each period of the lease te1m so as to produce a constant rate of interest on the outstanding balance of the liability. 16

19 2. Summary of Significant Accounting Policies (continued) All other leases are classified as operating leases. Payments made under operating leases, net of any incentive received from the lessor, are charged to the income statement on a straight-line basis over the period of the lease. 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 conhibution plan is a pension plan under which the Company pays fixed contributions to 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. Taxation Under the laws of Bennuda there is presently no income, withholding or capital gains tax payable by the Company. Changes in Comparatives Certain comparative amounts have been reclassified to conform to the cunent year's presentation. The reclassifications are: Financial assets at fair value tlu ough profit and loss and held-to-maturity have been combined into one line, financial assets, in the statement of financial position. Further details on financial assets are presented in Note 4. Funds withheld in the amount of 213,517 reported on a separate line of the statement of fmancial position in the financial statements for 2014, are now reported within cash and cash equivalents. This is the amount of deposit held in favor of the Superintendent of Insurance of the Turks & Caicos Islands as part of that country's regulatory requirement. All changes in presentation had no impact on the net income repmied in the statement of comprehensive income and statement of changes in shareholder's equity and statement of cash flows. 17

20 ( Colonial Medical Insurance Company Limited 2. Summary of Significant Accounting Policies (continued) New Standards, Interpretations and Amendments to Published Standards New Standards, Amendments and Interpretations but not Effective for the Financial Year Beginning January 1, 2014 and not Early Adopted IFRS 9 Financial Instruments specifies how an entity should classify and measure fmancial 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 ofias 39. The standard applies a consistent approach to classifying financial assets and replaces the numerous categories of financial assets in las 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 on or after January 1, 2018.!FRS 15 Revenue from Contracts with Customers was issued in May 2014 and is effective for years beginning on or after January 1, 2018, to be applied retrospectively or on a modified retrospective basis. IFRS 15 clarifies revenue recognition principles, provides a robust framework for recognizing revenue and cash flows arising from contracts with customers and enhances qualitative and quantitative disclosure requirements. IFRS 15 only impacts the Company's revenues from sources other than insurance contracts, for example service type contracts. Accordingly, the adoption of IFRS 15 may impact the revenue recognition related to the Company's service contracts and may result in additional financial statement disclosure. The Company is assessing the impact of this standard. There were no other such standards, interpretations or amendments to existing standards that are expected to have a significant impact on the Company. 3. Cash and Cash Equivalents Cash and cash equivalent balances in the amount of 16,816,550 (2014-9,930,138) are held by 3 Bermuda based financial institutions. As at December 31, 2015 and 2014 the bank overdraft ammmt related to the overdrawn balance per the books and resulted primarily from un-presented cheques. 18

21 (Expressed in Bermuda Dollar.s) 4. Financial Assets At the balance sheet date, financial assets are categorized as follows: Carrying Value 2015 Cost/ Amo tized Cost 2014 Cost/ Carrying Amortized Value Cost At fair value through profit or loss Held-to-maturity 48,985,302 1,108,064 49,559,766 1!138!108 53,946,491 1,112,936 50,093,366 50,697,874 55,059,427 53,509,406 1,112,936 54,622,342 Held-to-Maturity Investments Investments held to maturity include fixed maturity debt instruments and preferred shares which mature as follows: From one year to five years FTom five years to ten years 883, , , ,000 1,108,064 1,112,936 Financial assets held-to-maturity are carried at amortized cost and comprise prefen ed shares maturing in 2019 of 883,064 ( ,936) and a Bermuda Government debt instmment maturing in 2020 of 225,000 ( ,000), which have coupon rates of 8% and 5.6% respectively. The fair value ofthese investments at the balance sheet date are 1,225,516 (2014-1,245,038). The preferred shares are issued by a local Bermuda banlc and are guaranteed by the Govemment of Betmuda which has a credit rating of AA-. 19

22 (Expressed in Bermuda Dollar~) 4. Financial Assets (continued) At Fair Value Through Profit or Loss Financial assets at fair value tlu-ough profit or loss comprise the following: December 31, 2015 December 31,2014 Fair Value Cost Fair Value Cost Managed funds 48,404,520 48,424,760 53,183,047 51,823,292 Cotporate bonds 400, , , ,390 Common equity securities 179, , ,015 1,278,325 Prefen ed shares 10,569 6,399 Total 48,985,302 49,559,766 53,946,491 53,509,406 The managed funds owned by the Company invest in a number of different types of investments which 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 futther defmed 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 in 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 quruterly, the ability of the Company to realize such investments may be restricted. The investment portfolio is monitored by the Investment Committee and is subject to investment guidelines approved by the Board of Directors. For managed funds the Company's largest concentration in any one investee is 14% of total investments ( %). The security is a United States based fund investing in fixed income securities. For equity securities, the Company's largest concentration in any one investee is 5% of total investments. Corporate bonds represent a single secuiity with a coupon rate of 1.3% maturing in January

23 4. Financial Assets (continued) Fair Value Measurement The Company categorizes its fair value measurements according to a three-level hierarchy. The hierarchy prioritizes the inputs used by the Company's valuation techniques. A level is assigned to each fair value measurement based on the lowest level input significant to the fair value measurement in its entirety. The three levels of the fair value hierarchy are defined as follows: Level 1 - Quoted (unadjusted) market prices in active markets for identical instruments. ( Level 2 -Fair value measurements using inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in inactive markets, inputs that are observable that are not prices (such as interest rates, credit risks, etc.) and inputs that are derived from or coitoborated by observable market data. Most debt securities are classified within Level 2. Level3- 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 ofthese 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. The differences could be material. 21

24 4. Financial Assets (continued) The following table presents the Company's fair value hierarchy for those assets or liabilities measured at fair value and for which fair values are disclosed as of December 31, 2015: Levell Level2 Level3 Total Financial assets at fair value through profit or loss Managed funds 13,838,179 31,035,584 3,530,757 48,404,520 Corporate bonds 400, ,920 Common equity securities 160, ,998,789 31,436,504 3,550,009 49,985,302 ( Assets for which fair values are disclosed Held to maturity - 1,225,516-1,225,516 The following table presents the Company's fair value hierarchy for those assets or liabilities measured at fair value and for which fair values are disclosed as of December 31,2014: Financial assets at fair value through profit or loss Managed funds Cmporate bonds Common equity securities Prefened shares Total Assets for which fair values are disclosed Held to maturity December 31, 2014 Level 1 Level2 Level 3 Total 16,888,415 31,445,386 4,849,246 53,183, , , ,512 38, ,015 10,569 10,569 17,199,927 31,848,246 4,898,318 53,946,491-1,245,038-1,245,038 There were no reclassifications of investments between Level 1 and Level 2 dwing the year ended December 31, 2015 and December 31,

25 4. Financial Assets (continued) (a) Financial Assets in Level 1 The fair value of investments traded in active markets is based on quoted market prices at the balance sheet date. A market is regarded as active if quoted ptices are readily and regularly available from an exchange, dealer, broker, indushy group, pricing service, or regulatory agency, and those prices represent actual and regularly occuning market transactions on an arm's length basis. The quoted market price used for financial assets held by the Company is the current bid price. These investments are included in Level 1. Investments included in Level 1 comprise primarily domestic and foreign quoted equity shares and managed funds. ( (b) Financial Assets in Level 2 The fair value of investments that are not traded in an active market is determined by using valuation techniques. These valuation techniques maximize the use of observable market data where it is available and rely as little as possible on entity specific estimates. Specific valuation techniques include market standard valuation methodologies, which include discounted cash flow analysis, consensus pricing from various broker dealers that are typically the market makers, or other similar techniques. The assumptions and valuation inputs in applying these market standard valuation methodologies are determined ptimarily using observable market inputs, which include, but are not limited to, benchmark yields, reported trades of identical or similar instmments, broker-dealer quotes, issuer spreads, bid prices and reference data including market research publications. In limited circumstances, non-binding broker quotes are used. If all significant inputs required to fair value an investment are observable, the investment is included in level 2. Investments included in Level 2 comprise primarily corporate debt securities and managed funds. Fair values of the Company's interests in unquoted 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. The Company's ability to redeem its managed fund investments at the reported net asset value per share (or its equivalent) determines whether the managed fund investment is categorized within Level 2 or Level 3 of the fair value hierarchy. If the managed fund can be redeemed within a time period of 3 months with no gates or other redemption restrictions it is classified within Level2. Otherwise the managed fund is classified within Level 3. 23

26 4. Financial Assets (continued) (c) Financial Assets in Level 3 The following table provides a summary of the changes in fair value of the Company's Level 3 financial assets (and liabilities) for the year ended December 31, 2015: Managed Common Preferred Funds Eguities Shares Total ( Beginning balance at Januaty 1, ,849,246 38,503 10,569 4,898,318 Realized gains (losses) 280, ,749 Movement in unrealized gains (losses) (555,354) (19,251) (4,169) (578,774) Purchases and issuances 2,879,225 2,879,225 Sales (3,923,1 09) (3,923,1 09) Settlements (6,400) (6,400) Ending balance at December 31, ,530,757 19,252-3,550,009 Total gains (losses) for the year included in income on Level 3 assets (recognized in investment income) (274,605) (19,251) (4,1692 (298,025) 24

27 (Expressed in Bermuda Dollar,\~ 4. Financial Assets (continued) The following table provides a summary of the changes in fair value of the Company's Level3 financial assets (and liabilities) for the year ended December 31, 2014: Managed Common Preferred Funds Equities Shares Total ( Beginning balance at Janua1y 1, ,972,318 38,503 7,881 2,018,702 Movement in unrealized gains (losses) 235,395 2, ,083 Purchases and issuances (1,243,413) (1,243,413) Sales 3, ,884,946 Ending balance at December 31, ,849,246 38,503 10,569 4,898,318 Total gains (losses) for the year included in income on Level 3 assets (recognized in investment income) 235,395-2, ,083 A review of the fair value hierarchy classifications is conducted on an ongoing basis. Changes in the observability of valuation inputs may result in a reclassification for certain financial assets and liabilities. Reclassifications impacting Level3 of the fair value hierarchy are reported as transfers in/out of the Level 3 category as of the beginning of the period in which the reclassifications occur. Investnwnt Income Investment income comprises the following: Interest and dividend income Amortization Realized gains (losses) on sale of investments Net umealized gains (losses) on investments ,048,120 (4,873) (607,402) (180,729) 255, ,207,817 (4,873) (265,978) 1,010,290 1,947,256 25

28 5. Insurance Balances Receivable Insurance balances receivable are presented net of an allowance for doubtful accounts of 63 9,191 ( ,732). 6. Outstanding Losses and Loss Expenses and Reinsurance Assets Outstanding losses and loss expenses are reported gross of reinsurance ceded and the ceded liabilities are reported separately as a reinsurance asset. Outstanding losses and loss expenses include reserves for reported unpaid losses and losses and loss expense incuned but not repmied. The outstanding claims provision comprises: Medical, dental and vision Long-term disability Group Life ,547,763 2,163,155 13,710, ,701,264 1,617, ,080 13,517,793 26

29 6. Outstanding Losses and Loss Expenses and Reinsurance Assets Movements in insurance liabilities and reinsurance assets are as follows: Loss reserves Notified claims Incurred but not reported Total at beginning of year Gross 3,013, ,517, Reinsurance Net (3,013,402) ,391 (3,013,402) 10,504,391 Gross 3,772,403 8,941,268 12,713, Reinsurance (3,772,403) (3,772,403) Net 8,941,268 8,941,268 Movements during the year Claims incurred -current year Claims incurred -prior year Total claims incurred 111,543, , ,788,010 (3,959,460) 1 07,583,711 (350,088) (105,249) (4,309,547) 107,478, ,389,430 (2,327,762) 100,061,668 (1,692,491) (358,840) (2,051,331) 100,696,939 (2,686,602) 98,010,337 Claims sl:ttled in the year (111,594,885) 5,004,229 (I 06,590,656) {99,257,546) 2,810,332 (96,447,214) Total at end of year 13,710,918 (2,318, 721) 11,392,197 13,517,793 (3,013,402) 10,504,391 Notified claims Incurred but not reported Total at end of year 2,318,721 11,392,197 13,710,918 (2,318,721) 3,01 3,402 11,392,197 10,504,391 (2,318,721) 11,392,197 13,517,793 (3,013,402) 10,504,391 (3,013,402) 10,504,391 The determination of the provision for future policy benefits is dependent on the estimates relating to the historical monthly lag patterns of claim payments relative to the claim incunal date. These lag patterns are used to develop completion factors which estimate the ultimate level of incurred claims for each month. The Company also reviews enrollment and pattems of claims paid per employee per month to estimate incuned claims for months closest to the valuation date. This is referred to as the PEPM method. The use of the 12-month weighted average Completion Factor Method, blended with the PEPM method for recent months, is selected as it provides stability and reliability in the provision for future policy benefits. With respect to both methods, paid claims are adjusted for reinsurance recoveries and medical trends. The development of insurance liabilities provides a measure of the Company's ability to estimate the ultimate value of claims. As claims are typically settled within a one year period, the Company has not included disclosure about claims development. 27

30 ( Colonial Medical Insurance Company Limited 6. Outstanding Losses and Loss Expenses and Reinsurance Assets Claims Paid Gross claims paid consist of: Medical Dental Vision Long-term disability Group life Other Deferred Acquisition Costs ,942,667 9,136,188 1,460, ,833 1,535,336 3,250, ,594, ,186,867 8,114,779 1,289, , , ,622 99,257,546 The following reflects the amounts of acquisition costs deferred and amortized as of the year end date: Deferred acquisition cost, beginning of year 10,223 9,383 Expenses capitalized 6, Deferred acquisition cost, end of year 16,445 10,223 28

31 ~ ~ ~ ~ ~ ~ ~ ~ Colonial Medical Insurance Company Limited 7. Property, Plant and Equipment Property, plant and equipment as at December 31, 2015 are detailed below: January 1, 2015 Additions Dis[!osals Cost Leasehold improvements 2,862,061 ~ Computer hardware 2,874,887 97,814 Furniture and fixtures 706,083 6,803 Office equipment 680,771 10,000 7,123, ,617 December 31, ,862,061 2,972, , ,771 7,238,419 ( January 1, Dcp1 eciation 2015 Expense Dis[!osals Accumulated depreciation Leasehold improvements 1,499, ,110 Computer hardware 2,399, ,812 Furniture and fixtures 692,172 4,851 Office equipment 657,991 14,459 5,248, ,232 December 31, ,785,166 2,582, , ,450 5,737!606 Net book value 1,875,428 1,500,813 Property, plant and equipment as at December 31, are detailed below: January I, 2014 Additions Dis[!osals Cost Leasehold improvements 2,839,763 22,298 Computer hardware 2,68 1, ,651 Furniture and fixtures 702,039 4,044 Office equipment 680,771 6,903, ,993 December 31, ,862,061 2,874, , ,771 7, 123,802 January 1, Depreciation 2014 Ex[!ense Dis[!osals Accumulated depreciation Leasehold improvements 1,214, ,650 Computer bard ware 2,192, ,396 Furniture and fixtures 687,570 4,602 Office equipment 639,997 17,994 4,734, ,642 December 31, ,499,056 2,399, , ,991 5,248,374 Net book value 2, 169,077 I,875,428 29