2011 Annual Report THE GUARANTEE COMPANY OF NORTH AMERICA

Transcription

1 2011 Annual Report

2 EXECUTIVE REPORT Net Earnings for the 2011 year were $34 million, resulting in an increase in retained earnings of $26 million to $440 million at December 31, Gross written premiums increased $7.6 million or 2.1% to $364 million. Volatility in equity markets in the last quarter of 2011 substantially reduced comprehensive income for the year. Although the slow economic recovery continued through 2011, our surety business delivered excellent results. Our longstanding relationship with the construction industry, strong support of our broker/agency force and depth of experience in our underwriting and claims handling teams combined to deliver profitable results in both Canada and the United States. Our surety bonding subsidiary in the US continues to grow and generate underwriting profit despite the ongoing challenges in the US construction economy. Delivery of our commercial surety products was significantly improved with the introduction of proprietary web based technology, QuickWrite, which was recently released in Canada. Guarantee GOLD Centres in Toronto, Montreal and Woodstock, that underwrite high value personal lines residential and automobile, generated solid growth and positive underwriting results. Our residential portfolio continued to grow as we focused on providing superior service to our brokers and their high net worth clients. Auto insurance experienced significantly improved results due to changes in coverage options promulgated by the Ontario regulator together with favourable weather conditions. Our Corporate Insurance Division which provides Fidelity and Directors and Officers Liability Insurance achieved another profitable year. We met the challenge of a continuing soft market for these products by maintaining our position in this market. Not-for-Profit Directors and Officers Liability Insurance growth was realized through the introduction of GQuote, our internally developed web based technology. The investment portfolio performed well despite the ongoing volatility in financial markets. Investment income was consistent with 2010 and continues to be impacted by historically low interest rates arising from the global economic situation. Investment income was complemented by realized gains on sale of investments. On behalf of management and the Board of Directors, we thank our dedicated employees for their excellent work and our brokers and agents for their continuing support in this, our 140 th year. Jules R. Quenneville Chief Executive Officer Robert A. Dempsey President and Chief Operating Officer 1

3 Consolidated Statement of Financial Position as at December 31, 2011 January 1, Notes Assets Cash and cash equivalents 65,183 37,610 62,611 Financial investments 5 789, , ,640 Accounts receivable 6 98,034 93,123 84,816 Deferred premium acquisition costs 11 48,699 47,994 45,607 Provision for recoverable portion of unpaid claims 104,702 73,596 45,888 Unearned premiums - ceded 31,863 26,673 22,744 Deferred income taxes 7 11,585 13,966 13,352 Property and equipment 8 2,489 2,733 3,241 Intangible assets 9 6,697 6,383 6,673 1,158,898 1,094,878 1,033,572 Liabilities Accounts payable 10 29,398 22,455 35,602 Deferred commissions 10,822 8,871 7,587 Unpaid Claims - gross , , ,574 Unearned premiums - gross , , , , , ,236 Shareholders equity Capital stock Contributed surplus Accumulated other comprehensive (loss) income (32,454) (1,659) 8,209 Retained earnings 439, , , , , ,336 1,158,898 1,094,878 1,033,572 The Board of Directors approved and signed the financial statements on February 22, Director Director 2

4 Consolidated Statement of Comprehensive Income for the Year Ended December 31, 2011 (in thousands of Canadian dollars, except net earnings per common share) Notes Gross premiums written 363, ,043 Ceded reinsurance premiums written 89,879 69,374 Net premiums written 4 273, ,669 Gross premiums earned 359, ,836 Ceded reinsurance premiums earned 84,743 65,305 Net premiums earned 274, ,531 Net investment income 5 28,119 28,423 Revenue 302, ,954 Expenses Claims incurred, gross 226, ,334 Less claims incurred, ceded 52,506 40,639 Claims incurred, net , ,695 Commissions, net of reinsurance 61,378 60,970 Premium taxes 8,905 8,815 Other underwriting and administrative 45,602 43, , ,628 Earnings before gain on investments 12,135 13,326 Gain on investments - net 5 30,086 5,992 Earnings before income taxes 42,221 19,318 Income tax expense (recovery) Current 4, Deferred 3,874 (1,035) 7 8,407 (210) Net earnings 33,814 19,528 Unrealized investment (losses) gains, net of income taxes (35,935) 887 Unrealized foreign exchange gains (losses) on consolidation 5,140 (10,755) Other comprehensive loss, net of income taxes (30,795) (9,868) Comprehensive income 3,019 9,660 Net earnings per common share ($)

5 Consolidated Statement of Changes in Equity for the year Ended December 31, 2011 Accumulated other Capital Contributed comprehensive Retained stock surplus gain (loss) earnings Total Balance at January 1, , , ,336 Changes in equity for the period Net earnings ,528 19,528 Dividends paid (7,673) (7,673) Unrealized investment gains, net of $212 tax recovery Unrealized foreign exchange losses on consolidation - - (10,755) - (10,755) Balance at December 31, (1,659) 413, ,323 Changes in equity for the period Net earnings ,814 33,814 Dividends paid (7,673) (7,673) Unrealized investment losses, net of $17,430 tax recovery - - (35,935) - (35,935) Unrealized foreign exchange gains on consolidation - - 5,140-5,140 Balance at December 31, (32,454) 439, ,669 Accumulated other comprehensive gain (loss) comprises foreign-exchange gains and losses arising from currency translation from functional currencies into the Company s presentation currency and unrealized gains and losses, net of related income taxes, arising from recording available-for-sale investments at fair value. Included in the December 31, 2011 accumulated other comprehensive (loss) income balance is an income tax recovery of $1,651 (December 31, 2010 income tax expense of $15,779 and January 1, 2010 income tax expense of $15,991). 4

6 Consolidated Statement of Cash Flows For the year ended December 31, Cash flows provided by (used in) Operating activities Receipts (payments) of Premiums - net of commissions 285, ,152 Interest and dividends 30,421 29,272 Sales of financial instruments 309, ,107 Purchases of financial instruments (325,456) (233,236) Claims - net of salvage and subrogation (196,820) (144,223) Reinsurance premiums - net of claims paid (23,152) (66,146) Purchases of equipment (628) (410) Expenses (44,670) (42,023) Income taxes 13,982 (30,420) Other taxes (12,963) (9,401) 35,246 (17,328) Financing activities Dividends paid (7,673) (7,673) Increase (decrease) in cash and cash equivalents 27,573 (25,001) Cash and cash equivalents - beginning of year 37,610 62,611 Cash and cash equivalents - end of year 65,183 37,610 5

7 1. REPORTING ENTITY The Guarantee Company of North America and its subsidiary, The Guarantee Company of North America USA, (the Company ) underwrite property and casualty insurance in both Canada and the United States of America. The Guarantee Company of North America is a wholly owned subsidiary of Princeton Holdings Limited, an Ontario based company. 2. BASIS OF PREPARATION Statement of compliance These financial statements are the Company s first financial statements prepared in accordance with international financial reporting standards (IFRS). Accordingly, the Company has applied IFRS 1, first-time adoption of international financial reporting standards, in their preparation. Basis of measurement All assets and liabilities are presented on a fair value basis except for property, equipment, intangible assets, and certain financial instruments which are measured at historical or depreciated cost. Functional and presentation currency Transactions recorded in the financial statements of each company are measured using the currency of the primary economic environment in which each company operates (the functional currency ). All amounts in these financial statements are presented in Canadian dollars, which is the parent s functional currency. Use of estimates and judgements Preparation of financial statements in conformity with IFRS requires that management make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. All estimates and underlying assumptions are reviewed annually, and any revisions to accounting estimates are recognized prospectively. Reported claims liabilities, deferred premium acquisition costs, deferred income taxes and employee future benefits require the use of estimates and judgements to determine the amount reported. 3. SIGNIFICANT ACCOUNTING POLICIES Unless otherwise indicated, the accounting policies set out below have been applied consistently to all periods presented in these financial statements. Basis of consolidation An entity is considered a subsidiary of the Company if the financial and operating policies of that entity may be governed by the Company, directly or indirectly, with the intent to achieve economic benefits. The results and cash flows relating to subsidiaries acquired or disposed of in the year are included in the consolidated statement of comprehensive income and the consolidated statement of cash flows from the date of acquisition or up to the date of disposal. All inter-company transactions, balances and profits are eliminated. The Company uses the purchase method of accounting to account for the acquisition of subsidiaries. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest. The excess of the cost of acquisition over the fair value of the Company s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in net earnings. 6

8 Foreign currency The assets and liabilities of foreign operations are translated from their functional currencies into the Company s presentation currency using year end exchange rates, and their income and expenses using average exchange rates for the year. Exchange differences arising from the translation of the net investment in foreign operations are taken to the currency translation reserve within equity. On disposal of a foreign operation, such exchange differences are transferred out of this reserve and are recognized in the statement of comprehensive income as part of the gain or loss on sale. Foreign-currency transactions are translated into the functional currency using exchange rates prevailing at the date of the transactions. Exchange gains and losses resulting from the settlement of such transactions, and from the translation of monetary assets and liabilities denominated in foreign currencies, are recognized in the statement of comprehensive income. Intangible assets On acquisition of a subsidiary the Company records as goodwill the excess of the cost of an acquiree over the fair value of the Company s share of net identifiable assets acquired. Subsequently, the value of goodwill is tested annually for impairment and adjusted accordingly through net earnings. On acquisition, licences are recorded at their fair value. Subsequently, licenses are measured at cost less all impairment losses. The value of licenses is tested annually for impairment and appropriate adjustments are recorded through net earnings. Such adjustments are never reversed. Computer software is carried at historical cost less accumulated depreciation. The value of computer software is depreciated over a useful life of between three and five years, using the straight-line method beginning when software is implemented. The depreciation charge for the period is included in net earnings within other underwriting and administrative expenses. Property and equipment On acquisition, property and equipment are recorded at cost. Subsequently, depreciation is provided over the useful lives of the depreciable assets using the declining balance and straight-line methods at rates ranging from 4% to 33%. Depreciation methods, useful lives and residual values are reviewed at each financial year end and are adjusted if appropriate. The value of land is not depreciated. Financial Instruments Cash and cash equivalents include cash on hand, deposits with banks, other short-term, highly liquid investments with original maturities of three months or less from the date of acquisition and bank overdrafts. Cash, cash equivalents, financial derivatives and short term money market instruments with maturities up to one year from the date of issue are classified as fair value through profit or loss (FVTPL) and are recorded on the consolidated balance sheet at fair value with all related gains and losses recorded in net earnings. Prior to 2011, the parent had classified as held-to-maturity all bonds and money market notes held by its US operating subsidiary where the maturity date of the security was greater than one year from date of issue. In 2011, the Company disposed of some of these bonds and re-designated the entire pool as available-for-sale. Bonds designated as held-to-maturity are recorded initially at fair value. Subsequently they are measured at cost, adjusted for amortization of any discounts and premiums on purchase and any provisions for impairment in value. All held-tomaturity investments had fixed determinable payments. Loans, receivables, accounts payable and accrued liabilities are measured at amortized cost using the effective interest rate method which approximates fair value. Management has designated all other financial assets as available-for-sale. Available-for-sale financial assets, with quoted prices in an active market, are carried at fair value on the balance sheet from the trade date. Changes in fair value of equities are recorded, net of income taxes, in other comprehensive income until 7

9 Financial Instruments (continued) the financial asset has been sold, after which time the full amount of gain or loss is recorded in net earnings. Changes in the difference between the fair value of available-for-sale bonds and the amortized value of such bonds is recorded, net of income taxes, in other comprehensive income until the financial asset has been sold, after which time the full amount of gain or loss is recorded in net earnings. Changes in the amortized value of held-to-maturity bonds are recorded as interest income. The amortization of premiums and discounts on the purchase of bonds is calculated using the effective interest rate method. When an asset classified as available-for-sale is sold, the accumulated fair-value adjustments recognized in accumulated other comprehensive income are transferred to net earnings and a corresponding adjustment, net of income taxes, is made to other comprehensive income. The Company s financial instruments are priced using quoted, unadjusted bid prices in active markets for identical assets or liabilities. Impairment of financial assets A financial asset not designated as FVTPL is assessed at each reporting date to determine whether there is objective evidence that it is impaired. A financial asset is impaired if objective evidence indicates that a loss event has occurred after the initial recognition of the asset, and that loss event had a negative effect on the estimated future cash flows of that asset that can be estimated reliably. Objective evidence that financial assets are impaired include default or delinquency by the debtor, indications that the issuer of a security will enter bankruptcy, economic conditions that correlate with defaults or the disappearance of an active market for a security, or a significant or prolonged decline in fair value of an equity security below its cost. Impairment losses on available-for-sale financial assets are recognized by reclassifying losses accumulated in other comprehensive income to net earnings. The cumulative loss that is reclassified from accumulated other comprehensive income to net earnings is the difference between the acquisition cost, net of any principal repayment and amortization, and the current fair value, less any impairment loss recognized previously in net earnings. Changes in impairment provisions attributable to the application of the effective interest rate method are reflected as a component of investment income. If, in a subsequent period, the fair value of an impaired available-for-sale debt security increases and the increase can be related objectively to an event occurring after the impairment loss was recognized in net earnings, then the impairment loss is reversed, with the amount of the reversal recognized in net earnings. Any subsequent recovery in fair value of an impaired available-for-sale equity security is recognized in other comprehensive income. Income taxes Tax expense comprises current and deferred tax. Tax is recognized in net earnings except to the extent it relates to items recognized in other comprehensive income or directly in equity. Current tax expense is based on net earnings for the period as adjusted for items that are not taxable or not deductible. Current tax is calculated using tax rates and laws that were enacted or substantively enacted at the end of the reporting period. Deferred income taxes are provided in respect of assets and liabilities for which book values differ from tax values at rates expected to be enacted or substantively enacted when differences reverse. They result principally from provisions of the Income Tax Act (Canada) requiring discounting of claims and permitting application of prior year losses against taxable income of future years. Insurance and reinsurance contracts The Company s business comprises short-term, non-participating property and casualty contracts that transfer significant risk. The Company accepts and transfers significant risk in the normal course of business at varying retention limits. Gross premiums written comprise premiums assumed from other insurers and premiums received directly from insured parties in respect of risks incepting during the financial year. Premiums are stated before the deduction of brokerage and 8

10 Insurance and reinsurance contracts (continued) commission but net of taxes and duties paid by the insured. Estimates are included for premiums recorded after period-end in respect of contracts incepting during the accounting period and an allowance is also made for cancellations. Premiums are recognized as revenue (premiums earned) proportionally over the period of coverage. The portion of premium receivable or received in respect of in-force contracts that relates to unexpired risks at the balance sheet date is reported as unearned premium liability which represents the Company s obligation to settle losses that will occur during the unexpired portion of the policy period. Premiums ceded to reinsurers are accounted for using the same rules of revenue recognition adopted for gross premiums. Deferred premium acquisition costs, including primarily brokers commissions and premium taxes, are, to the extent that they are considered recoverable, deferred and amortized over the terms of the related premiums. If, in the estimation of management, unearned premiums and investment income on those premiums are insufficient to meet the policy obligations expected in respect of unexpired policies at period-end, the shortfall is deducted from deferred premium acquisition costs. Reinsurance commissions give rise to deferred commission revenue which is accounted for in the same way as deferred premium acquisition costs. Liabilities for unpaid claims include the Company s estimates of loss and adjustment expenses for reported and unreported claims less estimated recoveries expected on these claims. Except for the subsidiary, these estimates are calculated in accordance with accepted, current actuarial practice for Canadian property and casualty insurers and are based upon past claims experience modified for current trends as well as prevailing economic, legal and social conditions. They are discounted at rates, presently 4.7% ( %), that are determined by reference to the Company s rate of return on its invested assets, which adjustment reduces the stated liability by approximately 17% ( %), and increased by actuarially determined provisions intended to allow for uncertainty inherent in the estimation process which adjustment increases the stated liability by approximately 13% ( %). Such estimates are continually reviewed and updated and all resulting adjustments, which can be material, are reflected in current operating results. Methods of estimation have been used which the Company believes produce reasonable results given current information. All movements in claims assets and liabilities are recorded through net earnings. Employee future benefits The Company maintains pension plans for the benefit of its employees. Every three years, and most recently in respect of the 2010 year end, the Company obtains an actuarial valuation where required for these plans and the Company administers and invests the plan assets primarily in equities (17% to 82%) and fixed income securities (25% to 90%). The Company revises these valuations, using up-to-date estimates of plan yields and discount rates, at each of the two subsequent year ends. At each fiscal year end, the Company estimates the present value of all plan obligations and calculates its net pension liability by subtracting the fair value of assets in the plans from the value of all obligations. The pension costs are assessed using the projected unit credit method whereby the cost of providing pensions is charged to the statement of earnings so as to spread the regular cost over the service lives of employees. The present value of all obligations is determined as the present value of all future inflows of employee contributions and outflows of plan benefits and expenses, discounted using rates of return consistent with those earned on high quality commercial bonds. All actuarial gains and losses arising in the determination of these estimates are recorded immediately in net earnings. Comprehensive Income Comprehensive income comprises net earnings and other comprehensive income and includes all changes in equity during the year, except those resulting from investments by and distributions to owners. Changes in unrealized gains and losses on available-for-sale investments are recorded in other comprehensive income and in accumulated other comprehensive income on the balance sheet until such time as the underlying asset is sold, at which time the appropriate balances are transferred to net earnings and to retained earnings. The changes in valuation of assets held by the Company s selfsustaining foreign subsidiaries that occur as a result of translation of these amounts into Canadian currency are recorded in other comprehensive income and in accumulated other comprehensive income. 9

11 New standards and interpretations not yet adopted IFRS 9 Financial Instruments becomes mandatory for annual periods beginning on or after January 1, This standard will replace IAS 39 Financial Instruments: Recognition and Measurement and will limit the options currently available to determine the classification and measurement of financial assets. Amendments made to IAS 19 Employee Benefits become mandatory for annual periods beginning on or after January 1, These amendments will eliminate options for recognizing actuarial gains and losses, streamline the presentation of changes in assets and liabilities relating to defined benefit plans and enhance disclosure requirements. The impact of the above IFRS and amended IAS on the financial statements has not yet been determined. 4. RISk MANAGEMENT Objectives and policies for mitigating business risk The Company has identified the following risk areas: insurance, market, credit, liquidity, currency, and capital management. The Company has various procedures in place to manage these exposures. These procedures have been embedded into decision making processes and the culture of the business. They include an overall risk management framework together with a set of clearly defined risk policies which articulate the Company s risk appetite. Insurance risk Insurance risk is the risk that the total cost of claims and adjustment expenses will exceed premiums received. The Company has identified pricing, concentration and reserving as the most significant sources of insurance risk. Underwriting and pricing controls are in place, underpinned by sound analysis, market expertise, guidelines, polices and procedures. The Company manages risks to limit severity through its underwriting strategy, a comprehensive reinsurance program, and proactive claims handling. Pricing risk arises when actual claims experience differs from the assumptions included in pricing calculations. The Company focuses on profitable underwriting using a combination of experienced underwriting staff, underwriting risk tolerance guidelines and price adequacy models. The Company s pricing is designed to ensure an appropriate return on capital while also providing long-term stability. Concentrations of risk arise when the Company issues policies to many insureds within groups that are exposed to loss from single events. The Company mitigates concentration risk by diversifying its underwriting across many geographical areas and different lines of business. The Company also maintains a comprehensive programme of proportional and excess of loss reinsurance. Distribution of gross and net premiums Gross Net Gross Net Surety and Fidelity 124,503 88, ,177 94,307 Property 96,132 76,691 89,818 74,408 Auto 91,468 82,164 91,188 82,489 Liability 51,586 26,275 43,860 35, , , , ,669 10

12 Distribution of gross and net premiums (continued) Reserving risk arises when actual ultimate incurred claims and adjustment expenses differ from the amounts estimated at the end of prior accounting periods. Claims settlements arising from liability lines of business are difficult to predict. The inherent risk in setting reserves is influenced by external factors such as economic inflation, medical inflation, court interpretations of coverage, the regulatory environment and changes in legislation and jurisprudence. These lead to uncertainty as to when a claim will be settled, and with respect to the amount and timing of any payments. Late notification of claims necessitates holding provisions for events that are unknown to the insurer when the provisions are established. Minimum reserves for certain types of claims, periodic review of all reserves, and an annual actuarial review of the outstanding reserves are among the controls used to mitigate reserving risk. The Company considers the liability for unpaid claims and adjustment expenses to be adequate; however, given the inherent uncertainty in setting reserves, actual experience will differ from the expected outcome. Reserve changes associated with claims from prior years are recognized in net earnings. The following loss development tables show the development of undiscounted claims arising from all lines of business except development associated with industry-administered risk sharing pools and unallocated loss adjustment expenses. Accident Years Gross ultimate claims Estimate of gross ultimate claims at end of : First accident year 183, , , , ,972 Most recent accounting year 183, , , , ,101 Net ultimate claims Estimate of net ultimate claims at end of: First accident year 134, , , , ,114 Most recent accounting year 134, , , , ,125 Market risk The value of the Company s investments fluctuates with credit spreads and movements in interest rates, equity markets, and prices of foreign currencies. The Company mitigates these risks by adopting a conservative asset mix and holding a well diversified portfolio. The Company owns operations in the United States of America and accounts for these as self-sustaining operations. The value of these investments fluctuates depending on the relative value of Canadian and US dollars. This risk is mitigated by the fact that the Company s operations in the United States and all its obligations from operations are denominated in US dollars. Should the relevant composite index increase/decrease by 100 basis points, the Company s portfolio of equity instruments will increase/decrease in value by between nil and $1,350, net of tax, with any change going to other comprehensive income. Should the yield curve for investment quality, fixed-income securities shift upward/downward by 100 basis points, the Company s debt instruments would suffer a temporary decrease/increase in value of between nil and $5,700, net of tax, with this change going to other comprehensive income. Any change would gradually dissipate, again through other comprehensive income, as the Company s existing debt instruments mature during the next five years. The same upward shift in the yield curve would enhance the yield on short-term money-market instruments, adding between nil and $1,200 before tax, to net earnings each year. 11

13 Credit risk The Company is exposed to the risk of credit losses, that is the failure of its debtors to pay amounts owed when due, on its investment portfolio and on amounts owed to it by its policyholders, reinsurers, and intermediaries. In order to mitigate this risk, management regularly reviews the Company s investment portfolio to ensure that it complies with the Company s investment policy which includes appropriate concentration limits and requirements for diversification, including a prohibition against holding more than 5% of its assets in the securities of any one issuer. Management also regularly assesses the creditworthiness of its principal debtors, including its reinsurers. The Company s exposure to credit losses from any one individual policyholder or related group of policyholders is not material. The Company estimates its aggregate exposure to credit risk as the sum of its reported fixed-income investments, accrued investment income, and insurance balances owing from policyholders and reinsurers as recorded on the statement of financial position. The aggregate gross credit exposure at December 31, 2011 was $334,988 ($340,404 at December 31, 2010). All investment securities held by the Company at year end are rated investment grade or better. The following table summarizes the ratings of all bonds held by the company as of December 31, as determined by Standard & Poor s: January 1, AAA 23.6% 27.9% 23.0% AA or better 10.9% 10.4% 17.8% A or better 41.5% 41.6% 33.2% A- 10.6% 10.1% 9.3% BBB or better 13.4% 10.0% 16.7% 100.0% 100.0% 100.0% Liquidity risk Liquidity risk is the risk that the Company will encounter difficulty in raising funds to meet obligations associated with financial liabilities. The Company mitigates this risk by always holding sufficient cash equivalents to meet its ongoing claims and other obligations. The Company estimates that its financial liabilities at December 31 will be paid or otherwise discharged according to the following schedule: January 1, Within 1 year 178, , , years 232, , , years 95,729 88,813 75, or more years 59,560 31,040 25, , , ,176 12

14 Management of capital The Company is subject to regulatory supervision by the Canadian Office of the Superintendent of Financial Institutions (OSFI). OSFI imposes on all property and casualty insurers a capital management regime called the minimum capital test, which requires the Company to determine its available capital, required capital, and excess capital, being the difference between available and required capital. The Company monitors these measures quarterly and consistently maintains its excess capital at levels in excess of 150% of required capital. 5. FINANCIAL INVESTMENTS Available- Held -tofor- sale maturity FVTPL Total Short term investments ,153 62,153 Bonds and debentures Maturing within one year 32, ,124 Maturing in one to five years 216, ,463 Shares Preferred 266, ,981 Common 211, ,925 Balance at December 31, ,493-62, ,646 Short term investments , ,489 Bonds and debentures Maturing within one year 30,921 21,540-52,461 Maturing in one to five years 108,912 99, ,780 Shares Preferred 246, ,461 Common 179, ,609 Balance at December 31, , , , ,800 Short term investments ,978 77,978 Bonds and debentures Maturing within one year 10,156 21,573-31,729 Maturing in one to five years 112, , ,305 Shares Preferred 296, ,398 Common 115, ,230 Balance at January 1, , ,577 77, ,640 13

15 5. FINANCIAL INVESTMENTS (continued) The Company reviewed currently available information for available-for-sale investments with unrealized pre-tax losses amounting to $33,332 ( $2,890), which losses have already been charged to other comprehensive income, net-of-tax, and determined that these declines in value do not represent impairments in value. The Company uses a fair value hierarchy to categorize the inputs used in valuation techniques to measure fair value. The categories established under IFRS are use of quoted market prices, internal models using observable market information as inputs, and internal models without observable market information as inputs. The Company s bonds and equity investments were priced only using quoted, unadjusted bid prices in active markets for identical assets. There were no transfers between categories of the fair value hierarchy during 2011 or Net investment income and gains on investments recorded through net earnings are as follows: Available- Held -tofor- sale maturity FVTPL Total 2011 Interest income 5, ,896 Dividend income 21,834-21,834 Investment expenses (611) - (611) Net investment income 27, ,119 Realized net gains 30, , Interest income 1,568 5, ,578 Dividend income 21, ,439 Investment expenses (594) - - (594) Net investment income 22,413 5, ,423 Realized net gains 6,436 - (444) 5, ACCOUNTS RECEIVABLE January 1, Brokers and policyholders 62,390 60,223 57,694 Taxes recoverable 11,633 13,960 - Self-insured retentions 10,850 10,246 10,394 Other insurers 10,866 5,830 13,427 Accrued investment income and other 2,295 2,864 3,301 98,034 93,123 84,816 14

16 7. INCOME TAXES Effective tax rate reconciliation Earnings and unrealized investment (losses) gains before income taxes 42,221 19,318 Statutory income tax rate 29.9% 30.9% Provision for income taxes at statutory income tax rate 12,624 5,969 Increase (decrease) in income tax expense due to: Dividend income (5,836) (6,325) Difference in tax rate on investment gains transferred from accumulated other comprehensive (loss) income 1, Other 479 (46) Provision for income taxes 8,407 (210) Current 4, Deferred 3,874 (1,035) Income tax expense (recovery) recorded in net earnings 8,407 (210) Components of deferred income Consolidated statement of taxes Consolidated balance sheet comprehensive income January 1, Deferred tax assets arising from: Claims liabilities discount 5,583 5,339 4,667 (128) (478) Losses available for carry forward 3,761 6,601 7,324 2, Property and equipment and other 1,141 1,301 1,109 1,172 (111) Pension liability 1, (156) (463) Total deferred tax assets 11,585 13,966 13,352 3,874 (1,035) Reported in: Deferred tax assets 11,585 13,966 13,352 Income tax expense (recovery) included in net earnings 3,874 (1,035) 15

17 8. PROPERTY AND EqUIPMENT Property Equipment Total Cost Balance at January 1, ,425 9,523 12,948 Acquisitions Disposals (67) (770) (837) Foreign exchange fluctuations (2) (29) (31) Balance at December 31, ,375 9,040 12,415 Acquisitions Disposals - (385) (385) Foreign exchange fluctuations Balance at December 31, ,375 9,033 12,408 Accumulated depreciation Balance at January 1, ,473 8,234 9,707 Depreciation for the year Disposals (67) (770) (837) Foreign exchange fluctuations - (21) (21) Balance at December 31, ,646 8,036 9,682 Depreciation for the year Disposals - (387) (387) Foreign exchange fluctuations Balance at December 31, ,831 8,088 9,919 Carrying amount Balance at January 1, ,952 1,289 3,241 Balance at December 31, ,729 1,004 2,733 Balance at December 31, , ,489 16

18 9. INTANGIBLE ASSETS Software and licenses Goodwill Total Cost Balance at January 1, ,535 2,371 6,906 Acquisitions Disposal (46) - (46) Foreign exchange fluctuations (225) (127) (352) Balance at December 31, ,398 2,244 6,642 Acquisitions Disposal (51) - (51) Foreign exchange fluctuations Balance at December 31, ,690 2,295 6,985 Accumulated amortization Balance at January 1, Amortization for the year Disposals (46) - (46) Foreign exchange fluctuations (6) - (6) Balance at December 31, Amortization for the year Disposals (51) - (51) Foreign exchange fluctuations 2-2 Balance at December 31, Carrying amount Balance at January 1, ,302 2,371 6,673 Balance at December 31, ,139 2,244 6,383 Balance at December 31, ,402 2,295 6,697 17

19 10. ACCOUNTS PAYABLE January 1, Accrued expenses 4,322 2,911 2,591 Others 12,907 11,411 8,955 Reinsurance payable 12,169 8,133 7,121 Tax payable ,935 29,398 22,455 35, POLICY LIABILITIES Unearned premiums Gross Net Gross Net Unearned premiums - opening 169, , , ,729 Written premiums 363, , , ,669 Earned premiums (359,135) (274,392) (348,836) (283,531) Foreign exchange fluctuations (574) (434) Unearned premiums - closing 173, , , ,433 Deferred premium acquisition costs Gross Net Gross Net Balance deferred - opening 47,994 39,123 45,607 38,020 Acquisition costs incurred 102,619 78, ,632 82,275 Acquisition costs recognized in net earnings (101,914) (79,518) (100,245) (81,172) Balance deferred - closing 48,699 37,877 47,994 39,123 18

20 11. POLICY LIABILITIES (continued) Claims liabilities Gross Net Gross Net Unpaid claims - opening 481, , , ,686 Current accounting-year losses incurred on current accident year 191, , , ,363 Discounting on current-year losses (16,882) (10,845) (13,877) (11,241) Provision for adverse deviation on current-year losses 13,052 9,074 12,329 9,903 Current accounting-year losses incurred on prior accident years 59,273 52,887 54,788 30,913 Change in discounting on prior-year losses (6,774) (7,690) 1,725 3,270 Change in provision for adverse deviation on prior-year losses (5,212) (4,129) (4,412) (4,513) Total losses incurred 234, , , ,695 Paid losses on prior accident years 116,178 98, ,227 87,143 Paid losses on current accident year 63,544 52,512 68,052 61,711 Total paid losses 179, , , ,854 Unpaid claims - closing 536, , , , CAPITAL STOCk January 1, Authorized Unlimited number of preference shares Unlimited number of common shares Issued 187,147 common shares

21 13. RELATED - PARTY TRANSACTIONS The Company conducts normal business transactions through related insurance intermediaries. All such business is transacted on a basis consistent with other similar intermediaries and represents net premiums written of $71,986 (2010- $63,312). Key management personnel are those individuals having authority and responsibility for planning, directing and controlling the activities of the Company, directly or indirectly, including directors of the Company and its subsidiaries. Total compensation recognized for key management personnel in the year was $8,100 ( $7,740). 14. EMPLOYEE FUTURE BENEFITS January 1, Present value of future pension obligations 17,573 14,937 11,184 Less: fair value of plan assets 13,370 12,198 10,406 Accrued pension liability in acccounts payable 4,203 2, Net pension plan costs recognized 3,074 3,471 Movement in present value of future defined-benefit pension obligations: Benefit obligation - opening 14,937 11,184 Cost of benefits 1,404 1,085 Interest on benefit obligation Actuarial losses 667 2,137 Benefits paid (325) (258) Benefit obligation - closing 17,573 14,937 20

22 14. EMPLOYEE FUTURE BENEFITS (continued) January 1, Authorized Discount rate 5.5% 5.5% 6.5% Expected annual yield on plan assets 6.0% 6.5% 7.0% Future annual salary increases 3.5% 3.5% 3.5% Future pension increases 0.0% 0.0% 0.0% Life expectancy for male pensioners 83.9 yrs 83.9 yrs 83.9 yrs Life expectancy for female pensioners 86.9 yrs 86.9 yrs 86.9 yrs January 1, Composition of pension plan assets, at fair value: Cash and cash equivalents 8.0% 13.2% 12.9% Fixed income securities 30.0% 32.8% 31.3% Equities 62.0% 54.0% 55.8% Total 100.0% 100.0% 100.0% 15. RATE REGULATION Automobile insurance, which accounts for approximately 28% ( %) of the Company s net written premium volume, is subject to rate regulation for all insurers in most jurisdictions. With respect to individually rated, private-passenger, automobile insurance, the Company is subject to provincial, prior-approval rate regulation that could result in the imposition of government mandated, retrospective rate reductions or modifications to standard policy terms and conditions. 16. TRANSITION TO IFRS As stated in note 2, these are the Company s first financial statements prepared in accordance with IFRS, as issued by the International Accounting Standards Board (IASB). The accounting policies set out in note 3 have been applied in preparing the financial statements for the year ended December 31, 2011, the comparative information presented in these financial statements for the year ended December 31, 2010 and in the preparation of an opening IFRS statement of financial position at January 1, 2010, the Company s date of transition. An explanation of how the transition from previous Canadian generally accepted accounting principles (CGAAP) to IFRS has affected the Company s financial position, financial performance and cash flows is described in the following: Initial elections upon adoption Set forth below are the IFRS 1 exemption options and mandatory exceptions applied in the conversion from CGAAP to IFRS. 21

23 IFRS Exemption Options Business combinations - IFRS 1 provides the option to apply IFRS 3, Business Combinations, retrospectively or prospectively from the Transition Date. The retrospective basis would require restatement of all business combinations that occurred prior to the Transition Date. The Company elected not to retrospectively apply IFRS 3 to business combinations that occurred prior to its Transition Date and such business combinations have not been restated. Any goodwill arising on such business combinations before the Transition Date has not been adjusted from the carrying value previously determined under CGAAP as a result of applying these exemptions. Further, the Company did not early adopt IFRS 3 Revised and instead has adopted that standard upon its effective date which, for the Company, was January 1, Employee benefits - IFRS 1 provides the option to retrospectively apply the corridor approach under IAS 19, Employee Benefits, for the recognition of actuarial gains and losses, or recognize all cumulative gains and losses deferred under CGAAP in opening retained earnings at the Transition Date. The Company elected to recognize all cumulative actuarial gains and losses that existed at its Transition Date in opening retained earnings for all of its employee benefit plans. Currency translation differences - Retrospective application of IFRS requires the Company to determine cumulative currency translation differences in accordance with IAS 21, The Effects of Changes in Foreign Exchange Rates, from the date a subsidiary or equity method investee was formed or acquired. IFRS 1 permits cumulative translation gains and losses to be reset to zero at transition date. The Company elected to determine cumulative translation differences retrospectively. Property and equipment IFRS 1 provides a choice between measuring land, property, and equipment at its fair value at the date of transition and using those amounts as deemed cost or using the historical valuation under CGAAP. The Company has decided to continue to apply the cost model for land, property, and equipment and has not restated land, property, and equipment to fair value under IFRS. The historical cost bases as determined in previous accounting periods have been designated as the deemed cost under IFRS at transition date. Claims development- The Company has elected to apply the transitional arrangements contained in IFRS 4 that permits the disclosure of only five years of data in claims development tables in the year of adoption. The number of years of data presented will be increased each subsequent year until ten years of data are included in the tables. IFRS Mandatory Exceptions Estimates - Hindsight is not used to create or revise estimates. The estimates previously made by the Company under CGAAP were not revised for application of IFRS except where necessary to reflect any difference in accounting policies. Reconciliations of Earnings and Shareholder s Equity upon Adoption of IFRS Where earnings or equity changes as a result of adopting IFRS, IFRS 1 requires that the Company s financial statements disclose a complete reconciliation explaining the changes. Because the change in accounting rules that resulted from adopting IFRS effective January 1, 2010 has had no effect on either the company s reported equity or reported earnings, no reconciliation is required.. 22

24 Role of the Actuary and the Auditors The actuary is appointed by the Board of Directors. With respect to preparation of the annual financial statements, the actuary is required to carry out a valuation of the policy liabilities and to report thereon to the policyholders and shareholders. The valuation is carried out in accordance with accepted actuarial practice and regulatory requirements. The scope of the valuation encompasses the policy liabilities as well as any other matter specified in any direction that may be made by the Superintendent of Financial Institutions. The policy liabilities consist of a provision for unpaid claims and adjustment expenses on the expired portion of policies and of future obligations on the unexpired portion of policies. In performing the valuation of the liabilities for these contingent future events, which are by their very nature inherently variable, the actuary makes assumptions as to future rates of claim frequency and severity, inflation, reinsurance recoveries, expenses and other contingencies, taking into consideration the circumstances of the Company and the nature of the insurance policies. The valuation is necessarily based on estimates, and consequently, the final values may vary significantly from those estimates. The actuary also makes use of management information provided by the Company and relies on the work of the auditors with respect to the verification of the underlying data used in the valuation. The external auditors are appointed by the shareholders pursuant to the Insurance Companies Act. Their responsibility is to conduct an independent and objective audit of the financial statements in accordance with Canadian generally accepted auditing standards and report thereon to the shareholders regarding the fairness of presentation of the Company s financial statements in accordance with international financial reporting standards. In carrying out their audit, the auditors make use of the work of the actuary and the actuary s report on the claim and premium liabilities. The auditors report outlines the scope of their audit and their opinion. Opinion of the Actuary I have valued the policy liabilities of The Guarantee Company of North America for its consolidated balance sheet at December 31, 2011 and their change in the consolidated statement of income for the year then ended in accordance with accepted actuarial practice in Canada, including selection of appropriate assumptions and methods. I am satisfied that the data utilized for the valuation of these liabilities are reliable and sufficient. I verified the consistency of the valuation data with the Company s financial records. In my opinion, the amount of policy liabilities makes appropriate provision for all policy obligations and the consolidated financial statements fairly present the results of the valuation. Signature of Actuary February 22, 2012 Date opinion was rendered André Racine, FCAS, FCIA Printed name of Actuary 23