FINANCIAL STATEMENTS (AND INDEPENDENT AUDITORS REPORT THEREON) FOR THE YEARS ENDED
FINANCIAL STATEMENTS AS AT CONTENTS Independent Auditors Report... 2 Statements of Financial Position... 3 Statements of Comprehensive (Loss) Income... 4 Statements of Changes in Shareholders Equity... 5 Statements of Cash Flows... 6 Notes to the Financial Statements... 7-21
INDEPENDENT AUDITORS REPORT To the Shareholders, Fergus Reinsurance Limited, We have audited the accompanying financial statements of Fergus Reinsurance Limited (the Company ), which comprise the statements of financial position as at December 31, 2017 and 2016, and the statements of comprehensive (loss) income, changes in shareholders equity, and cash flows for the years then ended, and the related notes to the financial statements. Management s responsibility for the financial statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Company 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 Company s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Fergus Reinsurance Limited as of December 31, 2017 and 2016, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. CHARTERED PROFESSIONAL ACCOUNTANTS Hamilton, Bermuda June 26, 2018 A.S. Cooper Building, 4th Floor, 26 Reid Street, Hamilton HM 11, Bermuda P.O. Box HM 471, Hamilton, HM BX, Bermuda Tel: 441 292 3862 - Fax: 441 295 1349 Email: info@mazars.bm 2
STATEMENTS OF FINANCIAL POSITION AS OF (Expressed in United States Dollars) December 31 December 31 2017 2016 Note $ $ ASSETS: Cash and cash equivalents 3,4 562,879 2,855,066 Investments 3,5,6 15,057,707 16,075,623 Accrued interest 68,128 73,442 Reinsurance balances receivable 389,909 1,052,341 Funds held by ceding reinsurers 7 1,681,381 1,687,755 Outstanding losses recoverable from reinsurers 9 650,000 - Prepaid expenses 10,000 - Other assets - 3,104 Total assets 18,420,004 21,747,331 LIABILITIES AND SHAREHOLDERS EQUITY: LIABILITIES Unearned premium 13 1,400,041 2,734,145 Losses and loss adjustment expenses 9 10,840,262 10,027,769 Funds held for reinsured company 302,127 306,566 Reinsurance balances payable 1,428,025 77,493 Deposit liabilities 10 1,350,662 1,388,649 Amounts due to former shareholder 8-1,600,000 Accounts payable and accrued expenses 183,544 292,107 Total liabilities 15,504,661 16,426,729 SHAREHOLDERS EQUITY Share capital 11 620,005 620,005 Additional paid-in capital 12 10,162,421 10,162,421 Retained deficit (7,780,145) (5,243,526) Accumulated other comprehensive loss (86,938) (218,298) Total shareholders equity 2,915,343 5,320,602 Total liabilities and shareholders equity 18,420,004 21,747,331 The accompanying notes should be read in conjunction with these financial statements SIGNED ON BEHALF OF THE BOARD OF DIRECTORS: DIRECTOR DIRECTOR 3
STATEMENTS OF COMPREHENSIVE (LOSS) INCOME FOR THE YEARS ENDED (Expressed in United States Dollars) December 31 December 31 2017 2016 Note $ $ UNDERWRITING INCOME: Premiums earned, net 13 4,019,637 6,250,079 UNDERWRITING EXPENSES: Losses and loss adjustment expenses incurred 9 5,948,044 4,906,763 Acquisition costs 79,826 43,288 Other underwriting expenses 95,416 - Total underwriting expenses 6,123,286 4,950,051 NET UNDERWRITING (LOSS) INCOME (2,103,649) 1,300,028 OTHER INCOME AND EXPENSES: Investment income, net 5 255,216 234,933 Other income 8-135,000 General and administrative expenses (599,945) (583,228) Total other income and expenses (344,729) (213,295) NET (LOSS) INCOME FROM OPERATIONS (2,448,378) 1,086,733 OTHER COMPREHENSIVE INCOME (LOSS): Net unrealized holding gains (losses) arising during the year 123,752 (157,051) Less: reclassification adjustment for net realized gains included in net income 7,608 (57,629) COMPREHENSIVE (LOSS) INCOME (2,137,018) 872,053 The accompanying notes should be read in conjunction with these financial statements 4
STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY FOR THE YEARS ENDED (Expressed in United States Dollars) Accumulated Additional other Share paid-in Retained comprehensive capital capital deficit loss Totals $ $ $ $ $ Shareholders equity December 31, 2015 1,900,000 12,150,000 (6,330,259) (3,618) 7,716,123 Repurchased during the year (1,800,000) (1,367,579) - - (3,167,579) Returned during year - (600,000) - - (600,000) Common shares issued during year 500,000 - - - 500,000 Transfer 20,000 (20,000) - - - Preference shares issued during the year 5 - - - 5 Comprehensive income for the year - - 1,086,733 (214,680) 872,053 Shareholders equity December 31, 2016 620,005 10,162,421 (5,243,526) (218,298) 5,320,602 Contributed during the year - 200,000 - - 200,000 Returned during year - (200,000) (88,241) - (288,241) Comprehensive loss for the year - - (2,448,378) 131,360 (2,317,018) Shareholders equity December 31, 2017 620,005 10,162,421 (7,780,145) (86,938) 2,915,343 The accompanying notes should be read in conjunction with these financial statements 5
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED (Expressed in United States Dollars) December 31 December 31 2017 2016 OPERATING ACTIVITIES: $ $ Net (loss) income from operations (2,448,378) 1,086,733 Adjustments to reconcile net income from operations to net cash and cash equivalents provided by operating activities: Amortization of net premiums on investments 23,252 19,607 Realized (loss) gain on sale of investments 7,608 (57,629) Net changes in non-cash balances relating to operations: Accrued interest 5,314 (73,442) Reinsurance balances receivable 662,432 1,113,324 Funds held by ceding reinsurers 6,374 669,236 Outstanding losses recoverable from reinsurers (650,000) - Prepaid expenses (10,000) - Other assets 3,104 (3,104) Unearned premium (1,334,104) (638,181) Losses and loss adjustment expenses 812,493 1,172,324 Funds held for reinsured company (4,439) (43,816) Reinsurance balances payable 1,350,532 (111,803) Deposit liabilities (37,987) (148,717) Amounts due to former shareholder (1,600,000) (135,000) Accounts payable and accrued expenses (108,563) 135,021 Cash and cash equivalents (applied to) provided by operating activities (3,322,362) 2,984,553 FINANCING ACTIVITIES: Contribution of additional paid-in capital 200,000 - Repayment of additional paid-in capital (200,000) (400,000) Repurchase of share capital - (200,000) Distribution to segregated account owner (88,241) - Issuance of preference shares - 5 Cash and cash equivalents applied to financing activities (88,241) (599,995) INVESTING ACTIVITIES: Purchase of investments (6,750,536) (28,987,939) Proceeds from sale of investments 7,868,952 13,720,219 Cash and cash equivalents provided by (applied to) investing activities 1,118,416 (15,267,720) Decrease in cash and cash equivalents for the year (2,292,187) (12,883,162) Cash and cash equivalents, beginning of year 2,855,066 15,738,228 Cash and cash equivalents, end of year 562,879 2,855,066 The accompanying notes should be read in conjunction with these financial statemen 6
1. The Company Fergus Reinsurance Limited (the Company ), was incorporated under the laws of Bermuda on June 11, 2008 and is registered as a Class 3A insurer under The Insurance Act 1978, amendments thereto and related regulations (the Act ). The Company is managed and has its principal place of business in Bermuda. The Company s ultimate parent company is Park Regency Ventures Limited, a company domiciled in the British Virgin Islands. The Company is also registered under the Segregated Accounts Company Act 2000 of Bermuda. The Company may establish segregated accounts where directed by the related reinsurance agreement. For each segregated account the Company has an account ownership governing instrument. These agreements describe the terms and conditions of establishing the segregated account including an obligation by the account owner to fund any deficiency of segregated account liabilities over segregated account assets. Creditors of segregated accounts established to date have no claim upon the assets of other segregated accounts or upon the Company s general account assets. The Company carries on reinsurance business, assuming risks from a number of international insurance markets. The Company has entered into one specific contract which does not involve a transfer of underwriting risk. Deposit accounting has been applied to this agreement. Certain contracts include a 55% profit share with the ceding reinsurers. The brokers involved in placing certain other contracts with the Company participate by way of agreement with the Company in the profits and losses of the respective policies at rates between 7.5% and 10%. Effective 2017, the Company entered into an excess of loss reinsurance agreement covering certain programs from January 1, 2014 to December 31, 2017. There were two active segregated accounts within the Company during the year ended and as of December 31, 2017. A third segregated account was dissolved during 2017. One of the segregated accounts has assumed a 2% share, and another a 3.2% share, of a specific reinsurance program within the Company s general account. 2. Significant Accounting Policies The accompanying financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, denominated in U.S. dollars and which apply the following significant accounting policies adopted by the Company: Use of estimates To prepare the financial statements, the management has to make estimates and assumptions that affect the book value of assets and liabilities, income and expenses, and data disclosed in the notes to the financial statements. All estimates are subjective in nature and could materially influence the financial statements. Accordingly, management makes these estimates and assessments on an ongoing basis according to past experience and various factors that are deemed reasonable and which constitute the basis for these assessments. The amounts shown in the Company s future financial statements are likely to differ from these estimates in accordance with changes in assumptions or different conditions. The principal significant estimates made by the Company s management primarily affect the provision for outstanding losses and loss expenses, unearned premiums and fair value of investments. 7
2. Significant Accounting Policies (continued) Presentation of amounts relating to segregated accounts The Company consolidates the assets, liabilities, income and expenses of its segregated accounts with those of its general account in arriving at the amounts recorded in its financial statements. The liabilities of the segregated accounts and the liabilities of the general account have access to only the assets of the relevant cell or general account as the case may be in a winding up. Cash and cash equivalents Cash and cash equivalents include cash held in banks, money market funds and other short-term deposits having maturities within three months of the date of purchase. Investments and investments sold short Fixed maturity and equity investments have been classified as available-for-sale and are carried at fair value with unrealized gains or losses included in the statement of financial position as a component of accumulated other comprehensive income. Fair value of investments is based on market quotations. Realized gains and losses on sales of fixed maturity and equity investments are accounted for using the first-in and first-out method and are reflected in the income statement in the period of sale. Investments in unquoted hedge funds are stated at fair value based on net asset values as advised by the administrators of the funds with unrealized holding gains and losses being reported as other comprehensive income. Realized gains and losses on sales of investments are accounted for using the first-in and first-out method and are reflected in the income statement in the period of sale. Revenue recognition and acquisition costs Premiums are recognized as revenue on a pro-rata basis over the periods of the respective policies or contracts of reinsurance. Premiums which are subject to adjustment are estimated based upon available information. Any variances from the estimates are recorded in the periods in which they become known. Commissions and other costs incurred on the acquisition of new and renewal business are deferred and amortized over the terms of the policies or contracts of reinsurance to which they relate. The method followed in determining the deferred acquisition costs limits the amount of deferral to its realizable value by giving consideration to losses and expenses expected to be incurred as premiums are earned and also considers anticipated investment income. Interest income and general administrative expenses Interest income and general and administrative expenses are recognized on the accrual basis of accounting. Interest income is recognized net of withholding taxes. 8
2. Significant Accounting Policies (continued) Losses and loss adjustment expenses Losses and loss expenses paid are recorded when advised by ceding companies. The liability for loss and loss expense provisions includes an amount determined from loss reports and individual cases and an amount, based on past experience and industry loss development factors, for losses incurred but not reported. These estimates are continually reviewed and are necessarily subject to the impact of future changes in such factors as claims severity and frequency. While management believes that the amount is adequate, the ultimate liability is subject to inherent uncertainty given the nature of the reinsurance coverage in place and may be materially in excess of, or less than, the amounts provided and any adjustments will be reflected in the periods in which they become known. Taxation Under current Bermuda Law, the Company is not required to pay taxes in Bermuda on either income or capital gains. The Company has received an undertaking from the Minister of Finance in Bermuda that in the event of such taxes being imposed, the Company will be exempted from taxation until the year 2035. The Company is subject to withholding tax on investment income from foreign securities. Legal/regulatory risk Legal/regulatory risk is the risk that the legal or regulatory environment in which an insurer operates will change and create additional loss costs or expenses not anticipated by the insurer in pricing its products. That is, regulatory initiatives designed to reduce insurer profits or new legal theories may create costs for the insurer beyond those recorded in the financial statements. The Company mitigates this risk through its underwriting and loss adjusting practices which identify and minimize the adverse impact of this risk. New Accounting Standards Adopted During the Year In May 2015, the FASB issued ASU 2015-09, Financial Services Insurance (Topic 944): Disclosure about Short - Duration Contracts. The amendments require insurance entities to disclose for annual reporting periods specified information about the liability for unpaid claims and claim adjustment expenses. Additionally, the amendments require insurance entities to disclose for annual and interim reporting periods a roll forward of the liability for unpaid claims and claim adjustment expenses, described in Topic 944. New Accounting Standards to be Adopted In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 changes current U.S. GAAP by requiring the following, among others: (1) equity securities, except those accounted for under the equity method of accounting, to be measured at fair value with changes in fair value recognized in net income; (2) the use of the exit price when measuring fair value of financial instruments for disclosure purposes; (3) an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value; and (4) separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or notes to the financial statements. For nonpublic entities, the amendments are effective for annual periods beginning after December 15, 2018. The Company has assessed that the adoption of ASU 2016-01 will have no impact on future financial statements and disclosures. 9
2. Significant Accounting Policies (continued) In June 2016, the FASB issued ASU 2016-13, which amends the guidance on impairment of financial instruments and significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The ASU will replace the existing incurred loss approach, with an expected loss model for instruments measured at amortized cost and require entities to record allowances for available-for-sale debt securities rather than reduce the carrying amount under the existing other-than temporary-impairment model. The ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans. The ASU is effective for annual reporting periods beginning after December 15, 2019. In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments which addresses diversity in practice in how eight specific cash receipts and cash payments should be presented and classified on the statement of cash flows. This guidance is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted. As this guidance relates solely to financial statement disclosures, the adoption of ASU 2016-18, will not impact the Company s results of operations, financial condition and liquidity. In November 2016, the Financial Accounting Standards Board ( FASB ) issued ASU 2016-18, which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This ASU goes into effect for periods beginning after December 15, 2017. Management does not believe the adoption of these amendments will have a material effect on the Company s financial statements. The Company has determined that all other recently issued pronouncements do not apply to its operations. 3. Concentration of credit risk As of December 31, 2017, and 2016, cash and cash equivalents are held with two international financial institutions. As of December 31, 2017, and 2016, Company s investment portfolios is held by one large internationally recognized financial institution. 4. Pledged Assets Pursuant to its reinsurance agreements, the Company is required to provide its ceding companies with collateral to secure its obligations to them. At December 31, 2017 and 2016 the Company has provided its ceding companies with insurance trusts, held by Comerica Bank, with cash and cash equivalents amounting to $436,630 and $1,966,023, respectively and investments with a carrying value of $15,057,707 and $16,075,623, respectively. 10
5. Investments The cost or amortized cost, gross unrealized holding gains and losses, and estimated fair value of available for sale investments at December 31, 2017 and 2016 are as follows: Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value As at December 31, 2017 $ $ $ $ Fixed maturity investments: U.S. government obligations 4,094,173 1,859 (26,192) 4,069,840 Collateralized mortgage obligations 965,270 79 (26,289) 939,060 Asset backed securities 285,525 178 (1,510) 284,193 Corporate bonds 6,636,091 25,036 (66,307) 6,594,820 Foreign bonds and notes 1,647,043 1,597 (8,334) 1,640,306 Private placements 1,261,289 3,980 (18,238) 1,247,031 Total fixed maturity investments 14,889,391 32,729 (146,870) 14,775,250 Mutual Fund 255,255 27,202-282,457 Total investments 15,144,646 59,931 (146,870) 15,057,707 As at December 31, 2016 Fixed maturity investments: U.S. government obligations 4,172,523 - (18,778) 4,153,745 Collateralized mortgage obligations 1,353,962 668 (36,161) 1,318,469 Asset backed securities 674,546 372 (1,487) 673,431 Corporate bonds 6,403,713 19,691 (128,373) 6,295,031 Foreign bonds and notes 1,400,993 672 (15,346) 1,386,319 Private placements 2,227,316 4,193 (45,076) 2,186,433 Total fixed maturity investments 16,233,053 25,596 (245,221) 16,013,428 Mutual Fund 60,868 1,327-62,195 Total investments 16,293,921 26,923 (245,221) 16,075,623 11
5. Investments (continued) The tables below summarize the Company s available for sale investments in an unrealized loss position and the aggregate fair value and gross unrealized loss by length of time the security has continuously been in an unrealized loss position: 2017 2016 Fair Unrealized Fair Unrealized Value Loss Value Loss $ $ $ $ Fixed maturity investments: U.S. government obligations 4,028,258 (26,192) 4,153,745 (18,778) Collateralized mortgage obligations 878,673 (26,289) 928,433 (36,161) Asset backed securities 169,620 (1,510) 468,883 (1,487) Corporate bonds 5,459,039 (66,307) 5,119,869 (128,373) Foreign bonds and notes 1,338,746 (8,334) 1,134,869 (15,346) Private placements 887,519 (18,238) 1,677,618 (45,076) Total fixed maturity investments 12,761,855 (146,870) 13,483,417 (245,221) Mutual Fund - - - - Investments available for sale 12,761,855 (146,870) 13,483,417 (245,221) As of December 31, 2017 and 2016 there were seventy nine and seventy five securities respectively, in an unrealized loss position with an estimated fair value of $12,761,855 and $13,483,417, respectively. Of these securities, there were forty nine and none at December 31, 2017 and 2016 with an estimated fair value of $9,157,924 and $nil that had been in an unrealized loss position for 12 months or greater; none of these securities were considered to be other than temporarily impaired. The Company has no intent to sell, and it is not more likely than not that the Company will be required to sell these securities before their fair values recover above the adjusted cost. The unrealized losses from these securities were not a result of credit, collateral or structural issues. The cost or amortized cost, estimated fair value and contractual maturity of fixed maturity investments at December 31, 2017 and 2016 are shown below. Expected maturities may differ from contractual maturities as borrowers may have the right to call or prepay obligations without penalties. December 31, 2017 December 31, 2016 Amortized Fair Amortized Fair Cost/cost Value Cost/cost Value $ $ $ $ Due within one year 5,983,148 5,951,505 256,243 253,283 Due after 1 year to five years 4,757,650 4,716,871 9,573,474 9,232,766 Due after five years to ten years 3,183,322 3,167,814 5,182,290 5,341,911 Due after more than ten years 965,271 939,060 1,221,046 1,185,468 Total fixed income securities 14,889,391 14,775,250 16,233,053 16,013,428 12
5. Investments (continued) The following table sets forth certain information regarding the investment ratings of the Company's available for sale fixed interest securities for the year ended December 31, 2017 and 2016. Ratings are assigned by Standard & Poor's and Moody s. Amortized 2017 2016 Amortized Cost % Cost % $ $ AAA 5,187,661 35 6,075,849 37 AA 1,609,316 11 1,885,850 12 A 5,318,817 36 4,432,094 27 BBB 2,773,597 19 3,839,260 24 14,889,391 100 16,233,053 100 Major categories of net investment income are summarized as follows: 2017 2016 $ $ Interest income 343,613 243,459 Amortization expense (23,252) (19,607) Gross realized gains 4,709 68,724 Gross realized losses (12,317) (11,095) Investment expense (57,537) (46,548) Net investment income 255,216 234,933 6. Fair value of financial instruments The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments: Cash and cash equivalents: The carrying amounts reported in the statement of financial position for these instruments approximate their fair values. 13
6. Fair value of financial instruments (continued) Investments: The following tables show the fair value of the Company s investments in accordance with ASC 820, Fair Value Measurements and Disclosures as of December 31, 2017 and 2016. Carrying amount Total fair value Quoted prices in active markets for identical assets Fair value measurement using Significant other observable inputs Significant unobservable inputs (Level 1) (Level 2) (Level 3) December 31, 2017: $ $ $ $ $ Fixed maturity investments: U.S. government obligations 4,069,840 4,069,840-4,069,840 - Collateralized mortgage obligations 939,060 939,060-939,060 - Asset backed securities 284,193 284,193-284,193 - Corporate bonds 6,594,820 6,594,820-6,594,820 - Foreign bonds and notes 1,640,306 1,640,306-1,640,306 - Private placements 1,247,031 1,247,031-1,247,031 - Total fixed maturity investments 14,775,250 14,775,250-14,775,250 - Mutual fund 282,457 282,457 282,457 - - Total investments 15,057,707 15,057,707 282,457 14,775,250 - Carrying amount Total fair value Quoted prices in active markets for identical assets Fair value measurement using Significant other observable inputs Significant unobservable inputs (Level 1) (Level 2) (Level 3) December 31, 2016: $ $ $ $ $ Fixed maturity investments: U.S. government obligations 4,153,745 4,153,745-4,153,745 - Collateralized mortgage obligations 1,318,469 1,318,469-1,318,469 - Asset backed securities 673,431 673,431-673,431 - Corporate bonds 6,295,031 6,295,031-6,295,031 - Foreign bonds and notes 1,386,319 1,386,319-1,386,319 - Private placements 2,186,433 2,186,433-2,186,433 - Total fixed maturity investments 16,013,428 16,013,428-16,013,428 - Mutual fund 62,195 62,195 62,195 - - Total investments 16,075,623 16,075,623 62,195 16,013,428-14
6. Fair value of financial instruments (continued) There were no transfers between Levels 1, 2 and 3 during the years ended December 31, 2017 and 2016. In accordance with U.S. GAAP, we are required to recognize certain assets at their fair value in our consolidated balance sheets. This includes our fixed maturity investments and equity securities. In accordance with the Fair Value Measurements and Disclosures Topic of FASB s ASC 820 ( ASC 820 ), fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon whether the inputs to the valuation of an asset or liability are observable or unobservable in the market at the measurement date, with quoted market prices being the highest level (Level 1) and unobservable inputs being the lowest level (Level 3). A fair value measurement will fall within the level of the hierarchy based on the input that is significant to determining such measurement. The three levels are defined as follows: Level 1: Observable inputs to the valuation methodology that are quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 2: Observable inputs to the valuation methodology other than quoted market prices (unadjusted) for identical assets or liabilities in active markets. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical assets and liabilities in markets that are not active and inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability. Level 3: Inputs to the valuation methodology that are unobservable for the asset or liability. At each measurement date, we estimate the fair value of the security using various valuation techniques. We utilize, to the extent available, quoted market prices in active markets or observable market inputs in estimating the fair value of our investments. When quoted market prices or observable market inputs are not available, we utilize valuation techniques that rely on unobservable inputs to estimate the fair value of investments. The following describes the valuation techniques we used to determine the fair value of investments held as of December 31, 2017 and what level within the fair value hierarchy each valuation technique resides: Fixed maturity investments: Comprised of fixed income obligations of the U.S. government and corporations. The fair values of these securities are based on quotes and current market spread relationships and are classified as Level 2 in the fair value hierarchy. The Company considers that there is a liquid market for the types of securities held. Broker quotes are not used for fair value pricing. Mutual fund: At December 31, 2017 and 2016: Comprised of a mutual fund whose objective is to capture the performance of the riskier portion of the domestic and international equity and fixed income markets. The fair value of the mutual fund is based on quoted market prices in an active market and is classified as Level 1 in the fair value hierarchy. 15
6. Fair value of financial instruments (continued) While we obtain pricing from independent pricing services, management is ultimately responsible for determining the fair value measurements for all securities. To ensure fair value measurement is applied consistently and in accordance with U.S. GAAP, we periodically update our understanding of the pricing methodologies used by the independent pricing services. We also challenge any prices we believe may not be representative of fair value under current market conditions. Our review process includes, but is not limited to: (i) initial and ongoing evaluation of the pricing methodologies and valuation models used by outside parties to calculate fair value; (ii) quantitative analysis; (iii) a review of multiple quotes obtained in the pricing process and the range of resulting fair values for each security, if available, and (iv) randomly selecting purchased or sold securities and comparing the executed prices to the fair value estimates provided by the independent pricing sources. There have been no material changes to any of our valuation techniques from what was used as of December 31, 2016. Since the fair value of a financial instrument is an estimate of what a willing buyer would pay for our asset if we sold it, we will not know the ultimate value of our financial instruments until they are sold. We believe the valuation techniques utilized provide us with the best estimate of the price that would be received to sell our assets or transfer our liabilities in an orderly transaction between participants at the measurement date. Other assets and liabilities: The fair value of accrued interest, reinsurance balances receivable and payable, funds held by ceding reinsurers, amounts due from shareholder, accounts payable and accrued expenses, amounts due to former shareholder, and amounts due to affiliate approximates their carrying value due to their relative short-term nature. The estimates of fair values presented herein are subjective in nature and are not necessarily indicative of the amounts that the Company would actually realize in a current market exchange. However, any differences would not be expected to be material. Certain instruments such as other assets, unearned premiums, outstanding losses and loss expenses and deposit liabilities are excluded from fair value disclosure. Thus the total fair value amounts cannot be aggregated to determine underlying economic value of the Company. 7. Funds held by ceding reinsurers Pursuant to certain reinsurance contracts, the Company is required to provide security for the payment of its obligations. Included in funds held by ceding reinsurers is $1,350,662 and $1,388,649 at December 31, 2017 and 2016, respectively, provided as security for the policy recorded as a deposit liability as disclosed in Note 10. 8. Related party transactions Effective December 28, 2016, the Company signed a Global Settlement Agreement (the Settlement ) between affiliated companies and the holders of 180,000 common non-voting shares in the Company. In exchange for the repurchase of all of the outstanding 180,000 common non voting shares in the Company, and $2,100,000 in cash, of which $1,600,000 was payable at December 31, 2016, the amount of $1,067,579 due from shareholder and the amount due to affiliate of $135,000 at December 31, 2015 were extinguished. The amount payable of $1,600,000 at December 31, 2016 was paid during the year ended December 31, 2017. 16
8. Related party transactions (continued) The impact of the Settlement in the Company for the year ended December 31, 2016 were reductions in share capital of $1,800,000 and in additional paid in capital of $1,367,579. In addition, the Company recorded other income from the extinguished amount due to affiliate of $135,000. During the year ended December 31, 2017, a segregated account owned by a director was closed resulting in a return of additional paid-in capital of $200,000 and an equity distribution of $88,241. 9. Losses and Loss Adjustment Expenses The liability for losses and loss adjustment expenses comprises: 2017 2016 $ $ Outstanding losses 5,444,313 5,137,366 Losses incurred but not reported 4,745,949 4,890,403 10,190,262 10,027,769 Activity in the liability for losses and loss adjustment expenses comprises: 2017 2016 $ $ Gross balance at beginning of year 10,027,769 8,855,445 Less: reinsurance recoverable - - Net balance at beginning of year 10,027,769 8,855,445 Incurred losses related to: Current year 3,453,105 4,961,545 Prior years 2,494,939 (54,782) Total incurred 5,948,044 4,906,763 Paid losses related to: Current year 661,842 863,558 Prior years 5,123,709 2,870,881 Total paid 5,785,551 3,734,439 Net balance at end of year 10,190,262 10,027,769 Plus: reinsurance recoverable 650,000 - Gross balance at end of year 10,840,262 10,027,769 Management believes that the assumptions used to establish its provision for loss and loss adjustment expenses represent a realistic and appropriate basis for estimating those reserves as of December 31, 2017 and 2016. 17
9. Losses and Loss Adjustment Expenses (continued) However, these assumptions are subject to change and the Company continually reviews and adjusts its reserve estimates taking into account all currently known information and updated assumptions related to unknown information. While management believes it has made a reasonable estimate of loss expenses occurring up to the statement of financial position date, the ultimate costs of claims incurred could exceed the Company s reserves and have a materially adverse effect on its future results of operations and financial condition. Changes in the prior years provision for claims and claims adjustment expenses was primarily due to the ongoing analysis of loss development trends across all accident years and not attributable to any specific occurrence or event. The following tables present information about incurred and paid claims development as of December 31, 2017, net of reinsurance, as well as cumulative claim frequency and the total of IBNR reserves plus expected development on reported claims. The tables include unaudited information about incurred and paid claims development for the years ended December 31, 2013 through 2016, which we present as supplementary information. Workers compensation: At December 31, 2017 Total IBNR Cumulative Incurred claims and allocated claim adjustment expenses, net of Plus Expected number reinsurance Development of For the years ended December 31 on Reported reported Accident year 2013 2014 2015 2016 2017 Claims Claims $ $ $ $ $ $ Unaudited 2013 1,258,816 2,947,157 2,931,948 2,967,069 2,905,605 259,124 177 2,905,605 259,124 Older years, prior to 2013 9,663,579 - Workers compensation: 12,569,184 259,124 Paid claims and allocated claim adjustment expenses, net of reinsurance For the years ended December 31 Accident year 2013 2014 2015 2016 2017 $ $ $ $ $ Unaudited 2013 103,260 691,951 1,453,267 1,923,325 2,325,108 2,325,108 Older years, prior to 2013 9,275,873 11,600,981 Liability for losses and loss adjustment expenses, net of reinsurance 968,203 18
9. Losses and Loss Adjustment Expenses (continued) Commercial Trucking: At December 31, 2017 Total IBNR Cumulative Incurred claims and allocated claim adjustment expenses, net of Plus Expected number reinsurance Development of For the years ended December 31 on Reported reported Accident year 2013 2014 2015 2016 2017 Claims Claims $ $ $ $ $ $ Unaudited 2013 44,949 47,840 49,845 250,901 245,425 2,057 11 2014-2,297,179 2,361,053 2,869,806 3,556,472 102,736 748 2015 - - 4,574,096 4,204,849 5,668,278 841,489 1,299 2016 - - - 4,961,545 6,087,307 1,606,955 1,451 2017 - - - - 3,338,271 1,747,722 810 18,895,753 4,300,959 Commercial Trucking: Paid claims and allocated claim adjustment expenses, net of reinsurance For the years ended December 31 Accident year 2013 2014 2015 2016 2017 $ $ $ $ $ Unaudited 2013 1,272 8,304 30,186 226,712 241,223 2014-350,087 1,017,968 1,652,291 3,080,706 2015 - - 734,021 1,778,851 3,108,288 2016 - - - 863,558 2,581,635 2017 - - - - 661,842 9,673,694 Liability for losses and loss adjustment expenses, net of reinsurance 9,222,059 The reconciliation of the incurred and paid claims development tables to the liability for losses and loss adjustment expenses in the statement of financial position is as follows: 2017 $ Net outstanding liabilities: Workers compensation 968,203 Commercial trucking 9,222,059 10,190,262 19
9. Losses and Loss Adjustment Expenses (continued) The following table is unaudited supplementary information for average annual historical duration of claims: Average Annual Percentage Payout of Incurred Claims by Age, net of reinsurance Unaudited Years 1 2 3 4 5 Workers Compensation 4% 20% 26% 16% 14% Commercial Trucking 11% 17% 17% 30% 6% 10. Deposit liabilities The Company has entered into a multi-year loss portfolio transfer reinsurance contract with one reinsured company as at December 31, 2017 and 2016 on which there is no significant transfer of underwriting risk. 11. Share Capital The Company has authorized 900,000 shares of par value $10.00 each. As of December 31, 2017 and 2016, 12,000 voting shares respectively, and 50,000 non-voting shares respectively were issued and outstanding. The Company has authorized 5 non-voting redeemable preferred shares ( preferred shares ) of par value $1.00 each. The preferred shares are redeemable at the option of the Board of Directors at a price determined by the Board. As of December 31, 2017 and 2016, 5 preferred shares respectively were issued and outstanding. During the year ended December 31, 2017, $200,000 in additional paid-in capital was returned to an owner of a segregated account (see Note 8). In addition, the owner of a segregated account contributed $200,000 in additional paid-in capital to the segregated account. During the year ended December 31, 2016, $1,800,000 in non- voting share capital was repurchased as a result of the Settlement (see Note 8) and a director contributed $500,000 in non-voting share capital to the Company. In addition, the Company converted contributed surplus of $20,000 into 2,000 common shares of par value $10.00 each. 12. Additional paid in capital During the year ended December 31, 2016, $600,000 in additional paid in capital was returned to the owner of a segregated account. Additional paid capital was also reduced by $1,367,579 as a result of the Settlement (see note 8.) 20
13. Premiums Activity in unearned premium for the years ended December 31, 2017 and 2016 is as summarized as follows: 2017 2016 Gross Ceded Net Gross Ceded Net $ $ $ $ $ $ At January 1 2,734,145-2,734,145 3,372,326-3,372,326 Premium assumed 2,805,533 (120,000) 2,685,533 5,611,898-5,611,898 Premiums earned (4,139,637) 120,000 (4,019,637) (6,250,079) - (6,250,079) At December 31 1,400,041-1,400,041 2,734,145-2,734,145 14. Statutory Requirements As a registered insurance company under the Bermuda Insurance Act 1978 amendments thereto and related regulations ( the Act ) the Company is required to prepare Statutory Financial Statements and to file a Statutory Financial Return annually (or as otherwise agreed, in certain circumstances). The Act also requires the Company to meet certain defined measures of solvency and liquidity. The statutory capital and surplus amounted to $2,905,343 and $5,432,211 as of December 31, 2017 and 2016, respectively. The minimum statutory capital and surplus required by the Act for the Company s current operations amounted to $1,528,539 and $1,504,165 at December 31, 2017 and 2016 respectively. (The principal difference between the Company s statutory capital and surplus and shareholders equity as reported in conformity with generally accepted accounting principles relate to prepaid expenses and deferred acquisition costs). 15. Subsequent events The Company has evaluated all known recognized and non-recognized subsequent events through June 26, 2018, the date the financial statements were available to be issued. 21