COLONIAL MEDICAL INSURANCE COMPANY LIMITED. Financial Statements (With Auditors Report Thereon) Year ended December 31, PDF Free Download

Financial Statements (With Auditors Report Thereon) Year ended

ABCD KPMG Audit Limited Crown House 4 Par-la-Ville Road Hamilton HM 08 Bermuda Mailing Address: P.O. Box HM 906 Hamilton HM DX Bermuda Telephone +1 441 295 5063 Fax +1 441 295 9132 Internet www.kpmg.bm INDEPENDENT AUDITORS REPORT To the Shareholders of Colonial Medical Insurance Company Limited We have audited the accompanying financial statements of Colonial Medical Insurance Company Limited (the Company ), which comprise the statement of financial position as at and the statements of comprehensive income, changes in shareholder s equity and cash flows for the year ended December 31, 2012, and notes, comprising a summary of significant accounting policies and other explanatory information. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our 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, we consider internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of Colonial Medical Insurance Company Limited as at, and its financial performance and its cash flows for the year ended in accordance with International Financial Reporting Standards. Chartered Accountants Hamilton, Bermuda April 22, 2013 2013 KPMG Audit Limited, a Bermuda limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved.

Statement of Comprehensive Income Year ended (Expressed in Bermuda Dollars) Notes 2012 2011 Premiums written 10(b) $ 109,735,233 $ 106,446,996 Reinsurance premiums assumed 10(d) 5,905,624 5,865,533 Total premiums written 115,640,857 112,312,529 Change in unearned premiums (43,469) 22,934 Premiums earned 115,597,388 112,335,463 Reinsurance premiums ceded 4 (5,758,323) (5,613,241) Net premiums earned 109,839,065 106,722,222 Claims paid 9 85,040,195 78,248,162 Change in outstanding loss provisions 9 2,315,235 (38,228) Claims recovered and recoverable from reinsurers 4, 9 (3,352,920) (4,567,320) Net claims incurred 84,002,510 73,642,614 Reinsurance profit commission and commission income 192,550 143,785 Commission expense 10(d) (8,148,711) (7,865,968) Other underwriting expenses (3,222,814) (2,757,959) Net underwriting income 14,657,580 22,599,466 Net investment income 5(iv) 2,185,615 1,369,080 Administration fee income 13 868,840 382,014 Management fee income 10(e) 2,620,610 2,640,909 General and administrative expenses 10(c), 14 (15,101,956) (14,705,659) Net income and comprehensive income for the year (all attributable to the owner of the Company) $ 5,230,689 $ 12,285,810 See accompanying notes to financial statements 4

Statement of Changes in Shareholder s Equity Year ended (Expressed in Bermuda Dollars) Total Equity Attributable to the Share Contributed Retained Equity holder of Capital Surplus Earnings the Company Balance at December 31, 2010 $ 2,000,000 $ 1,500,000 $ 34,003,979 $ 37,503,979 Net income for the year 12,285,810 12,285,810 Balance at December 31, 2011 2,000,000 1,500,000 46,289,789 49,789,789 Net income for the year 5,230,689 5,230,689 Dividend paid (Note 20) (5,000,000) (5,000,000) Balance at $ 2,000,000 $ 1,500,000 $ 46,520,478 $ 50,020,478 See accompanying notes to financial statements 5

Statement of Cash Flows Year ended (Expressed in Bermuda Dollars) Notes 2012 2011 Cash flows from operating activities Net income $ 5,230,689 $ 12,285,810 Adjustments for: Depreciation and amortisation 7, 8 691,017 715,938 Dividend and interest income net of amortisation (1,775,182) (2,040,026) Net unrealized gains (losses) on investments (536,140) 522,694 Realised losses on sales of investments 120,835 143,379 Amortisation on investments 4,872 4,873 Bad debts 694,222 412,791 Operating cash flow before changes in non-cash operating 4,430,313 12,045,459 working capital Change in non-cash operating working capital 17 435,938 (1,087,064) Cash flows provided by operating activities 4,866,251 10,958,395 Cash flows from investing activities Proceeds from sales of investments 17,134,053 4,866,690 Purchase of investments (21,754,704) (17,836,047) Dividend and interest income received 1,775,182 2,040,026 Amounts due from related company 4,024,282 2,335,876 Purchase of property, plant and equipment 7 (244,909) (228,811) Purchase of intangible assets 8 (80,175) (33,625) Cash flows provided by (used in) investing activities 853,729 (8,855,891) Cash flows from financing activities Dividends paid 20 (5,000,000) Cash flows used in financing activities (5,000,000) Increase in cash and cash equivalents 719,980 2,102,504 Cash and cash equivalents at beginning of year 7,193,998 5,091,494 Cash and cash equivalents at end of year $ 7,913,978 $ 7,193,998 Cash balances comprise: Cash and cash equivalents $ 9,146,941 $ 7,496,905 Bank overdraft (1,232,963) (302,907) $ 7,913,978 $ 7,193,998 See accompanying notes to financial statements 6

1. General Colonial Medical Insurance Company Limited (the Company ) was incorporated in the Islands of Bermuda on August 9, 1990 and carries on business as an insurance company and holds a Class 3B license under the Insurance Act, 1978 of Bermuda and related regulations ( the Insurance Act ). The Company is a wholly owned subsidiary of Colonial Group International Ltd. ( CGI ). It commenced writing business on January 1, 1991. The registered office and principal place of business of the Company is Jardine House, 33-35 Reid Street, Hamilton, Bermuda. The Company provides health insurance coverage in Bermuda, Cayman, the British Virgin Islands and the Turks & Caicos Islands for medical, dental, vision, long term disability, short term disability, group life and accidental death and dismemberment risks. The Company provides coverage with the following maximum limits: Maximum Coverage Limit Medical $ 5,000,000 Group life $ 2,000,000 Accidental death and dismemberment $ 2,000,000 The medical coverage represents a lifetime maximum limit per insured. The Company has reinsurance protection which limits losses to $325,000 (2011 - $325,000) per calendar year per insured for medical cover. The dental cover represents an annual maximum limit and is not reinsured. For group life, the Company purchases reinsurance for 80% of the first $250,000 per life under a quota share agreement. In addition, the Company provides group life and accidental death and dismemberment coverage in excess of $250,000 which is fully reinsured on a quota share basis, and long term disability cover, reinsuring 90% of the associated risk. In 2011 the Company purchased catastrophic excess of loss life reinsurance for losses in excess of $250,000 per occurrence limited to $5,000,000 each occurrence. This reinsurance provides cover for the loss of six lives or more that are involved in any one loss. In 2012 the Company purchased Short Term Disability reinsurance for 60% of the Company s gross liability to a maximum gross weekly benefit of $3,500 per person. The Company assumed and administered all of the group medical, dental, group life and accidental death and dismemberment business written by British Caymanian Insurance Company Limited, a company incorporated in the Cayman Islands and related through a common shareholder, up to August 31, 2007. As of September 1, 2007 the Company started writing business directly in Cayman. The coverage provided and reinsurance purchased since that date is substantially the same as the other business written by the Company. Effective February 1, 2007, the Company assumed and administered all of the group medical, dental, group life and accidental death and dismemberment business written by Colonial Insurance (BVI) Limited, a company incorporated in the British Virgin Islands and related through a common shareholder (see Note 10(d)). The coverage provided and reinsurance purchased is substantially the same as the other business written by the Company. The Company also provides administrative services to a number of self-insured programs, under which it assumes no net underwriting risk but receives an administration fee (Note 13). 7

1. General (continued) The Company offers international health insurance coverage for medical, dental, life, long term disability and accidental death and dismemberment risks for individuals and groups working outside their home country. The maximum annual coverage limit is $2,000,000 per insured, and reinsurance is purchased limiting the Company s net exposure to $325,000 per insured. 2. Basis of preparation (a) Statement of Compliance These financial statements are prepared in accordance with International Financial Reporting Standards ( IFRS ). The financial statements were authorised for issue by the Board of Directors on April 22, 2013. (b) Basis of measurement The financial statements are prepared on the historical cost basis, except for financial assets at fair value through profit or loss, which are stated at fair value and financial assets held-to-maturity which are carried at amortised cost. The methods used to measure fair value are discussed further in Notes 3, 5 and 16. (c) Functional and presentation currency The financial statements are presented in Bermuda dollars, the Company s functional currency. (d) Use of estimates and judgements The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the year. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, and the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from those estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised. In particular, information about significant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amounts recognized in the financial statements are described in Notes 3(a), 3(c), 3(e)(ii), 3(k), 5, 9 and 16. 8

3. Summary of significant accounting policies The accounting policies set out below have been applied consistently to all periods presented in these financial statements by the Company. (a) Investments Investments comprise managed funds, common equity securities and preferred shares. Investments are accounted for on the trade date (the date the Company enters into a commitment to buy or sell the investment). The Company classifies its investments as fair value through profit or loss or held-to-maturity. Investments intended to be held for an indefinite period of time and which may be sold in response to needs for liquidity, changes in interest rates, exchange rates or equity prices are classified as financial assets at fair value through profit or loss. Investments with a fixed maturity, where management has both the intent and the ability to hold to maturity, are classified as financial assets held-to-maturity. Management determines the appropriate classification of its investments at the time of purchase. Investments classified as financial assets at fair value through profit or loss are initially recognised at cost in the statement of financial position and are subsequently re-measured at fair value based upon market quotations or counterparty prices. Investments in unquoted funds are typically valued using the net asset values obtained from the administrators of the respective investment entities. These investment entities generally carry their investments at fair value as determined by their respective investment managers or independent administrators. For securities in the underlying investment entities which are not actively traded, fair values are estimated by using values from independent pricing services or based on manager valuations. Due to the inherent uncertainty of such valuation, the value of investments in unquoted funds held by the Company may differ significantly from the values that would have been used had a ready market value for the investments existed, and such differences could be material. Unrealised gains and losses on financial assets recorded at fair value through profit or loss are included in the determination of net income in the year in which they arise. Financial assets held-to-maturity are carried at amortised cost. Premiums and discounts on acquisition are amortised over the periods remaining to maturity using the straight-line method, which approximates the effective yield method, and the amortisation is included as an adjustment to interest income. Any impairment on financial assets held-to-maturity that are considered to be other than temporary, calculated as the difference between the carrying value and recoverable amount, is included in the determination of net income in the year in which it arises. Realised gains and losses on sales of investments are calculated on the average cost basis. (b) Depreciation Property, plant and equipment are recorded at cost less accumulated depreciation and impairment losses. 9

3. Summary of significant accounting policies (continued) (b) Depreciation (continued) Subsequent costs The cost of replacing a component of an item of property or equipment is recognized in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Company and its cost can be measured reliably. The carrying amount of the replaced part is derecognized. The costs of the day-to-day servicing of property and equipment are recognized in profit or loss as incurred. Depreciation is charged to net income or loss in the statement of comprehensive income on a straight-line basis over the estimated useful life of the asset. The estimated useful lives are as follows: Furniture and fixtures Computer hardware Office equipment Leasehold improvements 5 years 5 years 5 years 10 years (c) Impairment Financial assets not recorded at fair value (including receivables) A financial asset is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset. Objective evidence that financial assets are impaired can include default or delinquency by a debtor, restructuring of an amount due to the Company on terms that the Company would not consider otherwise, indications that a debtor or issuer will enter bankruptcy. Individually significant financial assets are tested for impairment on an individual basis. The remaining financial assets are assessed collectively in groups that share similar credit risk characteristics. An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between its carrying amount, and the present value of the estimated future cash flows discounted at the original effective interest rate. Losses are recognised in income or loss and reflected in an allowance account against the financial assets. When a subsequent event causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through net income or loss in the statement of comprehensive income. Non-financial assets The carrying amounts of the Company s non-financial assets are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, then the asset s recoverable amount is estimated. An impairment loss is recognized whenever the carrying amount of an asset exceeds its recoverable amount. The recoverable amount of an asset or cash generating unit ( CGU ) is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or CGU. For the purpose of impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or CGUs. Impairment losses are recognised in the Statement of Comprehensive Income. An impairment loss is reversed only to the extent that the asset s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. 10

3. Summary of significant accounting policies (continued) (d) Share capital Share capital represents ordinary shares which are classified as equity. (e) Insurance contracts i) Classification The Company classifies its insurance contracts as short-term insurance contracts. Short-term insurance contracts include life and health insurance which is intended to protect the Company s customers from the consequences of events (such as death, disability or sickness) that would affect the ability of the customer or dependants to maintain their current level of income. Guaranteed benefits paid on occurrence of the specified insurance event are either fixed or linked to the event of the economic loss suffered by the policyholder. There are no maturity or surrender benefits attached to these contracts. ii) Recognition and measurement Premiums Premiums written and reinsurance premiums assumed are recorded and earned on a monthly basis as premium is billed, except for the international health insurance coverage, where premiums written are recorded and earned on a pro-rata basis over the term of the policy. Unearned premium reserves are established to cover the unexpired portion of premiums written. Reinsurance premiums ceded are recorded and amortised on a monthly basis as premium is payable, except for international health insurance coverage, where ceded premiums are similarly pro-rated over the terms of the contracts with the unexpired portion deferred in the balance sheet. Claims Claims are initially recorded based on requests for payment by health care providers and insureds. Claims payments and changes in estimates of unpaid claims resulting from the continuous review process and differences between estimates and payments are recognized in the statement of comprehensive income, in the period in which the estimates are changed or the payments are made. They include all direct and indirect claims settlement costs and arise from insured events that have occurred up to the balance sheet date even if they have not yet been reported to the Company. Medical IBNR The Company establishes a provision for claims reported but not paid and claims incurred but not reported based on the recommendations of the Company s actuary, using the Company's past loss history. The reserves recommended by the actuary are estimates, and are subject to variability. This variability cannot be evaluated with absolute certainty since the ultimate liability for loss and loss adjustment expenses is dependent on a number of factors including, but not limited to, expectations as to future development, expected future inflationary trends and change in judicial interpretation of policy provisions. Loss reserves are also dependent on the judgment and opinion of a number of individuals. The process of determining reserves necessarily involves risks that the actual results will deviate, perhaps substantially, from the best estimate made. Management believes that the provision for outstanding claims and claim expenses will be adequate to cover the ultimate net cost of losses incurred to the balance sheet date but the provision is necessarily an estimate and may ultimately be settled for a significantly greater or lesser amount. Any subsequent differences arising are recorded in the period in which they are determined. 11

3. Summary of significant accounting policies (continued) (e) Insurance contracts (continued) All provisions are periodically reviewed and evaluated in the light of emerging claim experience and changing circumstances. It is reasonably possible that changes in future conditions in the near term could require a material change in the amount estimated. The resulting changes in estimates of the ultimate liability are recorded as incurred claims in the period they are determined. Given the short-term nature of expected settlement, the provision estimations do not take into consideration the time value of money or make explicit provisions for adverse deviation. iii) Reinsurance contracts held Contracts entered into by the Company with reinsurers under which the Company is compensated for losses on one or more contracts issued by the Company and that meet the classification requirements for insurance contracts, are classified as reinsurance contracts held. The benefits to which the Company is entitled under its reinsurance contracts are included in losses recoverable from reinsurers. Amounts recorded as due from reinsurers comprise claims submitted to reinsurers and the reinsured portion of the reserves for losses on policies issued by the Company. The reinsured portion of the reserves for losses is estimated in a manner consistent with the estimation of reserves for losses on the policies issued by the Company. The Company assesses amounts due from reinsurers for any indication of impairment on a quarterly basis. As at, management is of the opinion that all amounts due from reinsurers are recoverable and there is no indication of impairment. Reinsurance profit commission is calculated based on past underwriting results and in accordance with the terms of the reinsurance contracts. The reinsurance profit commission is recorded on the accrual basis. iv) Premiums receivable and payable related to insurance contracts Premiums receivable and payable are recognized when due. These include amounts due to and from insurance contract holders, brokers and agents. Premiums receivable are assessed for doubtful accounts and impairment. (f) Foreign exchange Monetary assets and liabilities denominated in foreign currencies are translated at exchange rates in effect at the balance sheet date. Income and expenses are translated at the rates in effect at the date of the transaction and exchange gains and losses are included within general and administrative expenses in the statement of comprehensive income. (g) Commissions, interest and other expenses Commission expenses, interest income and expense, and other expenses are recorded on an accrual basis. Acquisition costs, mainly commissions and brokerage, related to unearned premiums are deferred and amortised to income over the period in which the premiums are earned. The method followed in determining deferred acquisition costs limits the amount of the deferral to its realisable value by giving consideration to losses and expenses and future investment income expected to be incurred as premiums are earned. 12

3. Summary of significant accounting policies (continued) (h) Defined contribution plan Contributions to the defined contribution plan are recognized as an expense in net income or loss in the statement of comprehensive income as incurred. (i) Taxation Under the laws of Bermuda there are presently no income, withholding or capital gains taxes payable by the Company. (j) Related parties Related parties include the parent, related companies, that is, fellow subsidiaries, directors and key management personnel who have the authority and responsibility for planning, directing and controlling the activities of the Company. (k) Provisions A provision is recognized if, as a result of a past event, the Company has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. (l) Intangible assets The Company has classified software costs as intangible assets if they are not an integral part of computer equipment. Software intangible assets are recorded at cost less accumulated amortization and impairment losses. Amortisation is provided for on a straight line basis over the estimated useful life of 5 to 10 years. (m) New standards, interpretations and amendments to published standards (a) New and amended standards adopted by the Company There are no IFRS or IFRIC interpretations that are effective for the financial year beginning on or after January 1, 2012 that would be expected to have a material impact on the Company. (b) New standards, amendments and interpretations but not effective for the financial year beginning January 1, 2012 and not early adopted IFRS 9: Financial Instruments sets out the recognition and measurement requirements for financial instruments and some contracts to buy or sell non-financial items. The IASB has broken the project into three phases, classification and measurement, impairment methodology and hedge accounting. The IASB continues to add to the standard as it completes the various phases of its project and it will eventually form a complete replacement for IAS 39: Financial Instruments Recognition and Measurement. IFRS 9 (2010): Financial Instruments: Classification and Measurement is due to be effective from January 1, 2015. Under the standard, a financial asset is measured at amortised cost if it is held within a business model whose objective is to hold assets to collect contractual cash flows and its cash flows are solely payments of principal and interest. All other financial assets are measured at fair value, with changes in fair value recognised in profit or loss, FVTPL, except for some equity investments for which changes in fair value are recognised in other comprehensive income. 13

3. Summary of significant accounting policies (continued) (m) New standards, interpretations and amendments to published standards (continued) (b) New standards, amendments and interpretations but not effective for the financial year beginning January 1, 2012 and not early adopted (continued) An exposure draft containing amendments to the standard was released in November 2012. It introduces a third measurement category, under which a financial asset is required to be measured at fair value through other comprehensive income, FVOCI, if its cash flows are solely payments of principal and interest and are held in a business model in which assets are managed both in order to collect contractual cash flows and for sale. The Company is yet to assess IFRS 9 s full impact and intends to adopt IFRS 9 no later than the accounting period beginning on or after January 1, 2015. In May 2011 the IASB issued IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements, IFRS 12 Disclosure of Interests in Other Entities and IFRS 13 Fair Value Measurement, which all have an effective date of January 1, 2013. The IASB also issued IAS 27 Separate Financial Statements (2011), which supersedes IAS 27 (2008) and IAS 28 Investments in Associates and Joint Ventures (2011), which supersedes IAS 28 (2008). All these standards have an effective date of January 1, 2013. In June 2011 the IASB issued an amended IAS 19 Employee Benefits, with an effective date of January 1, 2013. IFRS 13 is expected to impact the disclosures in respect of fair value measurement on adoption. The remaining standards are not expected to have a significant impact on the financial statements of the Company. 4. Underwriting policies and reinsurance agreements The Company follows the policy of underwriting and reinsuring all contracts of insurance, which limit the retained liability of the Company to a maximum amount of $325,000 (2011 - $325,000) on any one individual medical loss per year, 20% (2011-20%) of paid claims on all group life losses and 10% (2011-10%) of paid claims on all long-term disability losses and a maximum of $3,500 gross weekly benefit per person of paid claims on all short-term disability losses. The reinsurance of contracts does not, however, relieve the Company of its primary obligation to the policyholders. In the event that the reinsurers are unable to meet their obligations under the reinsurance agreements, the Company would also be liable for the reinsured amount. The Company evaluates the financial condition of its reinsurers and monitors the credit risk of the reinsurers to minimize its exposure to significant losses from reinsurer insolvency. 14

5. Investments (i) Of the total cash and cash equivalents, 47% (2011-64%) are held with a Bermuda-based bank related by common control and 34% (2011-26%) are held with unrelated Bermuda banks. (ii) Financial assets at fair value through profit or loss comprise the following: December 31, 2011 Fair Fair value Cost value Cost Managed funds $ 23,027,655 $ 22,396,802 $ 16,325,536 $ 16,157,796 Corporate bonds 752,821 801,838 Common equity securities 484,136 1,578,695 561,832 1,718,158 Preferred shares 545,426 556,412 1,131,072 1,104,301 Total $ 24,057,217 $ 24,531,909 $ 18,771,261 $ 19,782,093 Financial assets held-to-maturity comprise preferred shares maturing in 2019 carried at an amortised cost of $897,680 (2011 - $902,552) and Bermuda government debt instrument maturing in 2020 carried at an amortised cost of $225,000 (2011 - $225,000) which have coupon rates of 8% and 5.6% respectively. In the prior year, the Company also held a corporate bond carried at an amortised cost of $250,000 that matured during the year. The fair value of the investments at the balance sheet date is $1,316,987 (2011 - $1,596,326). The preferred shares are issued by a local Bermuda bank and are guaranteed by the Government of Bermuda which has a credit rating of AA-. The managed funds owned by the Company invest in a number of different types of investments which include: large cap, small cap and emerging market equity, U.S. bonds, high yield bonds, and alternative investments which can include private equity. These investments are subject to the conditions and restrictions as further defined in the terms of the offering of each fund, which are usually contained in a formal Offering Memoranda. Such Offering Memoranda generally define the nature and types of investments in which a managed fund can invest and provide for specified procedures regarding further investment in and redemption from the particular fund. Whilst investments in managed investment funds can achieve investment diversification, these investments can also subject the Company to a concentration of risk in one company or investment strategy. Because the investments in managed investment funds can only be redeemed or transferred in accordance with the terms of the offering of the particular fund, generally weekly, monthly, or quarterly, the ability of the Company to realise such investments may be restricted. For managed funds the Company s largest concentration in any one investee is 38% (2011-60%). The security is a Bermuda based fund investing in fixed income securities. For equity securities the Company s largest concentration in any one investee is 33% of total investments (2011-1%). For preferred shares, the Company s largest investment in any one investee is 33% (2011-1%) of total investments. Preferred shares have a coupon rate between 6.45% and 8.75% and mature between 2046 and 2069. 15

5. Investments (continued) The investment portfolio is monitored by management and is subject to investment guidelines approved by the Board of Directors. (iii) Fair value of investments The Company measures fair value using the following fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to fair values derived from unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below: Level 1 Quoted prices for identical instruments in active markets. Level 2 Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. Level 3 Model derived valuations in which one or more significant inputs or significant value drivers are unobservable. These measurements include circumstances in which there is little, if any, market activity for the asset or liability. In making the assessment, the Company considers factors specific to the asset or liability and such an assessment will involve significant management judgment. Because of the inherent uncertainty in the valuation of these Level 3 investments, fair values of such investments may differ from the values that would have been used had a ready market for these investments existed, and the differences could be material. The level in the fair value hierarchy within which the fair value measurement in its entirety falls shall be determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company determined that securities classified as Level 1 would include domestic and foreign exchange traded equity securities, quoted preferred shares and quoted managed funds. Level 2 would include corporate debt securities and unquoted preferred shares. Level 3 would include unquoted common equities. Fair values of the Company s interests in unquoted managed fund investments are based upon the Net Asset Values of the underlying investment funds as reported by the investment managers, or their independent administrators. The Company s ability to redeem its managed fund investments at the reported net asset value per share (or its equivalent) determines whether the managed fund investment will be categorized within Level 2 or Level 3 of the fair value hierarchy. If the managed fund can be redeemed within a time period of 3 months with no gates or other redemption restrictions it will be classified within Level 2. Otherwise the managed fund will be classified within Level 3. A review of the fair value hierarchy classifications is conducted on an ongoing basis. Changes in the observability of valuation inputs may result in a reclassification for certain financial assets and liabilities. Reclassifications impacting Level 3 of the fair value hierarchy are reported as transfers in/out of the Level 3 category as of the beginning of the period in which the reclassifications occur. 16

5. Investments (continued) (iii) Fair value of investments (continued) The following table presents the Company s fair value hierarchy for those assets or liabilities measured at fair value: Quoted prices Significant in active other Significant markets for observable unobservable identical assets inputs inputs Investments in securities (Level 1) (Level 2) (Level 3) Total Managed funds $ 5,737,237 $ 16,745,982 $ 544,436 $ 23,027,655 Common equity securities 445,191 38,945 484,136 Preferred shares 356,451 182,575 6,400 545,426 Total $ 6,538,879 $ 16,982,557 $ 589,781 $ 24,057,217 There were no reclassifications of investments between Level 1 and Level 2 during the year ended. December 31, 2011 Quoted prices Significant in active other Significant markets for observable unobservable identical assets inputs inputs Investments in securities (Level 1) (Level 2) (Level 3) Total Managed funds $ 2,173,267 $ 13,651,859 $ 500,410 $ 16,325,536 Corporate bonds 752,821 752,821 Common equity securities 524,529 37,303 561,832 Preferred shares 935,670 189,002 6,400 1,131,072 Total $ 3,633,466 $ 14,593,682 $ 544,113 $ 18,771,261 There were no reclassifications of investments between Level 1 and Level 2 during the year ended December 31, 2011. 17

5. Investments (continued) (iii) Fair value of investments (continued) The following table provides a summary of the changes in fair value of the Company s Level 3 financial assets (and liabilities) for the year ended December 31, 2011: Fair value measurements using significant unobservable Managed Common equity Preferred inputs funds securities shares Total Beginning balance at January 1, 2011 $ 509,564 $ 37,469 $ 6,400 $ 553,433 Total realized gains or (losses) (16,161) (16,161) Total change in unrealized gains or (losses) (16,368) (166) (16,534) Total purchases, issuances and settlements 29,667 29,667 Total sales, dispositions and settlements (6,292) (6,292) Ending balance at December 31, 2011 $ 500,410 $ 37,303 $ 6,400 $ 544,113 Total losses for the year included in income on Level 3 assets $ (32,529) $ (166) $ $ (32,695) Level 3 assets contain investments in unquoted managed funds which have limited observable inputs on which to measure fair value. The affect of changing one or more inputs used in the measurement of fair value of these instruments to another reasonably possible assumption would not be significant and no further analysis has been performed. 19

5. Investments (continued) (iv) Investment income comprises the following: 2012 2011 Interest and dividend income $ 1,775,182 $ 2,040,026 Amortisation (4,872) (4,873) Realised losses on sale of investments (120,835) (143,379) Net unrealized gains (losses) on investments 536,140 (522,694) $ 2,185,615 $ 1,369,080 6. Funds withheld Included within funds withheld is a restricted deposit of $210,978 (2011 - $209,713) with a banking institution in the Turks & Caicos Islands. The money is being held in favour of the Superintendent of Insurance of the Turks & Caicos Islands as part of that country s regulatory requirement. This amount is not to be reduced or removed without the prior written consent of the Superintendent of Insurance. 7. Property, plant and equipment Property, plant and equipment as at comprise the following: Cost January 1, December 31, 2012 Additions Disposals 2012 Leasehold improvements $ 2,838,801 $ $ $ 2,838,801 Computer hardware 2,288,465 219,913 2,508,378 Furniture and fixtures 689,831 7,593 697,424 Office equipment 663,368 17,403 680,771 $ 6,480,465 $ 244,909 $ $ 6,725,374 Accumulated depreciation January 1, Depreciation December 31, 2012 expense Disposals 2012 Leasehold improvements $ 646,646 $ 283,880 $ $ 930,526 Computer hardware 1,806,925 188,103 1,995,028 Furniture and fixtures 680,584 2,784 683,368 Office equipment 591,002 24,588 615,590 $ 3,725,157 $ 499,355 $ $ 4,224,512 Net book value $ 2,755,308 $ 2,500,862 20

7. Property, plant and equipment (continued) Property, plant and equipment as at December 31, 2011 comprise the following: Cost January 1, December 31, 2011 Additions Disposals 2011 Leasehold improvements $ 2,838,801 $ $ $ 2,838,801 Computer hardware 2,097,978 190,487 2,288,465 Furniture and fixtures 682,488 7,343 689,831 Office equipment 632,387 30,981 663,368 $ 6,251,654 $ 228,811 $ $ 6,480,465 Accumulated depreciation January 1, Depreciation December 31, 2011 expense Disposals 2011 Leasehold improvements $ 362,766 $ 283,880 $ $ 646,646 Computer hardware 1,583,881 223,044 1,806,925 Furniture and fixtures 675,103 5,481 680,584 Office equipment 571,773 19,229 591,002 $ 3,193,523 $ 531,634 $ $ 3,725,157 Net book value $ 3,058,131 $ 2,755,308 21

8. Intangible assets Intangible assets comprising computer software as at are detailed below: Cost January 1, December 31, 2012 Additions Disposals 2012 Computer software $ 1,408,894 $ 80,175 $ $ 1,489,069 $ 1,408,894 $ 80,175 $ $ 1,489,069 Accumulated amortisation January 1, Amortisation December 31, 2012 expense Disposals 2012 Computer software $ 970,255 $ 191,662 $ $ 1,161,917 $ 970,255 $ 191,662 $ $ 1,161,917 Net book value $ 438,639 $ 327,152 22

8. Intangible assets (continued) Intangible assets comprising computer software as at December 31, 2011 are detailed below: Cost January 1, December 31, 2011 Additions Disposals 2011 Computer software $ 1,375,269 $ 33,625 $ $ 1,408,894 $ 1,375,269 $ 33,625 $ $ 1,408,894 Accumulated amortisation January 1, Amortisation December 31, 2011 expense Disposals 2011 Computer software $ 785,951 $ 184,304 $ $ 970,255 $ 785,951 $ 184,304 $ $ 970,255 Net book value $ 589,318 $ 438,639 9. Outstanding losses and loss expenses The outstanding claims provision comprises: 2012 2011 Medical and dental $ 11,881,573 $ 10,098,432 Long-term disability 2,047,761 1,515,667 $ 13,929,334 $ 11,614,099 23

9. Outstanding losses and loss expenses (continued) Movements in insurance liabilities and reinsurance assets are as follows: December 31, 2011 Gross Reinsurance Net Gross Reinsurance Net Loss reserves: Notified claims $ 2,987,427 $ (2,987,427) $ $ 2,138,784 $ (2,138,784) $ Incurred but not reported 8,626,672 8,626,672 9,513,543 9,513,543 Total at beginning of year 11,614,099 (2,987,427) 8,626,672 11,652,327 (2,138,784) 9,513,543 Movements during the year: Claims incurred - current year 87,541,502 (2,501,936) 85,039,566 80,691,169 (4,032,995) 76,658,174 Claims incurred - prior year (186,072) (850,984) (1,037,056) (2,481,235) (534,325) (3,015,560) Total claims incurred 87,355,430 (3,352,920) 84,002,510 78,209,934 (4,567,320) 73,642,614 Claims settled in the year (85,040,195) 2,196,725 (82,843,470) (78,248,162) 3,718,677 (74,529,485) Notified claims 4,143,622 (4,143,622) 2,987,427 (2,987,427) Incurred but not reported 9,785,712 9,785,712 8,626,672 8,626,672 Total at end of year $ 13,929,334 $ (4,143,622) $ 9,785,712 $ 11,614,099 $ (2,987,427) $ 8,626,672 The determination of the provision for future policy benefits is dependent on the estimates relating to the historical monthly lag patterns of claim payment relative to claim incurral date. These lag patterns are used to develop completion factors which estimate the ultimate level of incurred claims for each month. The Company also reviews enrollment and patterns of claims paid per employee per month to estimate incurred claims for months closest to the valuation date. This is referred to as the PEPM method. The use of the 12-month weighted average Completion Factor method, blended with the PEPM method for recent months, is selected as it provides stability and reliability in the provision for future policy benefits. With respect to both methods, paid claims are adjusted for reinsurance recoveries and medical trend. 24

9. Outstanding losses and loss expenses (continued) The development of insurance liabilities provides a measure of the Company s ability to estimate the ultimate value of claims. As claims are typically settled within a one year period, the Company has not included disclosure about claims development. Claims paid Gross claims paid consist of: 2012 2011 Medical $ 76,354,086 $ 68,855,765 Dental 6,737,444 6,404,130 Vision 1,079,764 1,340,849 Long-term disability 356,530 243,334 Group life 376,690 716,946 Other 135,681 687,138 10. Related party transactions (a) The amounts due from companies related through common control comprise the following: $ 85,040,195 $ 78,248,162 2012 2011 Gibbons Management Services Limited $ 21,144,374 $ 25,168,656 British Caymanian Insurance Company Limited 110,454 599,723 Colonial Insurance Company Limited 471,913 Colonial Life Assurance Company Limited 3,007 Colonial Insurance (BVI) Limited 688,158 1,001,655 $ 21,942,986 $ 27,244,954 The amounts due to companies related through common control comprise the following: 2012 2011 Colonial Insurance Company Limited $ 426,866 $ Colonial Life Assurance Company Limited 24,616 Colonial Group International Ltd. 500,000 Atlantic Medical Insurance Limited 482,654 196,954 British Caymanian Agencies Company Limited 43,760 397,404 $ 1,477,896 $ 594,358 25

10. Related party transactions (continued) The amounts due from related companies are unsecured and repayable on demand. The balance due from Gibbons Management Services Limited bears interest at 6.5% (2011-6.5%) per annum. The balance due to Colonial Insurance Company Limited is repayable on demand and bears interest at a rate of 4.0%, this was changed from 6.5% on April 1 st, 2012 (2011-6.5%) per annum. Included in investment income is net interest income of $1,642,641 (2011 - $1,872,752) received from related parties. The remaining balances have no specific settlement terms and carry no interest. (b) The Company insures the health and life risks of several companies related through common control. These risks are written at standard rates and are subject to the normal reinsurance protections purchased by the Company. The premiums written for related companies were $7,985,333 (2011 - $7,469,997). (c) The Company recorded an expense of $1,128,407 (2011 - $1,187,440), charged by a company related through common control for the rental of office space and other group overhead expenses during the year. This has been included in general and administrative expenses. (d) The Company assumed $5,522,874 (2011 - $5,446,631) of premiums from Colonial Insurance (BVI) Limited, a company related through a common shareholder. Other balances and costs associated with this reinsurance business include: 2012 2011 Outstanding losses and loss expenses $ 1,102,000 $ 531,000 Commission expense $ 966,045 $ 947,155 Claims incurred $ 4,587,897 $ 4,098,329 (e) The Company provides management and consultancy services to a medical insurance company related through common control. Included in management fee income is $2,620,610 (2011 - $2,640,909) in respect of such services. (f) Investments with a recorded value of $25,179,897 (2011 - $20,148,813) are held in the custody of a Bank related through common control. (g) At, the Company had 2 (2011-2) positions with an aggregate carrying value of $11,715,314 (2011 - $13,476,883) in investment funds managed by the Company s investment manager, which is related through common control. (h) A director of the Company and significant shareholder of the ultimate parent company is also a director of an entity in which the Company held an equity investment with a carrying value of $134,103 at December 31, 2012 (2011 - $183,759). (i) Investment advisory fees, which are incurred on a quarterly basis and calculated as 0.5% of the total net asset value of the investment portfolio, are included in general and administrative expenses for the year ended and amounted to $144,897 (2011 - $94,988). Such fees are paid to a company related through common control. The Company also holds fixed deposits, included as amounts due from related companies on the balance sheet, with this entity of $Nil (2011 - $411,102). 26

10. Related party transactions (continued) (j) Compensation to key management employees deemed to be related parties under IAS 24 was as follows: 2012 2011 Short term employee benefits $ 2,650,859 $ 2,910,722 Defined contribution pension and medical insurance expenses 214,804 229,002 $ 2,865,663 $ 3,139,724 (k) On January 1, 2012 the Company entered into a quota share group life reinsurance agreement with Colonial Life Assurance Company Limited ( CLAC ), a company related through common control. Under this agreement, the Company cedes 50% of the net group life insurance premium to CLAC with a 10% ceding commission earned by the Company. For the year ended, the Company recognised net ceded premium in the statement of comprehensive income of $551,639, commission income of $57,659 and net claims recovered of $18,161. 11. Share capital 2012 2011 Authorized share capital of par value Bd$1 each: 2,250,000 (2011-2,250,000) ordinary shares $ 2,250,000 $ 2,250,000 Issued and fully paid: 2,000,000 (2011-2,000,000) ordinary shares $ 2,000,000 $ 2,000,000 12. Contributed surplus Contributed surplus represents amounts paid to the Company by the shareholder in addition to its subscription to the Company s share capital. 13. Administration fees The Company provides administrative services to a number of self-insurance programs. The Company collects premiums and pays claims on behalf of the self-insurance programs, but does not assume any insurance risk. The Company received fee income for providing the above services which has been recorded within administration fees in the income statement. Under one of these arrangements which ceased in early 2012, the Company did not assume any insurance risk under this arrangement and did not control the receipt of premiums or payment of losses, which are recorded through a trust account held by the U.S. insurance company. Accordingly, such amounts, including an amount in the trust account at of $nil (2011 - $210,723) are not reflected in the Company s financial statements. 27

COLONIAL MEDICAL INSURANCE COMPANY LIMITED. Financial Statements (With Auditors Report Thereon) Year ended December 31, 2012