Contact Trillium Mutual
1078 County Road 12
Formosa, ON N0G 1W0
Phone: (519) 367-5600
Fax: (519) 367-5681
admin@trilliummutual.com
130 John Street
Atwood, ON N0G 1B0
Phone: (519) 356-2582
Fax: (519) 356-2654
Notes to Financial Statements
1. Summary of Significant Accounting Policies
| Nature of Business | The company is incorporated under the laws of Ontario and is subject to the Ontario Insurance Act. It is licensed to write insurance in Ontario. The accounting policies of the company conform with those generally accepted in Canada and comply with the requirements for filing with the Financial Services Commission of Ontario. |
| Basis of Consolidation | These financial statements have been prepared using the purchase method of consolidation. The assets and liabilities of the acquired company are initially recorded at cost. The results of operations from the subsidiary company is included from its date of incorporation May 25, 2009. All significant inter-company transactions and balances have been eliminated on consolidation. The assets, liabilities and operations of the 100% owned subsidiary company 1792270 Ontario Inc. are included in these financial statements. |
| Cash and Cash Equivalents | Cash and cash equivalents consist of cash on hand, bank balances and investments in treasury bills with maturities of three months or less. |
| Premiums Earned and Deferred Policy Acquisition Expenses | Insurance premiums are included in income on a daily pro rata basis over the life of the policies. Acquisition expenses related to unearned premiums, which expenses comprise commissions and premium taxes are deferred and amortized to income over the periods in which the premiums are earned. The method followed in determining the deferred acquisition expenses limits the amount of deferral to its realizable value by giving consideration to claims and expenses expected to be incurred as the premiums are earned. |
| Capital Assets | Capital assets are recorded at cost less accumulated amortization. Amortization is provided using the straight line basis over the estimated useful life of the asset as follows: Building-straight line over 40 years Computer-straight line over 4 years Equipment and fixtures-straight line over 4 and 5 years |
| Other Intangible Assets | Software license rights are recorded at cost. They will be amortized on a straight line basis over the life of the software commencing in the year of implementation of the software. |
| Reinsurance Ceded | Reinsurance premiums ceded and reinsurance recoveries on losses incurred are recorded as reductions of the respective income and expense accounts. Estimates of the amounts recoverable from the reinsurer on unpaid claims and adjustment expenses are recorded as accounts receivable. A contingent liability exists with respect to reinsurance ceded which could become a liability of the company in the event that the reinsurer might be unable to meet its obligations under the reinsurance agreements. |
| Income Taxes | Income taxes are accounted for using the future income tax method. Future income taxes occur as a result of temporary timing differences arising between the carrying amount of assets and liabilities for financial statement purposes and their tax basis. Future income tax assets and liabilities are measured using the tax rates anticipated to apply in the periods in which the temporary differences are expected to be realized or settled.
The company is responsible for income taxes on the portion of its premiums that relate to non farm business. |
| Reserve for Unpaid Claims | Unpaid claims and related adjustment expenses are determined using cash basis evaluations plus an amount for adverse development and are estimates of the ultimate cost of all insurance claims incurred to December 31, 2009. The provision for unpaid claims represents the amounts needed to provide for the estimated cost of settling claims related to insured events (both reported and unreported) that have occurred on or before each balance sheet date. All provisions are periodically evaluated in light of emerging claim experience and changing circumstances. The resulting changes in estimates of the ultimate claim liability are reflected in current operations. |
| Financial Instruments | The company utilizes various financial instruments. Unless otherwise noted, it is management's opinion that the company is not exposed to significant interest, currency or credit risks arising from these financial instruments and the carrying amounts approximate fair values. All transactions related to financial instruments are recorded on a settlement date basis. The company classifies its financial instruments into one of the following categories based on the purpose for which the asset was acquired. The company's accounting policy for each category is as follows. Held-for-trading This category is compromised of cash and cash equivalents. It is carried in the balance sheet at fair value with changes in fair value recognized in the income statement. Transaction costs related to instruments classified as held-for-trading are expensed as incurred. Loans and receivables These assets are non-derivative financial assets resulting from the delivery of cash or other assets by a lender to a borrower in return for a promise to repay on a specified date or dates, or on demand. They arise principally through the provision of goods and services to customers (accounts receivable and corporate income taxes recoverable), but also incorporate other types of contractual monetary assets. They are initially recognized at fair value and subsequently carried at amortized cost, using the effective interest rate method, less any provision for impairment. Transaction costs related to loans and receivables are expensed as incurred. Available-for-sale investments Non-derivative financial assets not included in the above categories are classified as available-for-sale and comprises certain investments in equity instruments, including the company's investments in private companies. When they have a quoted market price in an active market, they are carried at fair value with changes in fair value recognized as a separate component of other comprehensive income. When they do not have a quoted market price in an active market, they are carried at cost. Where a decline in fair value is determined to be other than temporary, the amount of the loss is removed from other comprehensive income and recognized in the income statement. Transaction costs related to available-for-sale investments are expensed as incurred. Other financial liabilities Other financial liabilities includes all financial liabilities other than those classified as held-for-trading and compromise trade payables and other short-term monetary liabilities. These liabilities are initially recognized at fair value and subsequently carried at amortized cost using the effective interest rate method. Transaction costs related to other financial liabilities are expensed as incurred. |
| Revenue Recognition | Gross Premium revenue is recognized over the effective term of the insurance policy as the policy as the policy amount is determined and collection is reasonably assured. Investment income is recognized as it is earned. Discounts and premiums on debt securities are amortized to income using the effective interest rate method over the period of maturity. Gains and losses on investments are included in investment income when realized and are calculated on the basis of average cost. |
| Use of Estimates | The preparation of financial statements in accordance with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The principal estimates used in the preparation of these financial statements, not disclosed elsewhere (unpaid claims reserves and reinsurance ceded) are the determination of the estimated useful life of property, plant and equipment, and other intangibles, and valuation of property, plant and equipment and other intangibles, transaction costs and other assets when testing for possible impairment, and future income taxes. Actual results could differ from management's best estimates as additional information becomes available in the future. |
| New Accounting Pronouncements | A recent accounting pronouncement that has been issued but is not yet effective, and will have a potential implication for the company, is as follows: a) International financial reporting standards The CICA plans to converge Canadian GAAP with International Financial Reporting Standards ("IFRS") over a transition period expected to end 2011. The impact of the transition to IFRS on the company's financial statements has yet to be determined. |
2. Accounts Receivable
2009 |
2008 |
|
| Accrued interest | $82,783 |
$81,389 |
| Amounts receivable on paid claims | 312,895 |
613,520 |
| Amounts recoverable on unpaid claims | 19,072,506 |
20,407,658 |
| Amounts receivable from auto facility plan | 1,404,639 |
1,408,537 |
| Broker's balances | 2,685,849 |
2,506,229 |
| Due from policyholders | 5,975,266 |
5,052,241 |
| Other receivables | 7,074 |
29,064 |
$29,541,012 |
$30,098,638 |
3. Long-term Investments
The cost, estimated fair values and carrying values of investments at December 31, 2009 (with comparative carrying amounts for December 31, 2008) were as follows:
| 2009 | 2008 | |||
Cost |
Fair Value |
Carrying Value |
Carrying Value |
|
| Available for Sale | ||||
| Debt securities | ||||
| Federal | $ 742,961 |
$ 758,516 |
$ 758,516 |
$ 1,043,198 |
| Provincial | 2,556,611 |
2,611,234 |
2,611,234 |
860,967 |
| Municipal | 300,688 |
357,675 |
357,675 |
522,571 |
| Corporate | 5,466,445 |
5,639,493 |
5,639,493 |
6,851,353 |
| Common & preferred shares | 2,234,872 |
2,343,474 |
2,343,474 |
2,399,777 |
| Fixed Income Pooled Funds | 27,783,721 |
27,722,836 |
27,722,836 |
26,036,327 |
| Equity Pooled Funds | 9,939,453 |
9,011,078 |
9,011,078 |
7,340,394 |
| Fire Mutual Guarantee Fund | 84,908 |
84,908 |
84,908 |
82,088 |
$ 49,109,659 |
$ 48,529,214 |
$ 48,529,214 |
$ 45,136,675 |
Maturity profile of bonds, debentures, investment certificates and loans at December 31, 2009:
| Within 1 year | Over 1 to 5 years | Over 5 years | Carrying Value |
| $ 564,085 | $ 5,608,344 | $ 3,194,489 | $ 9,366,918 |
The effective interest rate of bonds, debentures, investment certificates and loans at December 31, 2009 is 3.8% (2008 - 4.5%).
For all investments, the carrying values are equal to their fair values and the maximum exposure to credit risk would be the fair value as shown above.
The difference between the cost and market value of the Pooled Fund investments has been included in comprehensive income instead of net income because the decline is expected to be temporary, due to a general market decline. The pooled fund has a portfolio of investments that is diversified, so the chances of it being permanently impaired are much lower than a single company's shares.
4. Capital Assets
2009 |
2008 |
|||
Accumulated |
Accumulated |
|||
Cost |
Amortization |
Cost |
Amortization |
|
| Land | $1,094,831 |
$- |
$90,471 |
$- |
| Buildings | 1,500,640 |
845,007 |
1,500,640 |
807,491 |
| Computer | 1,960,840 |
1,215,086 |
1,839,633 |
1,150,958 |
| Equipment and fixtures | 1,315,254 |
1,106,229 |
1,255,376 |
1,064,924 |
$5,871,565 |
3,166,322 |
$4,686,120 |
$3,023,373 |
|
| Net book value | $2,705,243 |
$1,662,747 |
5. Unpaid Claims
The process of determining the provision for unpaid claims and adjustment expenses, and related amounts recoverable, involves the risk that the actual results will deviate, perhaps substantially, from the best estimates made by the company. The deviation arises because all events affecting the ultimate settlement value of claims are not known at the time the unpaid claims liability is established.
6. Underwriting Policy
The company follows the policy of underwriting and reinsuring contracts of insurance which, in the main, limit the liability of the company to the first $300,000 plus 10% of the next $700,000 on any one claim in the event of a liability, property or automobile claim. In addition, the company has obtained reinsurance having an upper amount of $6,000,000, and which limits the company's liability to the first $600,000 plus 5% of any additional amount in the event of a series of claims arising out of a single occurrence.
7. Income Taxes
2009 |
2008 |
|
| Current income tax expense (recovery) | $774,835 |
$(558,755) |
| Future income tax expense (recovery) | (66,000) |
(1,550) |
| Income tax effect on other comprehensive (income) loss | (707,430) |
957,740 |
$1,405 |
$397,435 |
The future income tax asset of $282,000 (2008 - $216,000) arises from the differences between the carrying amounts of capital assets, investments and unpaid claims reserves for financial statement purposes and their tax amounts.
8. Pension Plan
Employees of the company are eligible to be members of the Ontario Mutual Insurance Association pension plan which is a multi-employer pension plan. The plan provides defined benefits to employees based on their length of service and rates of pay. Employees contribute 6% of their pensionable earnings to the plan, to a maximum of $11,000 (2008 - $10,500) each. The plan administrator calculates the total contributions required to meet the future benefits and the company pays the excess amount not covered by the employee contributions.
During the year, the company paid $227,075 (2008 - $173,462) in contributions on behalf of the employees to the plan. As this is a multi-employer pension plan, these contributions are the company's pension benefit expenses. No pension liability for this plan is included in the company's financial statements.
9. Statement of Cash Flows Information
The financial statements are prepared on the accrual basis. The following information, not disclosed separately on the statement of changes in cash flows, is presented on the cash basis:
2009 |
2008 |
|
| Income taxes recovered | $ 391,775 |
$ 299,464 |
| Income tax and premium taxes paid | $ 102,551 |
$ 501,864 |
10. Rate Regulation
The company's automobile insurance rates are subject to approval by Financial Services Commission of Ontario (FSCO). Application for automobile rate adjustments are presented to FSCO by the Farm Mutual Reinsurance Plan (FMRP) on behalf of members of OMIA. FSCO approves these rates based on information submitted. FMRP uses actuarial data to set the automobile rates.
11. Commitment
The board of directors have approved plans to relocate their offices to a new location. The company has begun construction on the new office building which will be completed subsequent to December 31, 2009 with budgeted costs of approximately $5,230,000 of which $1,393,206 has been completed and is included on the balance sheet at December 31, 2009 as construction in progress.
12. Capital Management
The company’s objectives with respect to capital management are to maintain a capital base that is structured to exceed regulatory requirements and to best utilize capital allocations. Reinsurance is utilized to protect capital from catastrophic losses as the frequency and severity of these losses are inherently unpredictable. To limit their potential impact, catastrophe coverage limits Trillium Mutual Insurance Company's exposure to $600,000 plus 5% of the remaining loss. The $600,000 net retained amount represents approximately 2% of company’s capital. For the purpose of capital management, the company has defined capital as policyholders equity excluding accumulated other comprehensive income.
The regulators measure the financial strength of property and casualty insurers using a minimum capital test (MCT). The regulators generally expect property and casualty companies to comply with capital adequacy requirements. This test compares a company’s capital against the risk profile of the organization. The risk-based capital adequacy framework assesses the risk of assets, policy liabilities and other exposures by applying various factors. The regulator indicates that the company should produce a minimum MCT of 150%. The MCT for the company at December 31, 2009 was in excess of 300%.
13. Financial Instrument Risk Management
Credit Risk
Credit risk is the risk of financial loss to the company if a debtor fails to make payments of interest and principal when due. The company is exposed to this risk relating to its debt holdings in its investment portfolio and the reliance on reinsurers to make payment when certain loss conditions are met.
The company's investment policy puts limits on the bond portfolio including portfolio composition limits, issuer type limits, bond quality limits, aggregate issuer limits, corporate sector limits and general guidelines for geographic exposure. The bond portfolio remains very high quality with 100% of the bonds rated A or better. All fixed income portfolios are measured for performance on a quarterly basis and monitored by management on a monthly basis.
Reinsurance is placed with FMRP, a Canadian registered reinsurer. Management monitors the creditworthiness of FMRP by reviewing their annual financial statements and through ongoing communication. Reinsurance treaties are reviewed annually by management prior to renewal of the reinsurance contract.
Accounts receivables are short-term in nature and are not subject to material credit risk.
The maximum exposure to credit risk and concentration of this risk is outlined in note 3.
Market risk
Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate as a result of market factors. Market factors include three types of risk; currency risk, interest rate risk, and equity risk.
Our company's investment policy operates within the guidelines of the Insurance Act. An investment policy is in place and its application is monitored by the investment committee and the board of directors. Diversification techniques are utilized to minimize risk. The policy limits the investment in any one corporate issuer to a maximum of 10% of the company's total assets.
a) Currency Risk
Currency risk relates to the company operating in different currencies and converting non Canadian earnings at different foreign exchange levels when adverse changes in foreign currency exchange rates occur.
The company's foreign exchange risk is related to its stock holdings. The company limits its holdings in foreign equity to 5% in accordance with its investment policy. Foreign currency changes are monitored by the investment committee and holdings are adjusted when out of balance with investment policy. A 1% change in the value of the United States dollar would affect the fair value of stocks by $3,960 which would be reflected in net income of OCI.
There have been no significant changes from the previous period in the exposure to risk or policies procedures and methods used to measure the risk.
b) Interest rate risk
Interest rate risk is the potential for financial loss caused by fluctuations in fair value or future cash flows of financial instruments because of changes in market interest rates.
The company is exposed to this risk through its interest bearing investments (T-Bills, GIC's, Bonds).
Historical data and current information is used to profile the ultimate claims settlement pattern by class of insurance, which is then used in a broad sense to develop an investment policy and strategy. However, because a significant portion of the company's assets relate to its capital rather than liabilities, the value of its interest rate based assets exceeds its interest rate based liabilities. As a result, generally, the company's investment income will move with interest rates over the medium to long-term with short-term interest rate fluctuations creating unrealized gain or losses in other comprehensive income. There are no occurrences where interest would be charged on liabilities, therefore, little protection is needed to ensure the fair market value of assets will be offset by a similar change in liabilities due to an interest rate change.
The objective and policies and procedures for managing interest rate risk is to diversify the bond portfolio in such a way that the bonds are a portfolio laddered over 10 years. One tenth of the bond portfolio would come due each year and be reinvested. This protects the company from fluctuations in the interest rate.
At December 31, 2009, a 1% move in interest rates, with all other variables held constant, could impact the market value of bonds by $2,219,000. For bonds that the company did not sell during the year, the change during the year and changes prior to the year would be recognized as other comprehensive income during the period.
There have been no significant changes from the previous period in the exposure to risk or policies, procedures and methods used to measure the risk.
c) Equity Risk
Equity risk is the uncertainty associated with the valuation of assets from changes in equity markets. The company is exposed to this risk through its equity holdings within its investment portfolio.
The Company's portfolio includes Canadian stocks with fair values that move with the Toronto Stock Exchange Composite Index, United States stocks with fair values that move with the S&P 500 Index and international stocks that move with Europe, Australia and Far East. A 10% movement in the stock markets with all other variables held constant would have an estimated affect on the fair values of the Company's Canadian and United States shares of $1,135,000. For stocks that the company did not sell during the period, the change would be recognized in the asset value and in other comprehensive income. For stocks that the company did sell during the period, the change during the period and changes prior to the period would be recognized as net realized gains in income during the period.
Liquidity Risk
Liquidity risk is the risk that the company will not be able to meet all cash outflow obligations as they come due. The company mitigates this risk by monitoring cash activities and expected outflows. Our current liabilities arise as claims are made. There are no material liabilities that can be called unexpectedly at the demand of a lender or client. There are no material commitments for capital expenditures and there is no need for such expenditures in the normal course of business. Claim payments are funded by current operating cash flow including investment income.
There have been no significant changes from the previous period in the exposure to risk or policies procedures and methods used to measure the risk.