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The Citizen, 1999-02-10, Page 27THE CITIZEN, WEDNESDAY, FEBRUARY 10, 1999. PAGE 27. Continued from Page 26 HOWICK MUTUAL INSURANCE COMPANY 3. Long-term Investments 1998 1997 Book value Estimated fair market value Book value Estimated fair market value Bonds and debentures $ 8,973,239 $ 9,419,750 $ 8,165,279 $ 8,620,780 Equities 642,594 990,493 749,209 1,173,990 Guarantee fund $ 22,648 $ 22,648 $ 24,095 $ 24,095 $ 9,638,481 $ 10,432,891 $ 8,938,583 $ 9,818,865 Maturity profile at December 31, 1998: ■ Within Over 1 to Over Book 1 year 5 years 5 years Value $ 1,237,333 $ 4,802,762 $ 2,933,144 $ 8,973,239 The effective interest rate at December 31, 1998 for these investments is 8.1%. Investment in Related Companies The company holds a 25% interest in HGGC Financial Services Inc. Activity of this company is accounted for using the equity method which resulted in a charge to investment income in the amount of $21,966 during 1998. The company also holds 1 share in a related investment sales corporation, known as Farm Mutual Financial Services Inc. (FMFS). FMFS is jointly owned by a majority of the farm mutuals in Ontario. 4. Capital Assets 1998 1997 Cost Accumulated Amortization Net Book Value Net Book Value Land $ 43,260 $$ 43,260 $ 43,260 Building 415,450 300,813 114,637 143,229 Computer 149,324 145,284 4,040 1,678 Equipment 224,496 198,400 26,096 33,968 Automobile 49,657 18,024 31,633 27,526 $ 882,187 $ 662,521 $ 219,666 $ 249,661 5. Unpaid claims Scope The determination of the provision for unpaid claims and adjustment expenses and the related reinsurers' share requires the estimation of two major variables or quanta being development of claims and reinsurance recoveries. The provision for unpaid claims and adjustment expenses and related reinsurers' share are estimates subject to variability, and the variability could be material in the near term. The variability arises because all events affecting the ultimate settlement of claims have not taken place and may not take place for some time. Variability can be caused by receipt of additional claim information, changes in judicial interpretation of contracts, or significant changes in severity or frequency of claims from historical trends. The estimates are principally based on the Company's historical experience. Methods of estimation have been used which the Company believes produce reasonable results given the current information. Assumptions Claim development Uncertainty exists on reported claims in that all information may not be available at the reporting date, therefore, the claim cost may rise or fall at some date in the future when the information is obtained. In addition, claims may not be reported to the Company immediately, therefore, estimates are made as to the value of claims incurred but not yet reported, a value which may take some months to finally determine. In order to determine the liability, assumptions are developed considering the characteristics of the class of business, the historical pattern of payments, the amount of data available and any other pertinent factors. Reinsurance recoveries 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. Future investment income The Company does not have a policy of specifically matching its investment cash flows to claims payment patterns. Comments and assumptions for specific claims categories The ultimate cost of long settlement general liability claims is difficult to predict for several reasons. Claims may not be reported until many years after a policy expires. Changes in the legal environment have created further complications. Court decisions and federal and provincial legislation may dramatically increase the liability between the time a policy is written and associated claims are ultimately resolved. For example, liability for exposure to toxic substances and environmental impairment, which did not appear likely or even exist when the policies were written, has been imposed by legislators and judicial interpretation. Tort liability has been expanded by some jurisdictions to cover defective workmanship. Provisions for such difficult-to-estimate liabilities are established by examining the facts of tendered claims and adjusted in the aggregate for ultimate loss expectations based upon historical experience patterns and current socio-economic trends. The Company assumes business from other insurers pursuant to quota share, facultative and excess of loss reinsurance agreements and there can be extended lags between the date of occurrence and the date the Company is notified of the claim. Further, the claims handling procedures of this book of business are not under direct control of the Company, thus the estimates of claims liabilities may fluctuate more than the average of the company's own business. Line of Business Segmentation 1998 1997 Ceded Gross Ceded Gross General Liability $ 1,004,229 $ 391,050 $1,053,183 $385,650 Property 848,047 95,721 824,678 211,553 Assumed Businesses 7,598 -3,527 - Facility and residual pools 67,379 -82,471 - Total $ 2,486,831 $ 776,226 $2,494,692 $869,571 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 $200,000 plus 10% of any excess and in the event of a property claim, and the first $125,000 plus 10% of any excess on any one claim in the event of a liability claim, and $110,000 plus 10% of any excess in the event of an automobile claim. In addition, the company has obtained reinsurance to protect itself against certain catastrophic losses. Its retention of lower level losses under such treaties was $300,000 for 1998. 7. Requirements Under the Ontario Insurance Act The Act in its measurement of the company's solvency position requires appropriation of members' surplus in respect of assets not admitted, investment valuation reserve and other statutory requirements. These appropriations are not considered part of surplus by the Ontario Insurance Commission. 8. income Taxes Current income taxes Deferred income taxes 1998 1997 $92,061 45,029 $250,660 (33,029) $137,090 $217,631 9. Pension Plan The company participates in a multi-employer pension plan through the Ontario Mutual Insurance Association. The plan is a contributory defined benefit pension plan which covers substantially all of its employees. The plan provides pensions based on length of service and final average earnings. 10. Commitment The company has leased equipment under an operating lease which expires in 2000. Minimum payments under this lease are as follows: I $ $ 1999 2000 28,024 6,635 $ 34,659 11. Uncertainty Due to the Year 2000 Issue The year 2000 issue arises because many computerized systems use two digits rather than four to identify a year. Date-sensitive systems may recognize the year 2000 as 1900 or some other date, resulting in errors when information using year 2000 dates is processed. In addition, similar problems may arise in some systems which use certain dates in 1999 to represent something other than a date. | The effects of the year 2000 issue may be experienced before, on, or after January 1,2000. If the year 2000 issue is not addressed by the company and its major customers, suppliers and other third party business associates, the impact on the company's operations and financial reporting may I range from minor errors to significant systems failure which could affect the company's ability to conduct normal business operations. It is not possible to be certain that all aspects of the year 2000 issue afflicting tne company, including those related to the efforts of customers, suppliers, or other third parties, will be resolved.