The Citizen, 2002-02-27, Page 9Continued from page 8 HOWICK MUTUAL INSURANCE COMPANY
Financial Statements for the year ended December 31, 2001
Notes to Financial Statements
December 31, 2001
1. Summary of Significant Accounting Policies (continued) 5. Unpaid Claims (continued)
Financial Instruments The company's financial instruments consist of accounts
receivable, long-term investments, investments in related
companies and accounts payable. Unless otherwise noted, it is
management's opinion that the company is not exposed to
slgr ficant interest, currency or credit risks arising from these
financial instruments. The fair values of these financial
instruments approximate their carrying values, unless otherwise
noted.
Future Investment income
The Company does not have a policy of specifically matching its investment cash flows to
claims payment patterns.
2. Accounts Receivable
2001 2000
Interest $ 70,127 $ 83,364
Agents' balances 584,199 508,744
Due from policyholders 764,665 626,750
Due from(to) reinsurers (62,860) 24,364
Amounts recoverable on unpaid claims 2,661,696 2,088,502
Amounts receivable on paid claims 5,491 19,181
Other 3,399 60,992
$ 4,026,717 $ 3,411,897
3. Long-term Investments
2001 2000
Book
value
Estimated fair
market value
Book
value
Estimated fair
market value
Bonds and debentures $ 7,915,257 $ 8,195,934 $ 8,762,037 $ 8,935,762
Equities 1,956,273 2,310,190 1,780,992 2,175,552
Guarantee fund 23,691 23,691 23,354 23,354
$ 9,895,221 $ 10,529,815 $ 10,566,383 $ 11,134,668
The effective interest rate at December 31, 2001 for these investments was 6.0%.(2000-6.2%)
Investment in Related Companies
The company holds a 117th interest in Farm and Town Financial Services. Activity of this
company is accounted for using the equity method which resulted in a charge to investment
income in the amount of $11,302 during 2001.
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
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
2001 2000
Gross Ceded Gross Ceded
$ 1,051,530 $ 311,391 $ 542,373
2,508,907 1,896,737 2,592,432 1,898,755
1,010,587 453,568 967,045 189,747
232,831 99,705
50,768 83,995
$ 4,854,623 $ 2,661,696 $ 4,285,550 $ 2,088,502
6. Underwriting Policy
The company foi'ows 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 ir1
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 ir. the event of an
automobile claim. In addition, the company ha obtained reinsurance to prctecr iiself against
certain catastrophic losses. Its retention of lower level losses under such treaties was $300,000
for 1998.
Maturity profile at December 31, 2001:
General Liability
Automobile
Property
Assumed businesses
Facility and residual pools
Total
Within
1 year
Over 1 to
5 years
Over
5 years
Book
Value
$ 1,361,522 $ 2,394,858 $ 4,158,877 $ 7,915,257
2001 2000
Cost
Accumulated
Amortization
Net
Book Value
Net
Book Value
Land $ 43,260 $ - 43,260 $ 43,260 7.
Building 415,450 361,757 53,693 63,437
Computer 160,011 151,614 8,397 3,151
Equipment 281,696 250,159 31,537 39,995
Automobile 72,862 28,473 44,389 12,163
$ 973,279 $ 792,003 $ 181,276 $ 162,006
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.
8. 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
statuatory requirements. These appropriations are not considered part of surplus by the
Financial Services Commission of Ontario.
Income Taxes
2001 2000
Current income taxes $ (215,062) $ (105,228)
Deferred income taxes 20,000 40,000
$ (195,062) $ (65,228)
9.
10. Pensinn Plan
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.
The con-oaf:I 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. The total pension expense contributed to the plan during the year is
$29,488.
Automobile loan
The company has financed the purchase of an automobile. The finance term is 48 months, at
0.9%, with monthly payments of $548. Minimum payments over the next 4 year:: are as follows:
2002 $ 6,379
2003 6,437
2004 6,495
2005 4,803
24,114
-ZK.Nioi4)
THE CITIZEN, WEDNESDAY, FEBRUARY 27, 2002. PAGE 9.