The Citizen, 1999-02-10, Page 26PAGE 26. THE CITIZEN, WEDNESDAY, FEBRUARY 10, 1999.
HOWICK MUTUAL INSURANCE COMPANY
Financial Statement as of December 31,1998
To the Policyholders of Howick Mutual Insurance Company
We have audited the balance sheet of Howick Mutual Insurance Company as at December 31,1998 and the statements of operations and unappropriated members' surplus and cash flows for the year then
ended. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial
statements are free of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
In our opinion, these financial statements present fairly, in all material respects, the financial position of the company as at December 31,1998 and the results of its operations and the changes in its cash
flows for the year then ended in accordance with generally accepted accounting principles.
BDO Dunwoody LLP >■ Wingham, Ontario
Chartered Accountants January 21, 1999
December 31
BALANCE SHEET
1998
STATEMENT OF CASH FLOWS
1997 For the year ended December 31______________________________1998 1997
Assets
Cash and short-term investments $$ 168,767
Accounts receivable (Note 2)2,443,637 2,335,162
Prepaid expenses 5,708 10,194
Long-term investments (Note 3)9,638,481 8,938,583
Deferred policy acquisition expenses 490,665 488,553
Capital assets (Note 4)219,666 249,661
Investment in related companies (Note )43,035 50,000
Deferred income taxes 85,000 130,029
$ 12,926,192 $ 12,370,949
Liabilities
Bank indebtedness 244,315
Accounts payable and accrued liabilities 144,396 146,582
Unpaid claims 2,486,831 2,494,692
Incomes taxes payable -125,551
Unearned premiums 2,885,099 2,900,336
5,760,641 5,667,161
Commitments (Note 10)
Members' equity
Reserves required (Note 7)100,926 116,242
Unappropriated members' surplus 7,064,625 6,587,546
7,165,551 6,703,788
$ 12,926,192 $ 12,370,949
Cash provided by (used in)
Operating activities
Net income $ 461,763 $ 771,106
Adjustments to convert income to cash basis
Amortization of bond discounts 11,700 1,777
Amortization of capital assets 47,354 50,557
Increase (decrease) in accounts payable (2,186)24,331
Increase (decrease) in income taxes payable (125,551)26,573
Increase (decrease) in provision for unpaid claims (7,861)(210,233)
Increase (decrease) in unearned premiums (15,237)74,098
Decrease (increase) in accounts receivable (108,475)(65,632)
Decrease (increase) in deferred policy acquisition expense (2,112)(13,809)
(Gain) loss on disposal of fixed assets 608 -
(Gain) loss on disposal of investments (193,521)(198,567)
Investment write down 21,966 -
Decrease (increase) in prepaid expenses 4,486 1,580
Decrease (increase) in deferred income taxes 45,029
137,963
(33,029)
428,752
Investing activities
Sales of investments 3,114,703 12,695,880
Purchase of investments (3,647,780)(13,208,605)
Acquisition of capital assets (29,550)(14,772)
Disposal of capital assets 11,582
(551,045)(527,497)
Decrease in cash during the year (413,082)(98,745)
Cash, beginning of year 168,767 267,512
Cash (deficiency), end of year ____________ $ (244,315) $ 168,767~
STATEMENT OF OPERATIONS AND UNAPPROPRIATED MEMBERS' SURPLUS
For the year ended December 31 1998 1997
Revenue
Gross premiums written $ 5,744,868 $ 5,784,511
Less reinsurance premiums cost.895,843 1,058,593
Net premiums written 4,849,025 4,725,918
Decrease (increase) in provision for unearned premiums 15,237 (74,098)
4,864,262 4,651,820
Service charges 43,960 42,635
4,908,222 4,694,455
Expenses
Net claims incurred 3,292,055 2,667,698
Commissions 1,074,790 1,054,564
Salaries and directors' fees 376,148 375,201
Premium tax 21,267 20,931
Other expenses 264,738 291,683
5,028,998 4,410,077
For the year ended December 31 1998 1997
Underwriting income (loss)(120,776)284,378
Investment income 723,359 693,149
Sundry (3,730)11,210
Income before taxes 598,853 988,737
Income taxes (Note 8)137,090 217,631
Net income for the year 461,763 771,106
Unappropriated members' surplus
Balance, beginning of year 6,587,546 5,790,226
Transfer from reserves required by
Department of Insurance
7,049,309
15,316
6,561,332
26,214
Balance, end of year $ 7,064,625 $ 6,587,546
December 31,1998 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 property, auto and liability insurance in Ontario. The company's products are
marketed through independent agents and brokers located throughout Ontario.
Long-term Investments
The company records its investments in debt securities at amortized cost with discounts and premiums being amortized to income using the constant yield method over the period to maturity. Investments
in common and preferred shares are carried at cost. Gains and losses on investments are included in investment income when realized and are calculated on the basis of average cost.
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, premium
taxes, association fees and certain identified business development costs, 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
Rates of depreciation applied to write-off the cost of property and equipment over their estimated lives are as follows:
Building 2.5%, straight line
Automobile 20.0%, straight line
Computer equipment . 20.0%, straight line
Equipment 20.0%, straight line
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
The company follows the tax allocation method in providing for income taxes. Timing differences between earnings and taxable income arise from differences between deferred policy acquisition
expenses, unpaid claims, unearned premiums and investment income for tax and accounting purposes.
The company is responsible for income taxes on the portion of its premiums that relate to non-farm business. The non-farm portion is 56.6% for 1998.
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, 1998.
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.
2. Accounts Receivable
1998 1997
Interest $ 110,399 $ 91,584
Agents' balances 515,007 540,770
Due from policyholders 604,574 591,413
Due from reinsurers 60,980 129,411
Income taxes 217,859
Amounts recoverable on unpaid claims 776,226 869,571
Amounts receivable on paid claims 151,834 106,495
Other 6,758 5,918
$ 2,443,637 $2,335,162_______ Continued on Page 27