Financial Statements of€¦ · unpaid claims and adjusting expenses, the reinsurer's share of provisions for unpaid claims and adjusting expenses, deferred policy acquisition expenses,

Financial Statements of

GRENVILLE MUTUALINSURANCE COMPANY

Year ended December 31,2011

BennettLewisMcMahonStillarChartered Accountants

46-48 King Street EastPO Box 459 Stn MainBrockville ON K6V 5V6

Telephone (613) 342-8424Telefax (613) 342-1714

INDEPENDENT AUDITOR'S REPORTTo the Policyholders of Grenville Mutual Insurance Company

We have audited the accompanying financial statements of Grenville Mutual Insurance Company,which comprise the statements of financial position as at December 31,2011, December 31,2010and January 1, 2010, and the statements of comprehensive income, statements of policyholders'equity and statements of cash flows for the years ended December 31, 2011 and December 31, 2010,and a summary of significant accounting policies and other explanatory information.

Management's Responsibility for the Financial StatementsManagement is responsible for the preparation and fair presentation of these financial statements inaccordance with International Financial Reporting Standards, and for such internal control asmanagement determines is necessary to enable the preparation of financial statements that are freefrom material misstatement, whether due to fraud or error.

Auditor's ResponsibilityOur responsibility is to express an opinion on these financial statements based on our audits. Weconducted our audits in accordance with Canadian generally accepted auditing standards. Thosestandards require that we comply with ethical requirements and plan and perform the audit to obtainreasonable assurance about whether the financial statements are free of material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosuresin the financial statements. The procedures selected depend on the auditor's judgment, including theassessment of the risks of material misstatement of the financial statements, whether due to fraud orerror. In making those risk assessments, the auditor considers internal control relevant to the entity'spreparation and fair presentation of the financial statements in order to design audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing an opinion on theeffectiveness of the entity's internal control. An audit also includes evaluating the appropriateness ofaccounting policies used and the reasonableness of accounting estimates made by management, aswell as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we obtained in our audits is sufficient and appropriate to provide abasis for our audit opinion.

OpinionIn our opinion, the financial statements present fairly, in all material respects, the financial position ofGrenville Mutual Insurance Company as at December 31, 2011, December 31, 2010 and January 1,2010, and its financial performance and its cash flows for the years ended December 31, 2011 andDecember 31, 2010 in accordance with International Financial Reporting Standards.

Chartered Accountants, Licensed Public Accountants

February 8,2012Brockville, Canada

GRENVILLE MUTUAL INSURANCE COMPANYStatements of Financial Position

December 31 December 31 January 12011 2010 2010

AssetsCash $ 2,112,946 $ 918,289 $ 1,263,030Investments (note 5) 39,788,732 40,525,505 37,093,102Accrued investment income 300,798 316,824 299,961Premiums uncollected 7,354,989 6,742,564 5,573,968Due from other insurers 164,290 115,617 503,444Income taxes recoverable 233,689 308,121Receivable from employees 6,197 6,682 3,438Recoverable subrogation of claims 758,656 712,005 1,123,092Unpaid claims and adjusting expensesrecoverable from reinsurer (note 8) 11,333,969 7,696,400 8,340,032

Prepaid expenses 64,993 34,638 28,998Deferred policy acquisition expenses (note 8) 795,865 808,340 710,838Property and equipment (note 7) 1,598,094 1,696,948 993,282Deferred income taxes 48,000 25,000 50,000

$ 64,561,218 $ 59,598,812 $ 56,291,306

LiabilitiesAccounts payable and accruedliabilities

Income taxes payableUnearned premiums (note 8)Provision for unpaid claims and adjustingexpenses (note 8)

Policyholders' EquityCommitments (note 9)

$ 809,860 $ 1,225,826 $ 697,431144,760

11,488,447 10,565,354 8,816,143

21,363,541 16,139,942 16,508,66633,661,848 28,075,882 26,022,240

30,899,370 31,522,930 30,269,066

See accompanying notes to financial statements.

$ 64,561,218 $ 59,598,812 $ 56,291,306

On behalf of the Board:

A~~AQL¥~

Director

Director

GRENVILLE MUTUAL INSURANCE COMPANYStatements of Comprehensive Income

Year ended December 31, 2011, with comparative figures for 2010

2011 2010

Underwriting income:Premiums writtenIncrease in unearned premiums

Premiums ceded to reinsurerNet premiums earned

Claims incurred:Gross claims and adjusting expenses (note 10)Less reinsurer's share of claims and adjusting expenses

Expenses:CommissionsPremium taxesManagement and administrative salaries and benefits (note 11)Directors fees and travelRisk managementProfessional and consulting feesAdvertisingPostage and telephonePrinting, stationery and office suppliesTraining and meetingsInsuranceLicences and association feesBuilding (note 12)Furniture and office equipment depreciationComputer operations and statistical information (note 13)Bank and payroll service chargesOther

Net underwriting loss

Other income (expenses):Investment income, net of investment expenses (note 14)Community support program donationsGain (loss) on disposal of equipmentImpairment loss on office premisesSettlement of legal claims (note 15)

Income (loss) before income taxes

Income taxes (note 16):Current (recovery)Deferred

Net comprehensive income (loss)

See accompanying notes to financial statements.2

$ 22,893,824 $ 20,764,730(923,093) (1,749,211)

21,970,731 19,015,519(3,920,408) (3,223,570)18,050,323 15,791,949

22,019,344 12,973,929(8,473,224) (2,664,492)13,546,120 10,309,437

4,504,203 5,482,512

4,154,200 4,028,31174,988 68,110

1,135,942 1,076,626158,377 154,74846,406 38,18581,364 36,85384,591 67,30357,499 53,13196,416 80,72348,916 44,93550,137 46,115121,227 116,61779,690 90,51111,242 19,814372,970 261,58942,938 32,03862,167 52,834

6,679,070 6,268,443

(2,174,867) (785,931)

1,531,454 2,678,747(19,095) (12,550)7,030 (6,506)

(119,194)(418,504)

1,400,195 2,241,187

(774,672) 1,455,256

(128,112) 176,392(23,000) 25,000(151,112) 201,392

$ (623,560) $ 1,253,864

GRENVILLE MUTUAL INSURANCE COMPANYStatements of Policyholders' Equity

Year ended December 31,2011, with comparative figures for 2010

Balance, beginning of year

Net comprehensive income (loss)

Balance, end of year

2011

$ 31,522,930

(623,560)

$ 30,899,370

2010

$ 30,269,066

1,253,864

$ 31,522,930

Statements of Cash Flows

Year ended December 31, 2011, with comparative figures for 2010

2011 2010

Cash provided by (used for):

Operations:Net comprehensive income (loss) $ (623,560) $ 1,253,864Items not involving cash:

Depreciation of property and equipment 344,481 245,360Amortization of discounts and premiums onbonds and debentures 49,039 45,624

Loss (gain) on investments 326,694 (894,828)(Gain) loss on disposal of equipment (7,030) 6,506Impairment loss on office premises 119,194Deferred income taxes (23,000) 25,000

185,818 681,526Change in working capital (note 17) (1,467,335) 198,020Change in insurance contract related balances (note 17) 2,472,925 2,314,444

1,191,408 3,193,990

Investments:Additions to property and equipment (374,231 ) (975,713)Proceeds on disposal of equipment 16,440 20,181Purchase of investments (3,147,027) (5,484,324)Proceeds on sale of investments 3,508,067 2,901,125

3,249 (3,538,731)

Increase (decrease) in cash 1,194,657 (344,741)

Cash, beginning of year 918,289 1,263,030

Cash, end of year $ 2,112,946 $ 918,289

See accompanying notes to financial statements.

3

GRENVILLE MUTUAL INSURANCE COMPANYNotes to Financial Statements

Year ended December 31, 2011

The Company is incorporated without share capital under the laws of Ontario as a mutual insurancecompany. The Company is subject to the Insurance Act (Ontario) and is licensed to write all classes ofinsurance other than life and surety in Ontario. The Company is subject to regulation by the FinancialServices Commission of Ontario.

These financial statements have been authorized for issue by the Board of Directors on February 8,2012.

1. Summary of significant accounting policies:

(a) Basis of accounting:

These financial statements have been prepared in accordance with International FinancialReporting Standards (IFRS) as issued by the International Accounting Standards Board (theIASB).

(b) Financial instruments:

The Company classifies its financial instruments into the following categories: held to maturity,fair value through profit or loss, and loans and receivables.

The classification of investments is determined by management at initial recognition anddepends on the purpose for which the investments were acquired. All transactions related tofinancial instruments are recorded on a trade date basis.

(i) Bonds and debentures:

Investments in bonds and debentures are classified as held-to-maturity financial assetsand are carried at amortized cost with premiums and discounts amortized using theeffective interest rate method.

(ii) Marketable common and preferred shares, pooled funds and mutual funds:

Management has designated to voluntarily classify its investments in marketable commonand preferred shares, pooled funds and mutual funds at fair value through profit and loss.These investments are initially recognized at fair value plus transaction costs that aredirectly attributable to their acquisition. Subsequently these investments are carried at fairvalue, unless they do not have a quoted market price in an active market and fair value isnot reliably determinable, then they are carried at cost. Fair values are determined byreference to published price quotations in an active market. Dividend income on commonand preferred shares is accrued on the ex-dividend date. Gains and losses are reflectedin net comprehensive income for the period in which they arise.

4



1. Summary of significant accounting policies (continued):

(iii) Other investments:

The Fire Mutual Guarantee Fund is carried at cost, less provision for permanent decline invalue (where appropriate) as the fair value is not reasonably determinable and there is noactive market for trading this investment.

(iv) Transaction costs:

Transaction costs associated with the acquisition and disposal of investments arecapitalized and are included in the acquisition costs or reduced proceeds on disposal.Investment management fees are expensed as incurred.

(c) Property and equipment:

Property and equipment is initially recorded at cost and subsequently measured at cost lessdepreciation and accumulated impairment losses, with the exception of land which is notdepreciated. Depreciation is recognized in net comprehensive income and is provided usingthe following methods and annual rates:

Asset

Office premisesParking lotBuilding service equipmentFurniture and office equipmentComputer equipment and softwareAutomobiles

Method

Straight-lineStraight-line

Declining balanceDeclining balance

Straight-lineDeclining balance

Rate

21/2%62/3%20%20%

331/3%30%

Amortization methods, useful lives and residual values are reviewed annually and adjusted ifnecessary.

(d) Impairment of non-financial assets:

Property and equipment is subject to impairment tests whenever events or changes incircumstances indicate that their carrying amount may not be recoverable. Where the carryingvalue of an asset exceeds its recoverable amount, which is the higher of value in use and fairvalue less costs to sell, the asset is written down accordingly.

For the purpose of assessing value in use, the estimated future cash flows are discounted totheir present value using a pre-tax discount rate that reflects current market assessments ofthe time value of money and the risks specific to the asset.

5




(e) Insurance contracts:

In accordance with IFRS 4, Insurance Contracts, the Company has continued to apply theaccounting policies it applied in accordance with Canadian generally accepted accountingprinciples ("Canadian GAAP") in effect prior to the adoption of IFRS.

Balances arising from insurance contracts primarily include unearned premiums, provisions forunpaid claims and adjusting expenses, the reinsurer's share of provisions for unpaid claimsand adjusting expenses, deferred policy acquisition expenses, and salvage and subrogationrecoverable.

(i) Premiums and unearned premiums:

Premiums written comprise the premiums on contracts commencing (or renewing) in thefinancial year. Premiums written are stated gross of commissions payable to agents andexclusive of taxes levied on premiums.

Insurance premiums are included in income on a daily pro rata basis over the terms of thepolicies. The portion of the premium related to the unexpired portion of the policy at theend of the fiscal year is reflected in unearned premiums.

(ii) Deferred policy acquisition expenses:

Acquisition expenses related to unearned premiums, which include commiSSions andpremium taxes, are deferred and charged to expense over the periods in which thepremiums are earned. The amount of the deferral is limited to its realizable value by givingconsideration to investment income as well as claims and adjusting expenses expected tobe incurred as the premiums are earned.

(iii) Provision for unpaid claims and adjusting expenses:

The provision for unpaid claims and adjusting expenses represents an estimate for the fullamount of all costs, including investigation and the projected final settlements, of claimsreported and for claims incurred but not reported. These estimates of future loss activityare subject to uncertainty and are selected from a wide range of possible outcomes basedon past experience and business in force. These provisions are adjusted, up or down, asadditional information affecting the estimated amounts becomes known during the courseof claims settlement. All changes in estimates are recorded as incurred claims in thecurrent period.

The Company does not consider the time value of money or actuarially determinedestimates of uncertainty when calculating this provision.

The Company also makes provisions for recovery from subrogation of claims, which arerecorded as reductions in claims and adjusting expenses. These provisions are alsoadjusted, up or down, as additional information affecting the estimated amounts becomesknown during the course of settlement. All changes in estimates are recorded as incurredclaims in the current period.

6




(e) Insurance contracts (continued):

(iv) Liability adequacy test:

At each reporting date the Company performs a liability adequacy test on its insuranceliabilities less deferred policy acquisition expenses to ensure the carrying value isadequate, using current estimates of future cash flows, taking into account the relevantinvestment return. If that assessment shows that the carrying amount of the liabilities isinadequate, any deficiency is recognized as an expense to the statement ofcomprehensive income initially by writing off the deferred policy acquisition expenses andsubsequently by recognizing an additional claims liability for claims provisions.

(v) Reinsurance ceded and reinsurer's share of provisions for unpaid claims and adjustingexpenses:

The Company enters into reinsurance contracts in the normal course of business in orderto limit potential losses arising from certain exposures. Reinsurance premiums ceded arecalculated based on earned premiums. Reinsurance liabilities, comprised of premiumspayable for the purchase of reinsurance contracts, are included in accounts payable andaccrued liabilities and are recognized as an expense when due.

Reinsurance recoveries on unpaid claims and adjusting expenses are recognized asassets at the same time that the Company recognizes the related liabilities.

(vi) Subrogation recoverable:

Where the Company indemnifies policyholders against a liability claim, it acquires rights tosubrogate its claim against other parties. These claims are reflected at amounts expectedto be received from the subrogated parties net of related costs.

(f) Fire Mutuals Guarantee Fund:

The Company is a member of the Fire Mutuals Guarantee Fund. The Fund was established toprovide payment of outstanding policy holders' claims if a member company becomesbankrupt. As a result, the Company may be required to contribute assets to their proportionateshare in meeting this objective.

(g) Income taxes:

Income tax expense comprises of current and future tax and is recognized in net income.

Current income taxes are recognized for the estimated income taxes payable or receivable ontaxable income or loss for the current year and any adjustment to income taxes payable inrespect of previous years. Current income taxes are determined using tax rates and tax lawsthat have been enacted or substantially enacted by the year-end date.

Deferred tax assets and liabilities are recognized where the carrying amount of an asset orliability differs from its tax base.

Recognition of deferred tax assets for unused tax losses, tax credits and deductible temporarydifferences is restricted to those instances where it is probable that future taxable profit will beavailable against which the future tax asset can be utilized. Future tax assets are reviewed ateach reporting date and are reduced to the extent that it is no longer probable that the relatedtax benefit will be realized.

7




(g) Income taxes (continued):

Deferred tax assets and liabilities are measured using enacted or substantially enacted taxrates expected to apply to taxable income in the years in which those temporary differencesare expected to be recovered or settled.

(h) Standards, amendments and interpretations not yet effective:

Certain new standards, amendments and interpretations have been published that aremandatory for the Company's accounting periods beginning on or after January 1, 2012 orlater periods that the Company has decided not to early adopt. The standards, amendmentsand interpretations that will be relevant to the Company are:

(i) IFRS 9 Financial Instruments is part of the lASS's wider project to replace lAS 39'Financial Instruments: Recognition and Measurement'. IFRS 9 retains but simplifies themixed measurement model and establishes two primary measurement categories forfinancial assets, amortized cost and fair value. The basis of classification depends on theentity's business model and the contractual cash flow characteristics of the financial asset.The standard is effective for annual periods beginning on or after January 1, 2013. TheCompany is in the process of evaluating the impact of the new standard.

None of the other new standards, interpretations and amendments, which are effective for theCompany's accounting periods beginning after January 1, 2012 and which have not beenadopted early, are expected to have a material effect on the Company's future financialstatements.

Certain new standards, amendments and interpretations have been published that aremandatory for the Company's accounting periods beginning on or after January 1, 2012 orlater periods that the Company has decided to early adopt. The Company has early adoptedthe amendments to IFRS 1 which replaces references to a fixed date of 'January 1, 2004' withthe 'the date of transition to IFRS. This eliminates the need for the Company to restatederecognition transactions that occurred before the date of transition to IFRS. Theamendment is effective for year ends beginning on or after July 1, 2011, however, theCompany has early adopted the amendment. The impact of the amendment and earlyadoption is that the Company only applies lAS 39 derecognition requirements to transactionsthat occurred after the date of transition.

8



2. First time adoption of international financial reporting standards:

IFRS 1, First Time Adoption of International Financial Reporting Standards, requires thatcomparative financial information be provided. As a result, the first date at which the Companyhas applied IFRS was January 1, 2010 (the "Transition Date"). IFRS 1 requires first-time adoptersto retrospectively apply all effective IFRS standards as of the reporting date, which for theCompany will be December 31, 2011. Therefore, the financial statements for the year endedDecember 31, 2011, the comparative information presented in these financial statements for theyear ended December 31, 2010 and the opening IFRS statement of financial position at January 1,2010 are prepared in accordance with IFRS standards effective at the reporting date. However,IFRS also provides for certain optional exemptions and certain mandatory exceptions for first timeIFRS adopters.

In adopting IFRS, there were no amendments to accounting policies previously applied inaccordance with Canadian GAAP to comply with IFRS that required adjustments to the amountsreported previously in the financial statements prepared in accordance with Canadian GAAP. Thetransition to IFRS had no impact on total operating or financing activities on the statement of cashflows.

The Company has elected the optional exemption regarding insurance contracts and has electedto apply the transitional provisions of IFRS 4, Insurance Contracts. IFRS 4 restricts the changes inaccounting policies for insurance contracts.

Under IFRS 1, the Company's estimates in accordance with IFRS's at the date of transition toIFRS shall be consistent with estimates made for the same date in accordance with previousGAAP, unless there is objective evidence that those estimates were in error. The estimatespreviously made by the Company in accordance with previous GAAP were not revised for theapplication of IFRS.

Under previous Canadian GAAP the Company classified its investments in bonds and debenturesas held-to-maturity, which were carried at amortized cost; and its investments in marketablecommon and preferred shares, pooled funds and mutual funds as held for trading, which werecarried at fair value. The Company maintained the classification of its investments in bonds anddebentures as held-to-maturity. Management designated to voluntarily classify its investments inmarketable common and preferred shares, pooled funds and mutual funds at fair value throughprofit and loss. This designation did not result in a change in how these investments weremeasured and recognized.

9



3. Critical accounting estimates and judgments:

The Company makes estimates and assumptions that affect the reported amounts of assets andliabilities within the next financial year. Estimates and judgments are continually evaluated andbased on historical experience and other factors, including expectations of future events that arebelieved to be reasonable under the circumstances. Actual experience may differ from theseestimates and assumptions.

The estimates and assumptions that have a significant risk of causing material adjustment to thecarrying amounts of assets and liabilities within the next financial year are discussed below.

(a) Provision for unpaid claims:

The estimation of the provision for unpaid claims and the related reinsurer's share are theCompany's most critical accounting estimates. There are several sources of uncertainty thatneed to be considered by the Company in estimating the amount that will ultimately be paid onthese claims. The uncertainty arises because all events affecting the ultimate settlement ofclaims have not taken place and may not take place for some time. Changes in the estimateof the provision can be caused by receipt of additional claim information, changes in judicialinterpretation of contracts, or significant changes in severity or frequency of claims fromhistorical trends. The estimates are based on the Company's historical experience andindustry experience.

(b) Income taxes:

The Company periodically assesses its liabilities and contingencies related to income taxes forall years open to audit based on the latest information available and records its best estimateof the tax liability. Management believes they have adequately provided for the probableoutcome of these matters; however, the final outcome may result in a materially differentoutcome than the amount included in the tax liabilities.

10



4. Financial instrument classification:

The carrying amount of the Company's financial instruments by classification is as follows inthousands of dollars:

Fair valueLoans through Otherand profit Held to financial

receivables and loss maturity liabilities Total

December 31,2011:Cash $ 2,113 $ $ $ $ 2,113Investments 12,750 27,039 39,789Accrued investmentincome 301 301

Premiums uncollected 7,355 7,355Receivable fromemployees 6 6

Accounts payable andaccrued liabilities (810) (810)

$ 9,775 $12,750 $ 27,039 $ (810) $ 48,754

December 31, 2010:Cash $ 918 $ $ $ $ 918Investments 13,509 27,017 40,526Accrued investmentincome 317 317


Accounts payable andaccrued liabilities (1,226) (1,226)

$ 7,985 $ 13,509 $ 27,017 $ (1,226) $ 47,285

January 1, 2010:Cash $ 1,263 $ $ $ $ 1,263Investments 12,032 25,061 37,093Accrued investmentincome 300 300


Accounts payable andaccrued liabilities (697) (697)

$ 7,140 $ 12,032 $ 25,061 $ (697) $ 43,536

11



5. Investments:

The carrying amounts of investments are summarized as follows in thousands of dollars:

December 31 December 31 January 12011 2010 2010

Face Carrying Face Carrying Face Carryingvalue amount value amount value amount

Bonds and debentures, carriedat amortized cost:

Government of Canada $ 2,650 $ 2,681 $ 1,750 $ 1,780 $ 1,000 $1,015Canadian provinces and

Provincial enterprises 7,950 8,047 8,100 8,204 7,850 7,926Canadian municipal and

public authorities 4,645 4,661 5,095 5,117 5,536 5,564Canadian corporate 11,460 11,650 11,710 11,916 10,410 10,556

$26,705 27,039 $26,655 27,017 $24,796 25,061

Marketable securities, carriedat fair market value:

Common shares ofCanadian corporations 3,188 3,595 3,305

Preferred shares ofCanadian corporations 2,780 2,851 2,361

Farm Mutual CanadianFixed Income Pooled Fund 3,281 3,000 2,796

Farm Mutual CanadianEquity Pooled Fund 1,815 2,131 1,837

Canadian equity mutual funds 1,597 1,794 1,592Other pooled investments 47 97 102

12,708 13,468 11,993

Fire Mutual Guarantee Fund 42 41 39

$ 39,789 $ 40,526 $ 37,093

The fair value of bonds and debentures, based on bid prices published in financial newspapers orbid quotations received from securities dealers for those or similar investments, is $29,169,000(December 31, 2010 - $28,282,000 and January 1, 2010 - $26,160,000).

12



5. Investments (continued):

The following table provides an analysis of investments that are measured subsequent to initialrecognition at fair value, grouped into Levels 1 to 3 based on the degree to which the fair value isobservable:

- Level 1 fair value measurements are those derived from quoted prices (unadjusted) in activemarkets for identical assets or liabilities using the last bid price;

- Level 2 fair value measurements are those derived from inputs other than quoted prices includedwithin Level 1 that are observable for the asset or liability, either directly (i.e. as prices) orindirectly (i.e. derived from prices); and

- Level 3 fair value measurements are those derived from valuation techniques that include inputsfor the asset or liability that are not based on observable market date (unobservable inputs).

December 31, 2011EquitiesFarm mutual pooled fundsCanadian equity mutual fundsOther pooled investments

Total

December 31,2010:EquitiesFarm mutual pooled fundsCanadian equity mutual fundsOther pooled investments

Total

January 1, 2010:EquitiesFarm mutual pooled fundsCanadian equity mutual fundsOther pooled investments

Total

Level 1

$ 5,968

$ 5,968

$ 6,446

$ 6,446

$ 5,666

$ 5,666

13

Level 2

$5,0961,597

47

$ 6,740

$5,1311,794

97

$ 7,022

$4,6331,592102

$ 6,327

Level 3

$

$

$

$

$

$

Total

$ 5,9685,0961,597

47

$12,708

$ 6,4465,1311,794

97

$13,468

$ 5,6664,6331,592102

$11,993




Credit risk

The Company is exposed to credit risk resulting from the possibility that other parties may defaulton their financial obligations. The maximum exposure to this risk with respect to investments is thecarrying value of bonds and debentures, the Fixed Income Pooled Fund and the other pooledfunds, as shown above.

The Company's investment policy operates within the guidelines of the Insurance Act. Aninvestment policy is in place and its application is monitored by the Board of Directors through itsConduct Review Committee. Diversification techniques are utilized to minimize risk. The policylimits the investment in anyone corporate issuer to a maximum of 10% of the Company's totalportfolio.

The Company's investment policy permits investment of 70% to 90% of the total portfolio ininvestment grade fixed income investments and up to 25% of the total portfolio in investment gradeCanadian equity investments. The Company's investment policy puts limits on the bond portfolioincluding portfolio composition limits, issuer type limits, bond quality limits and aggregate issuerlimits. The Company limits its holdings in foreign investments to 2% of its total portfolio.

The Farm Mutual Pooled Funds were established to provide investment management for theinvestable assets of farm mutual insurance companies. The eligible assets of the funds must beinvested in Canadian publicly traded securities. The Fixed Income Pooled Fund may have assetsconsisting of government bonds, corporate bonds with a BBB rating or better, Canadian TreasuryBills and preferred shares of corporations whose senior debt is rated A or better.

Other pooled investments represent hedge funds invested to earn dividend and interest incomefrom Canadian financial services companies. The funds will be redeemed in 2014. Based on thefair value of these investments at December 31, 2011, the effective yield rate was 8.6%.

There have been no significant changes from the previous period in the exposure to risk or policiesprocedures and methods used to measure the risk.

Liquidity risk

Liquidity risk is the risk that the Company will not be able to fund its obligations as they come due.The Company's maximum exposure to this risk would be the carrying values as shown on theprevious page.

Market risk

Market risk is the risk that the fair value of investments or future cash flows from investments willfluctuate as a result of market factors. The significant market risks to which the Company isexposed are interest rate price risk and equity risk.

14




Interest rate price risk

The Company's investments in bonds and debentures are held-to-maturity and as such are notexposed to interest rate risk arising from fluctuations in interest rates.

The Company has an investment strategy to maintain a laddered structure of maturities of bondsand debentures to manage interest rate price risk. The laddered strategy helps reduce thesensitivity of the portfolio to the impact of interest rate fluctuations.

Approximately 7% of the bonds and debentures mature within one year, 32% mature after oneyear through five years and 61% mature after five years. Investments in bonds and debenturesare generally held until maturity.

The coupon rates for the Company's bonds and debentures range from 2.65% to 3.75% forGovernment of Canada, from 3.25% to 5.875% for provinces and provincial enterprises, from 4.4%to 7.5% for municipal and public authorities and from 3.7% to 7.8% for corporate. Based on thefair value of these investments at December 31, 2011, effective interest rates were between 2.6%and 6.8%.

At December 31, 2011 a 1% move in interest rates, with all other variables held constant, wouldimpact the fair value of bonds and debentures by $1,494,000 and the value of the pooled bonds by$198,000.

Equity risk

Equity risk is the uncertainty associated wittl the valuation of assets arising from changes in theequity markets.

The Company's portfolio is entirely invested in Canadian stocks with fair values that move with theToronto Stock Exchange Composite Index. A 10% movement in the stock markets with all othervariables held constant would have an estimated affect on the fair values of the Company'scommon shares of $320,000. A 10% move iin the fair value of the Company's preferred shares is$280,000. Realized and unrealized gains and losses are recognized in income during the year.

Shares have no fixed maturity date and are !~enerally not exposed to interest rate risk. Dividendsare generally declared on an annual basis. Based on the fair value of these investments atDecember 31, 2011, effective yield rates ranged from 2.6% to 5.75%.

The Farm Mutual Equity Pooled Fund may have assets consisting of common shares ofcompanies listed on Canadian Stock Exchanges, convertible debentures or convertible preferredshares of eligible common shares, Canadian Treasury Bills, warrants of eligible common shares,exchange traded index funds and income trusts with growing underlying assets.

Based on the fair market value of the Canadian equity mutual funds at December 31, 2011,effective yields ranged from 0% to 7.25%.

15



6. Other financial instruments:

(a) Fair values of financial assets and financial liabilities:

The fair value of financial assets and liabilities, other than investments (note 6) and unpaidclaims and adjusting expenses (note 9), approximate their carrying amounts

(b) Credit risk:

The Company is exposed to credit risk as all of its reinsurance is placed with Farm MutualReinsurance Plan Inc. ("FMRP"), a Canadian registered mutual reinsurer incorporated withoutshare capital, of which the Company is a member. Management monitors the creditworthinessof FMRP by reviewing their annual financial statements and through ongoing communications.Reinsurance treaties are reviewed annually by management prior to renewal of thereinsurance contract. The maximum exposure resulting from this credit risk would be thecarrying amounts of "unpaid claims and adjusting expenses recoverable from reinsurer" asreported on the statement of financial position.

Premiums uncollected include $6,369,676 which is due from policyholders on monthlypayment plans. Almost all of these premiums are unearned as at December 31, 2011 andhave not been included in revenue.

The balance of premiums uncollected napresents amounts receivable from brokers. Brokeraccounts are due, per contract terms, in GOdays. Net premiums due from brokers greater than60 days amount to $42,000. Brokers are required, by regulation, to hold amounts collectedfrom policyholders in trust accounts until the funds are remitted to the insurer.

Due from other insurers and accrued investment income are short-term in nature and are notsubject to material credit risk.

(c) Liquidity risk:

The Company mitigates liquidity risk by monitoring its cash activities and expected outflows.Current liabilities arise as claims are made.

The Company has commitments for construction of a new office facility which are set out innote 9. Management has not finalized its financing plan for this project.

16



7. Property and equipment:

Office premises, Furniture Computer Officebuilding service and equipment Software premisesequipment and office and under under

Land parking lot equipment software development construction Automobiles Total

CostBalance, January 1, 2010 $24,000 $ 986,851 $429,951 $251,368 $ 11,475 $ - $106,843 1,810,488Additions 26,390 31,001 3,484 54,667 784,054 - 76,117 975,713Completion of softwareunder development - - - 444,442 (444,442)

Disposals - - - (29,734) - - (72,683) (102,417)Balance, December 31, 2010 50,390 1,017,852 433,435 720,743 351,087 - 110,277 2,683,784Additions 9,218 - 6,217 17,104 265,377 39,967 36,348 374,231Completion of softwareunder development - - - 290,036 (290,036)

Disposals - - (5,164) (67,995) (32,440) (105,599)- -

Balance, December 31, 2011 $59,608 $1,017,852 $434,488 $959,888 $ 326,428 $ 39,967 $114,185 $2,952,416

Accumulated depreciationBalance, January 1, 2010 $ - $ 339,969 $328,712 $ 87,306 $ - $ - $61,219 $ 817,206Depreciation expense - 55,710 20,596 148,659 - - 20,395 245,360Disposals - - - (29,734) - - (45,996) (75,730)

Balance, December 31,2010 - 395,679 349,308 206,231 - - 35,618 986,836Depreciation expense - 32,988 17,295 270,493 - - 23,705 344,481Impairment loss - 119,194 - - - - - 119,194Disposals - - (3,794) (67,995) - - (24,400) (96,189)

Balance, December 31,2011 $ - $ 547,861 $362,809 $408,729 $ - $ - $ 34,923 $1,354,322

Net book valueJanuary 1, 2010 $24,000 $646,882 $101,239 $164,062 $ 11,475 $ - $ 45,624 $ 993,282

December 31,2010 $50,390 $622,173 $ 84,127 $514,512 $351,087 $ - $74,659 $1,696,948

December 31, 2011 $59,608 $469,992 $ 71,678 $551,159 $326,428 $ 39,967 $79,262 $1,598,094

17



8. Insurance contracts:

(a) The following is a summary of the insurance contract provisions and related reinsuranceassets at December 31:

Gross Re-insurance Net

December 31 , 2011:Provision for unpaid claimsand adjusting expenses:Long settlement term $ 7,064,288 $ 4,468,146 $ 2,596,142Short settlement term 12,132,432 6,860,936 5,271,496Facility Association and otherresidual pools 451,062 4,887 446,175

19,647,782 11,333,969 8,313,813Provisions for claims incurredbut not reported 1,715,759 1,715,759

$ 21,363,541 $ 11,333,969 $10,029,572

December 31,2010:Provision for unpaid claimsand adjusting expenses:Long settlement term $ 6,304,314 $ 3,307,215 $ 2,997,099Short settlement term 7,768,922 4,384,298 3,384,624Facility Association and otherresidual pools 441,706 4,887 436,819

14,514,942 7,696,400 6,818,542Provisions for claims incurredbut not reported 1,625,000 1,625,000

$ 16,139,942 $ 7,696,400 $ 8,443,542

January 1, 2010:Provision for unpaid claimsand adjusting expenses:Long settlement term $ 4,284,615 $ 1,583,646 $ 2,700,969Short settlement term 10,192,965 6,571,499 3,621,466Facility Association and otherresidual pools 406,086 4,887 401,199

14,883,666 8,160,032 6,723,634Provisions for claims incurredbut not reported 1,625,000 180,000 1,445,000

$ 16,508,666 $ 8,340,032 $ 8,168,634

18



8. Insurance contracts (continued):

(b) Nature of unpaid claim and adjusting expenses:

During the year the establishment of the provision for unpaid claims and adjusting expenses isbased on known facts and interpretation of circumstances and is, therefore, a complex anddynamic process influenced by a large variety of factors. These factors include the Company'sexperience with similar cases and historical trends involving claim payment patterns, losspayments, pending levels of unpaid claims, product mix or concentration, claims severity andclaim frequency patterns.

Other factors include the continually evolving and changing regulatory and legal environment,professional experience and expertise of the Company's claims personnel and independentadjusters retained to handle individual claims, the quality of the data used for projectionpurposes, existing claims management practices including claims handling and settlementpractices, the effect of inflationary trends on future claims settlement costs, court decisions,economic conditions and public attitudes. In addition, time can be a critical part of thereserving determination, since the longer the span between the incidence of a loss and thepayment or settlement of the claims, the more variable the ultimate settlement amount can be.

Accordingly, short-tail claims such as property claims tend to be more reasonably predictablethan long-tailed claims, such as liability claims.

Consequently, the establishment of the provision for unpaid claims and adjusting expensesprocess relies on the judgment and opinions of a large number of individuals, on historicalprecedent and trends, on prevailing le9al, economic, social and regulatory trends and onexpectations as to future developments. The process of determining the provisionsnecessarily involves risks that the actual results will deviate, perhaps substantially, from thebest estimates made.

The Company must participate in industry automobile residual pools of business, andrecognizes a share of this business based on its automobile market share. The Companyrecords its share of the liabilities provided by the actuaries of the pools.

19




(c) Changes in claim liabilities recorded in the statements of financial position for the years endedDecember 31, 2011 and 2010 and their impact on claims and adjustment expenses for thesetwo years is as follows:

Gross Re-insurance Net

December 31, 2011:Unpaid claim liabilities, beginningof year, net of subrogation

Increase (decrease) in estimatedlosses and expenses for lossesoccurring in prior years

Provision for losses and expenseson claims occurring in thecurrent year

Payment on claims:Current yearPrior years

Unpaid claims, end of year, netSubrogation

December 31,2010:Unpaid claim liabilities, beginningof year, net of subrogation

Increase (decrease) in estimatedlosses and expenses for lossesoccurring in prior years

Provision for losses and expenseson claims occurring in thecurrent year

Payment on claims:Current yearPrior years

Unpaid claims, end of year, netSubrogation

$ 15,427,937 $ 7,696,400 $ 7,731,537

(1,275,230) 283,760 (1,558,990)

22,613,609 8,189,463 14,424,146

(11,266,245) (2,379,755) (8,886,490)(4,895,186) (2,455,899) (2,439,287)20,604,885 11,333,969 9,270,916

758,656 758,656$ 21,363,541 $ 11,333,969 $10,029,572

$ 15,385,574 $ 8,340,032 $ 7,045,542

(2,926,282) (689,076) (2,237,206)

15,227,851 3,478,077 11,749,774

(7,900,086) (959,540) (6,940,546)(4,359,120) (2,473,093) (1,886,027)15,427,937 7,696,400 7,731,537712,005 712,005

$ 16,139,942 $ 7,696,400 $ 8,443,542

The change in estimate of losses occurring in prior years is due to changes arising from newinformation received.

20




(d) Claim development:

The determination of the provision for unpaid claims and adjustment expenses and the relatedreinsurer's share requires the estimation of two major variables which are the development ofclaims and reinsurance recoveries.

The estimation of claim development involves assessing the future behavior of claims, takinginto consideration the consistency of the Company's claim handling procedures, the amount ofinformation available, the characteristics of the line of business from which the claim arisesand historical delays in reporting claims. In general, the longer the term required for thesettlement of a group of claims, the more variable the estimates. Short settlement term claimsare those which are expected to be substantially paid within a year of being reported.

The tables that follow present the development of claims payments and the estimated ultimatecost of claims for the claim years 200i' to 2011. The upper half of the tables shows thecumulative amounts paid or estimated to be paid during successive years related to each claimyear. The original estimates will be increased or decreased, as more information becomesknown about the original claims and overall claim frequency and severity.

In 2011, the year of adoption of IFRS, only information from periods beginning on or afterJanuary 1, 2007 is required to be disclosed. This disclosure will be increased in eachsucceeding additional year until ten years of information is disclosed.

21




(d) Claim development (continued):

Gross outstanding claims

2007 2008 2009 2010 2011 Total

Gross estimate of cumulative claims cost:At the end of year of claim $ 9,535,082 $ 19,757,482 $ 13,485,949 $ 15,742,661 $ 23,083,455One year later 9,274,921 18,448,323 12,115,164 14,264,328Two years later 9,568,308 18,531,540 12,143,325Three years later 9,560,551 18,326,714Four years later 10,000,442

Current estimate of cumulative claims cost 10,000,442 18,326,714 12,143,325 14,264,328 23,083,455Cumulative payments 9,019,934 14,354,992 11,474,466 12,456,621 11,860,782Outstanding claims 980,508 3,971,722 668,859 1,807,707 11,222,673 $ 18,651,469Outstanding claims 2006 and prior 1 QI:i~.I11R',""''''''_, .. ...,

$ 20,604,885

Net of reinsurance

Net estimate of cumulative claims cost:At the end of year claim $ 7,887,518 $ 11,426,737 $ 11,402,194 $ 12,264,584 $ 14,893,992One year later 7,114,554 10,677,225 10,208,259 10,788,778Two years later 7,243,946 10,825,311 10,232,611Three years later 6,953,859 10,610,489Four years later 7,021,529

Current estimate of cumulative claims cost 7,021,529 10,610,489 10,232,611 10,788,778 14,893,992Cumulative payments 6,742,186 9,611,192 9,691,529 9,413,840 9,481,026Outstanding claims 279,343 999,297 541,082 1,374,938 5,412,966 $ 8,607,626Outstanding claims 2006 and prior 663,290

$ 9,270,916

22




(e) Recoverable subrogation of claims:

The Company has incurred losses on a number of claims related to heating oil spills, whichresulted from actions of third parties. The Company is seeking subrogation of these claimsfrom those third parties, has estimated the amount that will likely be recovered from theseactions and has recorded these amounts as recoverable subrogation. The process ofdetermining the receivable necessarily involves risks that the actual results will deviate,perhaps substantially, from the best estimates made.

(f) Fair value of unpaid claims and adjusting expenses:

It is not practicable to estimate the fair value of unpaid claims and adjusting expenses, grossand recoverable from insurers.

(g) Unearned premiums:

2011 2010

Balance, beginning of year $ 10,565,354 $ 8,816,143Premiums written 22,893,824 20,764,730Premiums earned during the year (21,970,731) (19,015,519)

Balance, end of year $ 11,488,447 $ 10,565,354

(h) Deferred policy acquisition expenses:

2011 2010

Balance, beginning of year $ 808,340 $ 710,838Acquisition costs incurred 4,216,982 4,193,923Expensed during the year (4,229,457) (4,096,421)

Balance, end of year $ 795,865 $ 808,340

Deferred policy acquisition expenses will be recognized as an expense within one year.

9. Commitments:

The Company has the following commitments related to the construction of a new office facility:

(i) commitment for the purchase of land in the amount of $545,000 and

(ii) project management services estimated at $400,000 based on estimated construction costs of$4,400,000.

23



10. Gross claims and adjustment expenses:

Included in gross claims and adjusting expenses are salaries and benefits of $469,022 (2010 _$428,282).

11. Management and administrative salaries alnd benefits:

Underwriter salaries and benefitsAdministrative salaries and benefitsInformation systems salaries and benefitsTravel

2011 2010

$ 564,511 $ 546,931422,888 390,91397,064 96,14851,479 42,634

$ 1,135,942 $ 1,076,626

12. Building:

2011 2010

Property taxes $ 13,295 $ 13,605Insurance 6,047 5,562Utilities 13,975 16,039Repairs and maintenance 24,931 25,520Depreciation 21,442 29,785

$ 79,690 $ 90,511

13. Computer operations and statistical information:

2011 2010

Underwriting statistics $ 24,082 $ 17,138Licenses, fees and dues 137,907 110,237Computer costs 16,226 27,180Depreciation 194,755 107,034

$ 372,970 $ 261,589

24



14. Investment income, net of investment expenses:

Interest from bonds and debenturesAmortization of discounts and premiums on bonds anddebentures

Other interestDividendsReinvested distributions from pooled fundsGain (loss) on investmentsInvestment management costs

2011 2010

$ 1,313,778 $ 1,327,331

(49,039) (45,624)3,281 6,126

296,476 309,383323,930 215,146(326,694) 894,828(30,278) (28,443)

$ 1,531,454 $ 2,678,747

15. Settlement of legal claims:

During the 2010 fiscal year the Company paid $418,504 as part of a settlement of legal actionswhich arose in 2008 and 2009. The actions related to the Company's participation in Farm MutualFinancial Services Inc. The settlement was made without any admission of guilt and released theCompany from any future claims relating to the matter.

16. Income taxes:

(a) Income tax expense:

The Company is subject to income taxes on a portion of its taxable income. That portion isbased on the percentage of gross premium income earned for other than farm related risk,which in 2011 amounted to 65% (2010 - M%).

The income tax provision has been calculated on net income before considering loss fromequity investments and varies from the basic income tax rate as follows, in thousands ofdollars:

Provision for income taxes based on combined basicCanadian federal and provincial incomE! tax rate of28,25% (2010 - 31%)

Increases (decreases) resulting from:Small business deductionProvincial surtaxExempt income from insuring farm propertyAdjustment of prior years' income taxesNon-deductible expensesNon-taxable dividend incomeEffect of applying loss to a prior year whenrates were lower

Provision for income taxes

25

$

$

2011

(219)

7823

(61 )

46

(151)

$

$

2010

453

(40)20

(163)(2)3

(70)

201



16. Income taxes (continued):

(b) Deferred income taxes:

The movement in 2011 of deferred tax liabilities and assets are as follows in thousands ofdollars:

2011

Deferred tax liabilities:Property and equipment

Deferred tax assets:Claims liabilitiesOther

Deferred tax asset

2011 Net deferred tax asset movement

Openingbalance

$ 50

$ 6015

$ 75

$ 25

Recognize in netcomprehensiveincome (loss)

$ (2)

$ 183

$ 21

$ 23

Closingbalance

$ 48

$ 7818

$ 96

$ 48

The movement in 2010 of deferred tax liabilities and assets are:

Recognize in netOpening comprehensive Closing

2010 balance income balance

Deferred tax liabilities:Property and equipment $ 15 $ 35 $ 50

Deferred tax assets:Claims liabilities $ 50 $ 10 $ 60Other 15 15

Deferred tax asset $ 65 $ 10 $ 75

2010 Net deferred tax asset movement $ 50 $ (25) $ 25

26



16. Income taxes (continued):(b) Deferred income taxes (continued):

2011 2010

Deferred tax liabilities:To be settled within 12 months $ 28 $ 2To be settled after more than 12 months 20 48

$ 48 $ 50

Deferred tax assets:To be settled within 12 months $ 47 $ 49To be settled after more than 12 months 49 26

$ 96 $ 75

Net deferred tax asset $ 48 $ 25

17. Supplemental information to statements of cash flows:

2011 2010

Cash provided by (used for):Changes in working capital:

Accrued investment incomePremiums uncollectedIncome taxes recoverableReceivable from employeesRecoverable subrogation of claimsPrepaid expensesAccounts payable and accrued liabilitiesIncome taxes payable

$ 16,026 $ (16,863)(612,425) (1,168,596)(233,689) 308,121

485 (3,244)(46,651 ) 411,087(30,355) (5,640)(415,966) 528,395(144,760) 144,760

$(1,467,335) $ 198,020

Changes in insurance contract related balances:Due from other insurersUnpaid claims and adjusting expenses recoverablefrom reinsurer

Deferred policy acquisition expensesUnearned premiumsProvision for unpaid claims and adjusting expenses

27

$ (48,673)

(3,637,569)12,475923,093

5,223,599

$ 2,472,925

$ 387,827

643,632(97,502)

1,749,211(368,724)

$ 2,314,444



18. Related party transactions:

The Company incurred salaries, employee benefits and director's fees of $644,576 (2010 -$615,703) with respect to management personnel, defined as those persons having authority andresponsibility for planning, directing and controlling the activities of the Company.

19. Capital management:

The Company's objectives with respect to capital management are to maintain a capital base thatis structured to exceed regulatory requirements and to best ,utilize its capital. Reinsurance isutilized to protect capital from catastrophic losses as the frequency and severity of these lossesare inherently unpredictable. The Company's agreements with its reinsurer Farm MutualReinsurance Plan Inc are described in note 10. For the purpose of capital management, theCompany has defined capital as policyholders' equity.

The regulators measure the financial strength of property and casualty insurers using a minimumcapital test (MCT). The regulators generally expect property and casualty companies to complywith the capital adequacy requirements. This test compares a company's capital against the riskprofile of the organization. The risk-based capital adequacy framework assesses the risk ofassets, policy liabilities and other exposures by applying various factors. The regulator indicatesthat the Company should produce a minimum MCT of 150%, The MCT for the Company atDecember 31,2011 was 730% (2010 -760%),

20. Insurance risk management:

The principal risk the Company faces under insurance contracts is that the actual claims andbenefit payments or the timing thereof, differ from expectations. This is influenced by thefrequency of claims, severity of claims, actual benefits paid and subsequent development of long-term claims. Therefore, the objective of the Company is to ensure that sufficient reserves areavailable to cover these liabilities,

The above risk exposure is mitigated by diversification across a large portfolio of insurance. Thevariability of risks is also improved by careful selection and implementation of underwriting strategyguidelines, as well as the use of reinsurance arrangements,

The Company purchases reinsurance as part of its risks mitigation program. Retention limits forthe excess-of-Ioss reinsurance vary by product line.

Amounts recoverable from reinsurer are estiimated in a manner consistent with the outstandingclaims provision and are in accordance with the reinsurance contracts. Although the Company hasreinsurance arrangements, it is not relieved of its direct obligations to its policyholders and thus acredit exposure exists with respect to ceded insurance, to the extent that any reinsurer is unable tomeet its obligations assumed under such reinsurance agreements.

The Company writes insurance primarily over a twelve month duration. The most significant risksarise through high severity, low frequency events such as natural disasters or catastrophes, Aconcentration of risk may arise from insurance contracts issued in a specific geographic locationsince all insurance contracts are written in Ontario.

28



20. Insurance risk management (continued):

The Company manages this risk via its underwriting and reinsurance strategy within on overall riskmanagement framework. Exposures are limited by having documented underwriting limits andcriteria. Pricing of property and liability policies are based on assumptions in regard to trends andpast experience, in an attempt to correctly match policy revenue with exposed risk. Reinsurance ispurchased to mitigate the effect of the potential loss to the Company. Reinsurance is placed withFarm Mutual Reinsurance Plan Inc. (FMRP), a Canadian registered reinsurer.

A summary of reinsurance arrangements and underwriting limits are as follows:

• The Company follows the policy of undHrwriting and reinsuring contracts of insurance whichlimit the retained liability of the Company to a maximum amount, on anyone loss, of $325,000in the event of a property claim and $370,000 in the event of a liability or automobile claim.

• The reinsurance treaties provide stop loss coverage that limits the amount of net losses for ayear to 92% of earned premiums for property policies and 110% for automobile and liabilitypolicies.

• The Company has catastrophe reinsurance which provides coverage for 95% of single eventlosses in excess $750,000.

• The Company participates in a program to provide re-insurance coverage for crop insurance.The maximum retained liability for the Company in anyone year is $450,000. Reinsuranceassumed amounted to $30,779 (2010 - $:35,316).

• The Company is participating as a reinsurer of losses from catastrophe suffered by membersof the Farm Mutual Reinsurance Plan Inc. to the extent of $200,000 for a single catastropheloss. The Company's participation commences if a catastrophe loss exceeds $7.5 million andreaches the limit of $200,000 if the loss is $55 million or greater.

The Company is subject to rate regulation in the automobile business that it writes. Beforeautomobile insurance rates can be changed, a rate filing is prepared as a combined filing for mostOntario farm mutual companies by the Farm Mutual Reinsurance Plan Inc. The rate filing mustinclude actuarial justification for rate increases or decreases. All rate filings are approved ordenied by the Financial Services Commission of Ontario. Rate regulation may affect theautomobile premium revenues that are earned by the Company. The actual impact of rateregulation would depend on the competitive environment at the time.

Automobile premiums are subject to approval by the Financial Services Commission of Ontarioand therefore may result in a delay in adjusting the pricing to exposed risk; in this case theCompany has polices regarding renewal and new business accepted.

The Company is exposed to a pricing risk to the extent that unearned premiums are insufficient tomeet the related future policy costs. Evaluation is performed regularly to estimate future claimscosts, related expenses, and expected profit in relation to unearned premiums. There was nopremium deficiency at December 31, 2011 and 2010.

The risks associated with insurance contracts are complex and subject to a number of variableswhich complicate quantitative sensitivity analysis. The Company's various techniques based onpast claims development experience to quantify these sensitivities. This includes indicators suchas average claim cost, amount of claims occurrence, expected loss ratios and claims developmentas described in Note 8.

29



20. Insurance risk management (continued):

Results of sensitivity testing based on expected loss ratios are as follows, shown gross and net ofreinsurance as impact on pre-tax income:

5% Change in loss ratios

Property Claims2011 2010

Auto Claims2011 2010

Liability Claims2011 2010

Gross claims changeNet claims change

$ 724,370 $ 621,830 $ 266,560 $ 236,600 $ 107,610 $ 92,345$ 621,180 $ 538,555 $ 212,455 $ 188,680 $ 68,885 $ 62,365

30

Documents

Financial Statements of€¦ · unpaid claims and adjusting expenses, the reinsurer's share of provisions for unpaid claims and adjusting expenses, deferred policy acquisition expenses,