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Security and ServiceSince 1908  REPORTSBoard Management Auditor Actuary FINANCIALS Balance Sheet Operations Surplus Cash Flow Notes |
1999 SASKATCHEWAN MUTUAL INSURANCE COMPANY ANNUAL REPORT FINANCIAL NOTES NOTES TO FINANCIAL STATEMENTS Year ended December 31, 1999 Saskatchewan Mutual Insurance Company is a federally registered mutual corporation licensed to write property, automobile, liability, fidelity and boiler and machinery insurance, in the provinces of Saskatchewan, Manitoba, Alberta and British Columbia. The Company is subject to the Insurance Companies Act (the Act) and to regulation by the Office of the Superintendent of Financial Institutions Canada (OSFI) and the Provincial Superintendents of Financial Institutions/Insurance for the provinces in which the Company is licensed. 1. Summary of significant accounting policies: These financial statements have been prepared in accordance with Section 331(4) of the Act which states that, except as otherwise specified by OSFI, the financial statements are to be prepared in accordance with Canadian generally accepted accounting principles. The significant accounting policies adopted by the Company are as follows: a. Use of estimates: The preparation of financial statements in accordance with generally accepted accounting principles, including the requirements of OSFI, requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as at the date of the financial statements. Estimates also affect the reported amounts of income and expenses for the reporting period of the statement of operations. Actual results could differ from those estimates. b. Investments: Investments are carried at cost. A write-down of the carrying value is charged against income when evidence indicates a permanent decline in the underlying value and earning power of an individual investment. Gains and losses on disposal of investments are determined on a completed transaction basis. c. Capital assets: Capital assets are carried at cost less accumulated amortization. Amortization is provided on the following basis:
d. Premium earned and deferred policy acquisition costs: ( i) Premiums and unearned premiums: Insurance premiums are included in income evenly over the term of the insurance policy using the pro rata method. The portion of the premium related to the unexpired portion of the policy at the end of the fiscal year is reflected in unearned premiums. ( ii) Deferred policy acquisition costs: Acquisition expenses related to the unearned premium, including 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 policy acquisition costs limits the amount of the deferrals to a realizable value giving consideration to losses and expenses expected to be incurred as premiums are earned. Consideration is given to anticipated investment income in determining the amount of the deferral. e. Unpaid claims and adjusting expenses: The provision for unpaid claims and adjusting expenses represents an estimate for the full amount of all costs including investigation and the projected final settlements of claims incurred to the balance sheet date. The provision estimations do not take into consideration the time value of money, or make explicit provision for adverse deviation, except for accident benefit claims under automobile insurance policies. These estimates of future loss activity are necessarily subject to uncertainty and are selected from a wide range of possible outcomes. These provisions are adjusted up or down as additional information affecting the estimated amounts becomes known during the course of claims settlement. All changes in estimates are recorded as incurred losses in the current period. f. Reinsurance: The Company reflects reinsurance balances on the balance sheet on a gross basis to indicate the extent of credit risk related to reinsurance and its obligations to policyholders and on a net basis in the statement of operations to indicate the results of its retention of premiums written. Amounts recoverable from reinsurers are estimated in a manner consistent with the related liability. g. Income taxes: Income taxes are accounted for using the deferral method of tax allocation. Under this method, a provision for deferred income tax arises as a result of timing differences between income reported for financial statement purposes and that reported for income tax purposes. The major differences relate to unpaid claims and adjusting expenses, unearned premiums, investments in bonds and shares, amortization of capital assets and the pension plan asset. The deferred income taxes balance is not adjusted to reflect changes in income tax rates.
2. Role of the actuary and auditor: The actuary is appointed by the Board of Directors pursuant to the Insurance Companies Act. The actuary's responsibility is to carry out an annual valuation of the Company's policy liabilities in accordance with accepted actuarial practice and regulatory requirements and report thereon to the policyholders. Examination of supporting data for accuracy and completeness, and analysis of company assets for their ability to support the amount of policy liabilities are important elements of the work required to form this opinion. The actuary, in his verification of the underlying data used in the valuation, also makes use of the work of the external auditor. The actuary's report outlines the scope of his work and opinion. The external auditors have been appointed by the policyholders pursuant to the Insurance Companies Act. Their responsibility is to conduct an independent and objective audit of the financial statements in accordance with generally accepted auditing standards and report thereon to the policyholders. In carrying out their audit, the auditors also make use of the work of the actuary and his report. The auditors' report outlines the scope of their audit and their opinion. 3. Investments:
The estimated fair value of debt securities and common shares is based on quoted market values. Expected transaction costs as at the date of the balance sheet are immaterial and are not deducted in determining estimated fair values. Management has reviewed currently available information regarding those investments whose estimated fair value is less than book value and ascertained that the book values are expected to be recovered and accordingly there were no write-downs or provisions recorded in 1999 or 1998. Liquidity and interest rate risk: (thousands of dollars)
4. Provision for unpaid claims and adjusting expenses: Scope: The establishment of the provision for unpaid claims and adjusting expenses is based on known facts and interpretation of circumstances and is therefore a complex and dynamic process influenced by a large variety of factors. These factors include the Company’s experience with similar cases and historical trends involving claims payment patterns, loss payments, pending levels of unpaid claims, product mix or concentration, claims severity and claim frequency patterns, such as those caused by natural disasters or accidents. Other factors included the continually evolving and changing regulatory and legal environment, actuarial studies, professional experience and expertise of the Company’s claim department’s personnel and independent adjusters retained to handle individual claims, the quality of data used for projection purposes, existing claims management practices, including claims handling and settlement practices, 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 the provision determination, since the longer the span between the incidence of loss and the payment or settlement of the claims, the more variable the ultimate settlement can be. Accordingly, short-tailed claims, such as property claims, tend to be more reasonably predictable than long-tailed claims, such as general liability claims. Consequently, the establishment of the provision for unpaid claims and adjusting expenses process relies on the judgement and opinions of a large number of individuals, on historical precedent and trends, on prevailing legal, economic, social and regulatory trends and on expectations as to future developments. The provision for unpaid claims and adjusting expenses and related reinsurers’ share involves risk that actual amounts could vary materially from estimates in the near term. The table below details the provision for unpaid claims and adjusting expenses by risk categories. (thousands of dollars)
Future investment income: The provision for unpaid claims and adjusting expenses does not take into account the time value of money or make explicit provisions for adverse deviation, except for accident claims under automobile insurance policies, which have been discounted using an interest assumption of 2%. The total accident benefit claims on a discounted basis was $288,000 (net of reinsurance - $259,000) and the undiscounted value is estimated at $505,000 (net of reinsurance - $466,000). Claims and adjusting expenses: Changes in claim liabilities recorded in the balance sheet for the years ended December 31, 1999 and 1998 and their impact on claims and adjusting expenses for the two years follow: (thousands of dollars)
Provision for adverse deviations: Under accepted actuarial practice, the appropriate amount representing future obligations is defined as policy liabilities which take into consideration the time value of money and provisions for adverse deviations (the "PFAD"). As at December 31, 1999, OSFI does not recognize that these actuarially determined liabilities represent the appropriate amount of policy liabilities except with regard to automobile accident benefit claims. The following discussion is based on the evaluation of policy liabilities pertaining to all classes of business valued under accepted actuarial practice. The basic assumptions made in establishing actuarial liabilities are best estimates of possible outcomes. To recognize the uncertainty in establishing these best estimates, to allow for possible deterioration in experience, and to provide greater comfort that the actuarial liabilities are adequate to pay future benefits, actuaries are required to include margins in some assumptions. A range of allowable margins is prescribed by the Canadian Institute of Actuaries relating to claim development, reinsurance recoveries and investment income variables. The impact of the margins is referred to as the PFAD. The following table details the amounts: (thousands of dollars)
Estimated fair value: The estimated fair value of these assets and liabilities as outlined in the provision for adverse deviations section above could be affected by variations in market rates of return from the book rates assumed and variations in the selection of allowable margins from those utilized in determining the amounts reflected as fair values. 5. Underwriting policy and reinsurance ceded: The Company follows the policy of underwriting and reinsuring contracts of insurance which limited the liability of the Company in 1999 to a maximum amount of $190,000 ($475,000 for catastrophe losses) in respect of single loss or series of losses arising out of a single occurrence. In 1999, the reinsurance had an upper limit of $11,100,000 ($10,000,000 for catastrophe losses). Reinsurance ceded does not relieve the Company of primary liability as the originating insurer. The following table sets out the impact of reinsurance ceded on the claims and adjusting expenses: (thousands of dollars)
The Company has guidelines and a review process in place to ascertain the credit worthiness of the companies to which it cedes. The Company places all of its reinsurance with companies registered with OSFI. There were no write-offs in 1999 or 1998. No information has come to the Company’s attention indicating weakness or failure of any of its current reinsurers, so no provision has been made in the accounts for doubtful collection. 6. Reserves required by the Office of the Superintendent of Financial Institutions Canada: These reserves represent appropriations of earned surplus in respect of assets not admitted, investment valuations, and other statutory requirements. These appropriations are not recognized as part of statutory capital and surplus. 7. Income taxes: Income tax expense, including both the current and future portions, varies from the amounts that would be computed by applying the statutory federal and provincial tax rates aggregating 45.3% (1998 – 45.3%) to income before taxes. Income taxes have been computed as follows: (thousands of dollars)
8. Contributory defined benefit pension plan: Terms and conditions: The Company operates a defined benefit pension plan covering substantially all employees which provides pension benefits based on length of service and final pensionable earnings. Pension estimates: Pension obligations are estimated by an actuary based on management’s best estimate of the long-term rate of return on the pension asset portfolio, long-term salary escalation rates and long-term interest rates. Variances between such estimates and actual experience are amortized over the average remaining service lives of the employees. The most recent actuarial valuation was completed January 1, 1997 and the accrued pension obligation has been extrapolated from that date. Risks: Pension assets consist of units in a balanced fund. The Company bears the risk of experience loss against the actuarial assumptions and credit risk associated with the pension asset portfolio. Credit risk is managed through the pension plan investment policy which governs the types of investments that can be utilized in the pension plan. Plan assets and obiligations: (thousands of dollars)
9. Fair values: The fair value of financial assets and liabilities, other than investments (note 3) and unpaid claims and adjusting expenses (note 4) approximate their carrying amounts due to the short-term maturity of these financial instruments. 10. 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. Although the change in date has occurred, it is not possible to conclude that all aspects of the Year 2000 issue that may affect the entity, including those related to customers, suppliers, or other third parties, will have been fully resolved.     Top of Page || Reports || Financials || Notes |
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