Annual Report #3

2008 ANNUAL REPORTTradition MutualInsurance Company

The past year has been one ofchallenges and opportunities.

Tradition Mutual Insurancehas been going through aconversion of a newcomputer system. This hasput added pressure on thestaff and presented somechallenges to ourpolicyholders in the process.

We believe as a board, the new system will providemany benefits in years to come.

Our business has continued to grow at a moderatepace, unfortunately, so have claims. The board hasmade a recent decision to try and improve the claimsside by adding a full time Loss Prevention Officer. Ourboard has continued to be diligent on our strategicplan and will continue to monitor and implement it inthe following year.

I would like to recognize John Hudson for his 25 yearsof service as a director and adjuster. His dedicationand loyalty to the mutual insurance industry will bemissed, but at the same time the board and I wish Johnall the best in his retirement. Job well done John.

At last year’s annual meeting Don Brubacher retiredfrom the board. Don was replaced by John Nyenhuis,a hog farmer who lives just North of our Sebringvilleoffice. It takes some time to learn the ropes as newdirector but John has met the challenge and has beena great contributor in his first year.

Finally, I would like to thank the policyholders fortheir support and patience throughout the computerchangeover. I would also like to convey thanks andappreciation to the staff from the board, for the extraeffort and patience during this implementationprocess. Last but not least to our manager, AlecHarmer for his efforts and enthusiasm during achallenging year.

Your board is here for you to work on your behalf.They have been a great board and gave me strongsupport and guidance as President this past year.

Tradition Mutual Insurance is your company and Iencourage you to support and promote it in thefuture.

Jim WattPresident

President’s Message

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Although some of us are happythat 2008 is behind us, it will beremembered as a year ofchange and challenges. One ofthe largest challenges for uswas a conversion to a newcomputer system. I owe theentire staff my gratitude for thejob they have done to makethis transition occur as

smoothly as it did. A computer conversion thatinvolves over 9,000 policies, hundreds of claims, andthe accounting that ties all of it together, is amonumental task. We thank our loyal policyholdersfor their patience during this year, especially thosethat we gave extra challenges to. Now we have oursystem up and running more smoothly, our team isworking on the efficiencies it can provide for thecompany and ultimately our policyholders.

2008 was the first year I could honestly say being asnowbird looked very appealing. It was cold and thesnow came early and in large volumes. Throw in someshort mild spells with rain and what you end up withis heavy snow piling up on buildings. Tradition wasone of the first companies to add snowload to all thebuildings that qualified for wind coverage. This year, itpaid off for many of our policyholders as we wereable to cover these losses, some that would have beendevastating had there not been insurance. Noteveryone in our communities was fortunate to have acompany, like Tradition, that had the foresight to addthis coverage to all buildings. These types of decisionsare made because we have a policyholder based boardof directors and agents who want to protect theirpolicyholders, even if it means being a little higher inpremium than the competition. Insurance cannot payfor everything, but the more we can say “yes that’scovered”, the better we like it.

We helped a lot of people last year with just over1,000 claims reported. Tradition also made donationsto the Sebringville community center for new lightsaround their baseball diamond, Mitchell Public Libraryfor new office furniture, five scholarship awards at ourlocal high schools and to many other worthwhileevents and organizations. We are more than aninsurance company, we are part of the community.

For those of you who read our financial report, itdoesn’t look good. I mentioned before, we helped a lotof policyholders with claims. Added to that, was thedownturn in the investments that everyone felt in2008. We are confident our quality investments willrebound in future years as the negativity fades and anew positive attitude returns to the economy.Tradition Mutual is over 100 years old and hasweathered the storms of previous economicdownturns. We are a financially strong companybacked by 44 other mutual insurers across Ontario.Wherever you see the “ontario mutuals” logo below,you know it’s another great farm mutual company inour organization.

I hope you have a safe and prosperous 2009.

Alec Harmer, CIP(Chartered Insurance Professional)

Manager

Message from the Manager

Tradition MutualInsurance Company

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NOTICE OF THE 6TH ANNUAL MEETING

The 6th Annual Meeting of the policyholders of Tradition Mutual Insurance Company will be held at the St. Pauls Community Centrein St. Pauls, Ontario on Wednesday, March 4, 2009 at 1:00 pm. The meeting is called to; receive and dispose of the annual reportfor the year ending December 31, 2008, the auditors report, to appoint auditors and authorize the directors to set the auditors’remuneration, to set the remuneration of the directors, and to transact any other business that may properly come before themeeting.

Retiring directors are Doug Ahrens, Robert Kittmer & John Hudson. All directors are eligible for re-election to the board. JohnHudson has indicated he will not be running for re-election to the board. A new director must be elected to fill his position.

Be advised that any eligible policyholder, wishing to run for director, must state his or her intentions in writing to the CorporateSecretary at least five(5) days prior to the annual meeting. Election forms are available at the office during regular business hours.

President Corporate SecretaryJim Watt Irene Van De Walle

Notice of Change to By-laws

The following by-law sections will be amended with the approval of the policyholders:

1. Section 3.17 Executive Committee will be amended as follows:

Where the number of directors on the board is greater than six (6), the President, the Vice-President and one (1) other directordesignated by the Board from time to time shall constitute the Executive Committee of the Board of Directors, and shall meet atthe call of the President to advise and assist the Manager in dealing with emergency business during the intervals betweenmeetings of the Board of Directors, or to dispose of routine business in accordance with the instructions of the directors. Duringthe absence or inability to act of a member of the Executive Committee, another director shall be invited by the Board to act onthe Executive Committee in substitution. A majority of the members of the Executive Committee shall constitute a quorum forthe transaction of business by the Executive Committee. [Corporations Act, s. 70]

The Board shall constitute such other Committees of the Board as may be required from time to time by the Act. Subject to theAct, the terms of reference of such other Committees shall be as determined from time to time by the Board and suchCommittees shall meet at the call of the President of the Corporation or the Chair of the Committees.

2. A new section 2.06 Officer Designations is added as follows:

For the purposes of this Bylaw, references herein to “Manager” shall be deemed to refer to “President” and references herein to“President” and “Vice-President” shall be deemed to refer to “Chair” and “Vice-Chair” respectively.

Explanatory Notes:

In order to comply with certain provisions of Bill 151 (Budget Measures Act), a new section 2.06 was added and section 3.17 isamended to provide:

1. In section 2.06 – that the Manager will now be called the President of the Corporation and the President and Vice-President willnow be called the Chair and Vice-Chair of the Corporation to meet common practice regarding corporate officer titles.

2. In section 3.17, a second paragraph was added to show the board is specifically empowered to create committees of the boardwith specific terms of reference to meet new corporate governance regulations.


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AUDITORS’ REPORT

To the Policyholders ofTradition Mutual Insurance CompanySebringville, Ontario

We have audited the balance sheet of Tradition Mutual Insurance Company as at December 31, 2008 and the statements ofincome, comprehensive income, members’ surplus, accumulated other comprehensive income and cash flows for the year thenended. These financial statements are the responsibility of the company’s management. Our responsibility is to express anopinion on these financial statements based on our audit.

We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we planand perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit alsoincludes assessing the accounting principles used and significant estimates made by management, as well as evaluating theoverall financial statement presentation.

In our opinion, these financial statements present fairly, in all material respects, the financial position of the company as atDecember 31, 2008 and the results of its operations and cash flows for the year then ended in accordance with Canadian generallyaccepted accounting principles.

Stratford, Ontario Famme & Co. LLPFebruary 2, 2009 Chartered Accountants

Licensed Public Accountants

Tradition MutualInsurance Company BALANCE SHEET

as at December 31, 2008

Assets 2008 2007

Cash $ 2,336,167 $ 1,955,867Investments - (Note 1, 2 and 5) 16,306,481 18,015,566Accrued interest receivable 54,958 54,283Mortgage receivable, 6%, $983 monthly,

including principal and interest, due April 30, 2008 --- 90,935Outstanding premiums receivable 3,276,745 2,785,696Due from reinsurer - ceded claims 19,137,683 17,568,772

- other 58,596 223,912Other receivables 369,615 403,161Income taxes receivable --- 48,998Deferred policy acquisition expenses 563,600 535,018Capital assets - net of amortization 898,578 961,111Investment in subsidiary - (Note 6) 104,701 130,943Future income taxes 698,478 212,622Customer lists 106,250 ---

$ 43,911,852 $ 42,986,884

Liabilities

Provision for unpaid claims 27,674,599 25,252,201Unearned premiums 4,982,725 4,708,375Accounts payable and accrued liabilities 710,245 592,092Income taxes payable 23,842 ---

$ 33,391,411 $ 30,552,668

Members’ Surplus 12,135,530 12,330,079

Accumulated Other Comprehensive Income (1,615,089) 104,137

$ 43,911,852 $ 42,986,884

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Tradition MutualInsurance Company STATEMENT OF MEMBERS’ SURPLUS

for the year ended December 31, 2008

Members’ Surplus 2008 2007

Balance – beginning of year $ 12,330,079 $ 11,318,656Net income (loss) for the year per

statement of income (194,549) 1,011,423

Balance – end of year $ 12,135,530 $12,330,079

STATEMENT OF ACCUMULATED OTHER COMPREHENSIVE INCOME


Accumulated Other Comprehensive Income 2008 2007

Balance – beginning of year $ 104,137 $ 0Unrealized (losses) gains on available for sale financial

assets per statement of comprehensive income (1,719,226) 104,137

Balance – end of year $ (1,615,089) $ 104,137

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Tradition MutualInsurance Company STATEMENT OF INCOME


Income 2008 2007

Gross Premiums Written $ 10,708,351 $ 10,043,991Less:

Increase (decrease) in reserve for unearned premiums 270,237 35,717Reinsurance premiums 1,931,180 1,709,278Reinsurance assumed (40,887) (45,919)

2,160,530 1,699,076

Net premium income $ 8,547,821 $ 8,344,915

Claims and Expenses

Gross claims incurred 8,522,053 10,478,434Reinsurance plan recoveries 2,072,158 5,060,247

Net claims incurred 6,449,895 5,418,187Commissions 1,389,160 1,200,753Salaries and directors’ fees 615,641 564,111Benefits and education 312,915 310,180Audit and legal fees 22,176 17,521Travel, convention and meetings 99,253 90,201Corporation premium tax 22,897 21,963Printing supplies 52,140 46,326Office and general 39,290 45,647MVA’s and claim reports 31,566 30,690Telephone and mailing 47,060 34,973Insurance 36,547 31,554Association fees 89,474 88,764Office premises 117,707 125,612Data processing 150,143 264,142Bank charges 10,892 9,622Advertising and promotion 97,304 84,672Loss prevention 54,323 53,467

9,638,383 8,438,384

(1,090,562) (93,469)

Premium deficiency (5,508) 35,268

Underwriting gain (loss) (1,085,054) (128,737)

Other Revenue

Refund from reinsurer --- 11,955Investment income 424,478 1,081,410Other income 6,414 4,396

430,892 1,097,761

(654,162) 969,024

Equity in Net Income (loss) of Subsidiary (26,242) (3,037)

Income (loss) before income taxes (680,404) 965,987Provision for (recovery of ) income taxes - current --- ---

- future (485,855) (45,436)

(485,855) (45,436)

Net income (loss) for the year $ (194,549) $ 1,011,423

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Tradition MutualInsurance Company STATEMENT OF COMPREHENSIVE INCOME


2008 2007

Net income (loss) for the year (per statement of income) $ (194,549) $ 1,011,423

Other Comprehensive Income

Reclassification adjustment for gains (losses) included in income (372,602) 95,341

Unrealized gains (losses) on availablefor sale financial assets, net of income tax (1,346,624) 8,796

(1,719,226) 104,137

Comprehensive income (loss) for the year $ (1,913,775) $ 1,115,560

STATEMENT OF CASH FLOWSfor the year ended December 31, 2008

Cash Provided By (Used In): 2008 2007

Operating ActivitiesNet income (loss) for the year per statement of income $ (194,549) $ 1,011,423Adjustments to convert income to cash basis:

Increase (decrease) in unearned premiums 274,350 34,977Increase (decrease) in unpaid claims and adjustment expense 2,422,398 4,647,991

Increase (decrease) in payables 118,153 (17,301)Increase (decrease) in income taxes payable 23,842 ---Amortization of capital assets 83,684 85,800Amortization of discounts on bonds anddebentures 19,818 422

(Gain) loss on sale of investments 405,984 (95,341)Decrease (increase) in receivables (1,861,098) (4,192,927)Decrease (increase) in deferred policy acquisition expenses (28,582) (90,520)

Decrease (increase) in investment income dueand accrued (675) (1,655)

Decrease (increase) in income tax receivable 48,998 134,393Decrease (increase) in future income taxes (485,856) (45,436)

$ 826,467 $ 1,471,826

Investing ActivitiesProceeds from sale of investments 2,333,853 1,659,318Purchase of investments (2,769,796) (2,965,964)Decrease in investment in subsidiary 26,242 3,037Purchase of capital assets (21,151) (127,356)Purchase of customer lists (106,250) ---Repayment of mortgage receivable 90,935 6,206

(446,167) (1,424,759)

Excess of cash provided over cash applied (cash applied over cash provided) 380,300 47,067

Cash — beginning of year 1,955,867 1,908,800

Cash — end of year $ 2,336,167 $ 1,955,867

Interest paid during the year amounted to $10,892 (2007 - $8,855). Income taxes paid (recovered) during the year amounted to ($45,436) (2007 - ($112,179)).

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Tradition MutualInsurance Company NOTES TO THE FINANCIAL STATEMENTS


1. Accounting Policies

The accounting policies of the company conform with those generally accepted in Canada and comply with the requirements for filingwith the Financial Services Commission of Ontario.

a) InvestmentsThe company classifies its investments as available for sale financial assets. The classification depends on the purpose for whichthe investments were acquired. Management determines the classification of its investments at initial recognition and re evaluatesthis designation at each reporting date.

Available for sale financial assets, comprising principally of marketable equity securities, are investments that are quoted in anactive market but are not actively being traded. All mutual funds and Farm Mutual Pooled funds are classified as available for salebecause Management does not intend to trade these investments for short term profit making. Any increase or decrease in themarket value is shown in the current year on the Statement of Comprehensive Income as Unrealized gains (losses) on available forsale financial assets. The quoted market price was used to determine the fair value of these investments. Certain of theseinvestments are not publicly traded in an active market and as a result, are shown at cost.

b) Investment in SubsidiaryThe investment in the wholly owned subsidiary is accounted for on the equity basis. The company includes in income the earningsand losses of the subsidiary.

c) Premiums Earned and Deferred Policy Acquisition ExpenseInsurance premiums are included in income on a daily prorata basis over the life of the policies. Acquisition expenses related tounearned premiums, which expenses comprise commissions and premium taxes, are deferred and amortized to income over theperiods in which the premiums are earned. The method followed in determining the deferred acquisition expenses limits theamount of the deferral to its realizable value by giving consideration to claims and expenses expected to be incurred as thepremiums are earned.

d) Capital Assets Capital assets are shown at acquisition cost net of accumulated amortization to date as provided for using the declining balancemethod of amortization at the following rates:

Buildings 5%Furniture and office equipment 10%Parade cart 30%

Amortization of computer equipment is calculated using the straight-line method at an annual rate of 33.33%Normal maintenance and repair expenditures are expensed as incurred.

e) Customer ListsCustomer lists purchased are shown at acquisition cost net of accumulated amortization to date as provided for using the straightline method over a three year period.

f ) Provision for Unpaid ClaimsThe provision for unpaid claims represents an estimate for the full amount of all costs and the projected final settlements of claimsincurred prior to the balance sheet date. These estimates of future loss activity are necessarily subject to uncertainty. Theseprovisions are adjusted up or down as additional information affecting the estimated amounts become known during the course ofclaims settlement. All changes in estimates are recorded as incurred claims in the current period.

The company is a mutual insurance corporation and a member of the Fire Mutuals Guarantee Fund. Therefore, under provisions ofthe Ontario Insurance Act, it is exempt from the requirement to use actuarial reports.

g) Income TaxesThe company uses the liability method of accounting for income taxes. Under this method, current income taxes are recognized forthe estimated income taxes payable for the current year. Future income tax assets and liabilities are recognized for temporarydifferences between the tax and accounting bases of assets and liabilities as well as for the benefit of losses available to be carriedforward to future years for tax purposes that are likely to be realized.

h) Revenue RecognitionRevenue is recognized when the requirements for the sale of the goods or services are met and ultimate collection is reasonablyassured.

i) Use of EstimatesPreparation of financial statements in conformity with generally accepted accounting principles requires management to makeestimates and assumptions that could affect amounts reported as assets, liabilities, revenues, and expenses. Due to measurementuncertainty, results could differ from those estimates.

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2. Change in Accounting Policy

On January 1, 2008, the company adopted three new CICA Handbook Sections: Section 1535, Capital Disclosures; Section 3862, FinancialInstruments Disclosures; and Section 3863, Financial Instruments Presentation. Prior year financial statements have not beenrestated.

Section 1535 requires disclosure of the company’s objectives and policies, and processes for managing capital; information about whatthe company regards as capital; whether the company has complied with any external capital requirements; and the consequences ofnot complying with these capital requirements.

Sections 3862 and 3863 replace Handbook Section 3861, Financial Instruments Disclosure and Presentation. Section 3863 carriesforward unchanged the presentation requirements of Section 3861 while Section 3862 requires enhanced financial instrumentdisclosures focusing on disclosures related to the nature and extent of risks arising from financial instruments and how the companymanages those risks.

Since the purpose of these new standards is to enhance disclosure requirements, they do not have a financial impact on the company

3. Future Accounting Change

The Accounting Standards Board has confirmed that all publicly accountable enterprises will have to comply with International FinancialReporting Standards (IFRS) for fiscal years beginning on or after January 1, 2011. Management understands there to be differencesbetween current Canadian GAAP and IFRS, and have undertaken a project to understand the possible future effects on the financialstatements.

4. Capital Assets as at December 31, 2008

Capital assets are stated at cost and consist of the following:Accumulated 2008 Net 2007 Net

Cost Amortization Book Value Book ValueLand $ 89,390 $ -- $ 89,390 $ 89,390Buildings 1,089,036 458,477 630,559 656,894Furniture and fixtures 328,101 212,831 115,270 125,293Computer equipment 207,308 150,991 56,317 79,192Parade cart 12,469 5,427 7,042 10,342

$ 1,726,304 $ 827,726 $ 898,578 $ 961,111

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5. Investments

The company has reported its investments as described in note 1 as follows:

2008 2007

Available for sale, shown at fair value $ 16,306,481 $ 18,015,566

The company carries investments as summarized below:

Cost Market Value Cost Market ValueTerm Deposits $ 410,000 $ 410,000 $ 679,367 $ 679,335Bonds and Debentures

Provincial 2,375,239 2,459,882 1,970,475 1,979,165Municipal 194,592 203,880 294,739 304,651Corporate 2,241,910 2,133,152 2,367,380 2,354,354

$ 4,811,741 $ 4,796,914 $ 4,632,594 $ 4,638,170

Common Shares 2,304,696 1,809,151 2,543,500 2,679,654Mutual Funds 1,472,976 1,233,300 1,500,047 1,454,588Farm Mutual Pooled Funds 8,873,589 8,026,509 8,515,295 8,534,199Fire Mutuals Guarantee Fund 30,607 31,149 29,620 29,268

$ 17,903,609 $ 16,307,023 $ 17,900,423 $ 18,015,214

These investments mature over the following time periods:Within 1 to 3 3 to 5 Over 51 Year Years Years Years

Term Deposits $ 140,000 $ 180,000 $ 90,000 $ ---Bonds and Debentures

Provincial 225,942 358,168 339,721 1,451,408Municipal --- --- 49,977 144,615

Corporate 101,376 595,870 815,066 729,598

$ 467,318 $ 1,134,038 $ 1,294,764 $ 2,325,621

Percent of Total 9% 22% 25% 44%

Common shares, mutual funds, pooled funds and the Fire Mutuals Guarantee Fund have no specific maturities.

6. Investment in Subsidiary

Tradition Mutual Insurance Company owns 100 common shares of Tradition Financial Services Ltd., a wholly owned subsidiary. Theincome earned (loss incurred) by Tradition Financial Services Ltd. is reflected on the financial statements of Tradition Mutual InsuranceCompany as an increase (decrease) in income on the statement of income and an increase (decrease) in the investment in subsidiary onthe balance sheet.

2008 2007

Investments in subsidiary consists of:100 common shares $ 100 $ 100Advance to subsidiary 599,900 599,900Cumulative income earned (loss incurred) by the subsidiary (495,299) (469,057)

$ 104,701 $ 130,943

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7. Provision for Unpaid Claims

The provision for unpaid claims and amounts recoverable from the company’s reinsurer are categorized as follows:

2008 2007

Type of Unpaid Claims Gross Ceded Gross CededProperty $ 2,838,455 $ 1,694,259 $ 755,400 $ 563,413Liability 5,943,578 4,071,033 5,489,297 2,941,441Automobile 18,486,581 13,367,426 18,630,812 14,058,930Greenhouse 4,965 4,965 4,988 4,988Facility Association and risk sharing pool 401,020 --- 371,704 ---

$ 27,674,599 $ 19,137,683 $ 25,252,201 $ 17,568,772

8. Income Taxes

Under subsections 149(1)(t) and 149(4.2) of the Canadian Income Tax Act, the company is exempt from income taxes if it received at least90% of its gross premium income in respect of insurance of farm property or the residences of farmers. If more than 20% of its grosspremium income is from non farm sources, then the non farm percentage of the company’s net income is subject to income tax. If lessthan 20% of its gross premium income is from farm sources, then all of its net income is subject to income tax.

9. Related Party Transaction

During the year, the company entered into transactions with related parties as follows:

The company has advanced an interest free loan to Tradition Financial Services Ltd. (a wholly owned subsidiary) with no specific terms ofrepayment. At December 31, 2008, the balance of this loan was $599,900 (2007 - $599,900.)

10. Reinsurance Ceded

The company follows the policy of underwriting and reinsuring contracts of insurance which, in the main, limit the liability of thecompany to a maximum amount of one claim of $230,000 (2007 - $230,000) in the event of a property claim, $180,000 (2007 - $180,000)in the event of a liability claim, $205,000 (2007 - $200,000) in the event of an automobile claim and $20,000 (2007 - $20,000) in theevent of a farmer’s accident claim. In addition, the company has obtained reinsurance regarding stop loss coverage.

11. Income Taxes

For income tax purposes, the company has losses carried forward from prior years which can be used to reduce future years’ taxableincome. These losses expire as follows:

2009 359,6242014 64,8792026 233,9352027 124,3052028 2,809,824

$ 3,592,567

The potential benefits relating to the available losses have been recorded on the balance sheet as part of future income taxes of$212,622 (2006 - $167,186).

12. Investment in Farm Mutual Financial Services

During the year, Farm Mutual Financial Services Inc. (FMFS) made a voluntary assignment in bankruptcy and was appointed a Trustee inbankruptcy. A lawsuit has been commenced against FMFS. As such, the company has adjusted the common share value of FMFS andthe result is shown as a realized loss on investments on the financial statements.

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13. Financial Instruments

Purchases and sales of financial assets are accounted for at settlement date. Transaction costs are recognized immediately in income.

ASSETS LIABILITIES TOTAL

Held for Available Loans and Other financial Other (assets) trading for sale receivables liabilities and liabilities

Cash $ 2,336,167 $ --- $ --- $ --- $ --- $ 2,336,167Accounts receivable --- --- 22,897,597 --- --- 22,897,597Investments --- 16,306,481 --- --- --- 16,306,481Accounts payable --- --- --- 28,408,686 --- (28,408,686)Net other --- --- --- --- 2,611,118 (2,611,118)

Total $ 2,336,167 $ 16,306,481 $ 22,897,597 $ 28,408,686 $ 2,611,118 $ 10,520,441

14. Pension Plan

The company makes contributions to the Ontario Mutual Insurance Association Pension Plan, which is a multi employer plan, on behalfof 27 members of its staff. The plan is a money purchase plan for all employees with a defined benefit option at retirement for salariedemployees, which specifies the amount of the retirement benefit to be received by the employees based on length of service and rates ofpay. The amount contributed to the plan for 2008 was $71,240 for current service. These payments are included in expenses in thestatement of income.

15. Credit Risk

Credit risk is the risk of financial loss to the company if a debtor fails to make payments of interest and principal when due. Thecompany is exposed to this risk related to its debt holdings in its investment portfolio and the reliance on reinsurers to make paymentwhen certain loss conditions are met.

The company’s investment policy limits bonds, debentures and certificates to those issued by federal, provincial or municipalgovernments (or guaranteed by federal or provincial governments), trust companies and chartered banks. All fixed income portfolios areregularly measured for performance and monitored by management on a quarterly basis. Bonds and debentures issued by Ontariomunicipalities, municipalities of other provinces and chartered banks are each limited to 10% of surplus. The maximum for a guaranteedinvestment certificate is the Canada Deposit Insurance Corporation insurance limit (currently $100,000).

Reinsurance is placed with FMRP, a Canadian registered reinsurer. Management monitors the creditworthiness of FMRP by reviewingtheir annual financial statements and through ongoing communications. Reinsurance treaties are reviewed annually by managementprior to renewal of the reinsurance contract.

Accounts receivable are short term in nature and are not subject to material credit risk.

The maximum exposure to credit risk and concentration of this risk is outlined in Note 5.

There have been no significant changes from the previous period in the exposure to risk or policies, procedures and methods used tomeasure the risk.

16. Market Risk

Market risk is the risk that fair value or future cash flows of a financial instrument will fluctuate as a result of market factors. Marketfactors include three types of risk: currency risk, interest rate risk and equity risk.

The company’s investment policy operates within the guidelines of the Insurance Act. An investment policy is in place and its applicationis monitored by the Board of Directors. Diversification techniques are utilized to minimize risk. The Policy limits the investment inequities to a maximum of 25% of the company’s total assets, and a 10% limit in any one company.

a) Currency risk

Currency risk relates to the company operating in different currencies and converting non Canadian earnings at different points intime at different foreign exchange levels when adverse changes in foreign currency exchange rates occur.

The company’s foreign exchange risk is related to its stock and mutual fund holdings. Foreign currency changes are monitored bymanagement. A 1% change in the value of the United States dollar would affect the fair value of stocks by approximately $1,500which would be reflected in net income or Other Comprehensive Income.

There have been no significant changes from the previous period in the exposure to risk or policies, procedures and methods usedto measure the risk.

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b) Interest rate risk

Interest rate risk is the potential for financial loss caused by fluctuations in fair value or future cash flows of financial instrumentsbecause of changes in market interest rates. The company is exposed to this risk through its interest bearing investments.

Historical data and current information is used to profile the ultimate claims settlement pattern by class of insurance, which is thenused in a broad sense to develop an investment policy and strategy. However, because a significant portion of the company’sassets relate to its capital rather than liabilities, the value of its interest rate based assets exceeds its interest rate based liabilities.As a result, generally, the company’s investment income will move with interest rates over the medium to long term, with short terminterest rate fluctuations creating unrealized gains or losses in Other Comprehensive Income. There are no occurrences whereinterest would be charged on liabilities, therefore little protection is needed to ensure the fair market value of assets will be offsetby a similar change in liabilities due to an interest rate change.

The objective and policies and procedures for managing interest rate risk is to manage the bond portfolio in such a way that thebonds are a portfolio laddered over a period of years. One fifteenth of the bond portfolio would come due each year and bereinvested. This protects the company from fluctuations in the interest rates.

At December 31, 2008, a 1% move in interest rates, with all other variables held constant, could impact the market value of bondsby $600,000. For bonds that the company did not sell during the year, the change during the year and changes prior to the yearwould be recognized as Other Comprehensive Income during the period.


c) Equity risk

Equity risk is the uncertainty associated with the valuation of assets arising from change in equity markets. The company isexposed to this risk through its equity holdings within its investment portfolio.

The company’s portfolio includes Canadian stocks with fair values that move with the Toronto Stock Exchange Composite Index,United States stocks with fair values that move with the S&P 500 Index and international stocks that move with stock exchanges inEurope, Australia and the Far East. A 10% movement in the stock markets with all other variables held constant would have anestimated affect on the fair value of the company’s equity holdings of $843,000. For stocks that the company did not sell during theperiod, the change would be recognized in the asset value and Other Comprehensive Income. For stocks that the company did sellduring the period, the change during the period and changes prior to the period would be recognized as net realized gains inincome during the period.

In accordance with its investment policy, the company limits its holdings in equities to 25% of total assets and a 10% limit in anyone company. Up to 7% of the investment portfolio may be invested in other investments, known as the “basket clause”.


17. Liquidity Risk

Liquidity risk is the risk that the company will not be able to meet all cash outflow obligations as they come due. The company mitigatesthis risk by monitoring cash activities and expected outflows. Current liabilities arise as claims are made. There are no materialliabilities that can be called unexpectedly at the demand of a lender or client. There are no material commitments for capitalexpenditures and there is no need for such expenditures in the normal course of business. Claim payments are funded by currentoperating cash flow including investment income.

There have been no significant changes from the previous period in the exposure to risk or policies, procedures and methods used tomeasure the risk, other than the following :

The administrator of the Farm Mutual Pooled Funds held by the company entered bankruptcy protection during the year. Due to theuncertainty surrounding the bankruptcy, the custodian of these funds has frozen any contributions or withdrawals by the unit holders.The funds continue to be managed according to the investment mandate, but no purchase or sale of the units will be allowed until theuncertainty is resolved.

18. Capital Management

The company’s objectives with respect to capital management are to maintain a capital base that is structured to exceed regulatoryrequirements and to best utilize capital allocations. Reinsurance is utilized to protect capital from catastrophic losses as the frequencyand severity of these losses are inherently unpredictable. To limit their potential impact, stop loss coverage limits the company’sexposure to 92% of the earned property premium. This limits the company’s exposure to approximately $900,000 which represents8.6% of the company’s surplus. For the purpose of capital management, the company has defined capital as policyholders’ equityexcluding accumulated other comprehensive income.

The company measures the financial strength of the company by comparing the gross written premium to the company’s capital. Aguideline ratio of 1.2:1 (premium to surplus) has been adopted by the board. At December 31, 2008 the company’s ratio is at 88:1.

19. Subsequent Event

At the close of business on December 31, 2008, the wholly owned subsidiary, Tradition Financial Services Ltd. was wound up into theparent company, Tradition Mutual Insurance Company.

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DIRECTORS

Joan Schmidt . . . . . . . . . . . . . . . .519-625-8168

Glenn Coulthard . . . . . . . . . . . . .519-393-6653

John Nyenhuis . . . . . . . . . . . . . .519-393-6539

Larry Barker . . . . . . . . . . . . . . . .519-348-0084

Douglas Ahrens . . . . . . . . . . . . .519-393-6813

John Hudson . . . . . . . . . . . . . . . .519-461-1668

Robert Kittmer . . . . . . . . . . . . . .519-349-2416

Jim Watt . . . . . . . . . . . . . . . . . . . .519-284-0066

Jim McCutcheon . . . . . . . . . . . . .519-284-1913

AGENTS

Chris Dietz . . . . . . . . . . . . . . . . . .519-656-2585

Bruce Hanly . . . . . . . . . . . . . . . . .519-229-6560

Kathryn Mallon . . . . . . . . . . . . .519-271-9018

Ian Morrison . . . . . . . . . . . . . . . .519-349-2592

Keith Patterson . . . . . . . . . . . . . .519-348-8391

Laurel Poirier . . . . . . . . . . . . . . .519-348-0482

Robert Ready . . . . . . . . . . . . . . . .519-393-6965

Steve Riehl Sr. . . . . . . . . . . . . . . .519-393-6708

Patricia Riehl . . . . . . . . . . . . . . . .519-393-6708

Steve Riehl Jr. . . . . . . . . . . . . . . .519-393-5990

Jim Stacey . . . . . . . . . . . . . . . . . .519-284-3326

Lloyd Walkom . . . . . . . . . . . . . . .519-348-8050

Patrick McHugh . . . . . . . . . . . . .519-284-1291

BROKERS

F.A. Campbell & Son Ins. Brokers Ltd.– Mitchell . . . . . . . . . . . . . . . . . .519-348-8425

St. Marys Insurance Group– St. Marys . . . . . . . . . . . . . . . . .519-284-3321

OFFICERS

Alec Harmer . . . . . . . . . . . . . . . . . . . .Manager

Irene Van De Walle . . . . . .Secretary-Treasurer

LOCATIONS

Head Office Service Office264 Huron Road, P.O. Box 10 293 Queen Street WestSebringville, Ontario N0K 1X0 St. Marys, OntarioTel: 519-393-6402 Tel: 519-284-3084Toll Free: 1-800-263-1961Fax: 519-393-5185

www.TraditionMutual.com

Annual Report #3

Documents

Transcript of Annual Report #3