Townsend Farmers' Mutual Fire Insurance Co.

Townsend Farmers' Mutual Fire Insurance Co.Financial Statements

December 31, 2014

Townsend Farmers' Mutual Fire Insurance Co.Index to Financial Statements

December 31, 2014

Page

MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING 1

INDEPENDENT AUDITORS' REPORT 2

FINANCIAL STATEMENTS

Statement of Financial Position 3

Statement of Surplus 4

Statement of Income 5

Schedule of General Expenses 6

Statement of Cash Flow 7

Notes to Financial Statements 8 - 30

INDEPENDENT AUDITORS' REPORT

To the Members of Townsend Farmers' Mutual Fire Insurance Co.

We have audited the accompanying financial statements of Townsend Farmers' Mutual Fire InsuranceCo., which comprise the statement of financial position as at December 31, 2014 and the statements ofincome, surplus and cash flow for the year then ended, and a summary of significant accounting policiesand 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 free frommaterial misstatement, whether due to fraud or error.

Auditors' ResponsibilityOur responsibility is to express an opinion on these financial statements based on our audit. Weconducted our audit 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 from material misstatement.An audit involves performing procedures to obtain audit evidence about the amounts and disclosures inthe financial statements. The procedures selected depend on the auditors' 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 that areappropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness ofthe entity's internal control. An audit also includes evaluating the appropriateness of accounting policiesused and the reasonableness of accounting estimates made by management, as well as evaluating theoverall presentation of the financial statements.We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis forour audit opinion.

OpinionIn our opinion, the financial statements present fairly, in all material respects, the financial position ofTownsend Farmers' Mutual Fire Insurance Co. as at December 31, 2014 and its financial performanceand its cash flow for the year then ended in accordance with International Financial Reporting Standards.

February 17, 2015 Chartered Professional AccountantsSimcoe, Ontario Licensed Public Accountants

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Townsend Farmers' Mutual Fire Insurance Co.Statement of Surplus

Year ended December 31, 2014

2014 2013

Balance - beginning of year $ 9,668,517 $ 8,891,881

Net income for the year 310,550 776,636

BALANCE - END OF YEAR $ 9,979,067 $ 9,668,517

See accompanying notes4

Townsend Farmers' Mutual Fire Insurance Co.Statement of Income


2014 2013

UNDERWRITING OPERATIONSGross premiums written $ 7,776,771 $ 7,406,559Deduct: Reinsurance ceded (1,513,936) (1,705,464)

Net premiums written 6,262,835 5,701,095

Deduct: Increase in unearned premiums (195,779) (262,006)

Net premium earned 6,067,056 5,439,089

Service chargesService charges 111,168 102,684Other 13,626 18,773

124,794 121,457

Total underwriting revenue 6,191,850 5,560,546

Direct losses incurredGross claims and adjustment expenses 5,058,967 1,860,651Reinsurer's share of claims and adjustment expenses (794,968) 1,358,482

4,263,999 3,219,133

ExpensesFees, commissions and other acquisition expenses (Note 15) 1,039,224 772,312General expenses (see schedule on page 6) 1,523,169 1,505,536Premium deficiency adjustments (2,059) (27,572)

2,560,334 2,250,276

Underwriting income (loss) (632,483) 91,137

Investment income (Note 16) 985,686 847,188

Income before income taxes 353,203 938,325

Income taxes (Note 17)Current 56,156 107,533Deferred (13,503) 54,156

42,653 161,689

NET INCOME FOR THE YEAR $ 310,550 $ 776,636


Townsend Farmers' Mutual Fire Insurance Co.Schedule of General ExpensesYear Ended December 31, 2014

2014 2013

Advertising $ 41,406 $ 33,599Association fees 43,023 38,268Bad debts 6,400 8,844Bank charges and interest 25,718 25,356Computer 191,129 158,284Contracted services 2,985 16,019Directors fees 53,142 59,350Donations 31,707 20,728Inspections and investigations 46,510 39,935Insurance 47,304 51,751Loss prevention rebates and supplies 1,072 1,702Occupancy cost 159,102 163,801Other 18,679 18,742Pension deficit contribution (Note 18) - 107,860Postage 29,567 20,299Premium tax 15,710 14,370Printing and stationery 30,892 38,546Professional fees 104,268 86,376Salaries and benefits 531,031 452,429Seminars, conventions and meetings 55,164 62,705Statistics and reports 23,097 25,376Telephone 13,832 13,135Vehicle and travel 51,431 48,061

$ 1,523,169 $ 1,505,536


Townsend Farmers' Mutual Fire Insurance Co.Statement of Cash Flow


2014 2013

OPERATING ACTIVITIESNet income for the year $ 310,550 $ 776,636Items not affecting cash:

Amortization of property and equipment 51,059 50,203Amortization on bond discount and premiums - 32,640Deferred income taxes (13,503) 54,156Realized gain on sale of investments (103,851) (39,595)Unrealized gain on investments (438,364) (470,210)

(194,109) 403,830

Changes in non-cash working capital:Accrued investment income (7,781) (1,501)Due from policyholders (211,041) (235,050)Due from reinsurer (21,220) 1,058,234Reinsurers' share of unearned premiums 1,634 1,612Prepaid expenses 25 480Deferred policy acquisition costs (42,739) (217,814)Reinsurers' share of provision for unpaid claims (323,807) 2,526,047Accounts payable 27,765 29,670Due to other insurance companies 35,393 (524,554)Income taxes payable (81,216) (33,951)Amounts due to Facility Association (896) (1,739)Unearned premiums 194,145 260,331Unearned commission revenue (108) (4,749)Provision for unpaid claims and adjustment expenses 1,209,367 (1,988,961)

779,521 868,055

Cash flow from operating activities 585,412 1,271,885

INVESTING ACTIVITIESPurchase of property and equipment (35,738) (774,944)Purchase of investments (3,597,153) (23,131,646)Proceeds on disposition of investments 3,344,103 22,466,959

Cash flow used by investing activities (288,788) (1,439,631)

INCREASE (DECREASE) IN CASH 296,624 (167,746)

Cash - beginning of year 636,865 804,611

CASH - END OF YEAR $ 933,489 $ 636,865


Townsend Farmers' Mutual Fire Insurance Co.Notes to Financial StatementsYear ended December 31, 2014

1. NATURE OF BUSINESS

Townsend farmers' Mutual Fire Insurance Co. is a mutual insurance company and is owned by themember policyholders. The Company was incorporated in 1879 under the laws of Ontario and issubject to the Insurance Act of Ontario. It is licensed to write property, liability, automobile, hail,boiler and machinery and certain types of fidelity and accident and sickness insurance in Ontario.The Company is located in Waterford, Ontario.

The Company is subject to rate regulation in the automobile business it writes. Before automobileinsurance rates can be changed, a rate filing is prepared as a combined filing for most Ontario farmmutual insurance companies by the Ontario Mutuals Auto Rate Filing Committee. The rate filingmust include actuarial justification for rate increases or decreases. All rate filings are approved ordenied by the Financial Services Commission of Ontario. Rate regulation may affect the automobilerevenues that are earned by the Company. The actual impact of rate regulation would depend onthe competitive environment at that time.

These financial statements have been authorized for issue by the Board of Directors on February 17,2015.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

These financial statements have been prepared in accordance with International Financial ReportingStandards (IFRS).

These financial statements were prepared on a historical cost basis except for those financial assetsthat have been measured at fair value. The Company's functional and presentation currency is theCanadian dollar. The financial statements are presented in Canadian dollars.

Insurance contracts

In accordance with IFRS 4, Insurance Contracts, the Company has continued to apply theaccounting policies it applied in accordance with pre-changeover Canadian GAAP. Balances arisingfrom insurance contracts primarily include unearned premiums, provisions for unpaid claims andadjustment expenses, the reinsurers' share of unpaid claims and adjustment expenses, deferredpolicy acquisition expenses, and salvage and subrogation recoverable.

Premiums and unearned premiumsThe Company earns premium income over the term of the insurance policy on a pro rata basis. Theportion of the premium related to the unexpired portion of the policy at the end of the fiscal year isreflected in unearned premiums. Premiums receivable are recorded at amounts due less anyrequired provision of doubtful amounts.

Reinsurers' share of unearned premiumsThe reinsurers' share of unearned premiums are recognized as an asset using principles consistentwith the Company's method for determining the unearned premium liability.

(continues)

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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Deferred policy acquisition costsAcquisition costs are comprised of agents' commissions, premium taxes, and other expenses whichrelate directly to the acquisition of premiums, including salaries for underwriting personnel andinspection fees. These costs are deferred and amortized over the terms of the related policies to theextent that they are considered to be recoverable from unearned premiums, after considering therelated anticipated claims and expenses and investment income.

Provision for unpaid claims and adjustment expensesIndividual loss estimates are provided on each claim reported. In addition, provisions are made foradjustment expenses, changes in reported claims and for claims incurred but not reported, based onpast experience and business in force. The estimates are regularly reviewed and updated, and anyresulting adjustments are included in current income. Claim liabilities are carried on anundiscounted basis.

Liability adequacy testAt each reporting date the Company performs a liability adequacy test on its insurance liabilities lessdeferred policy acquisition expenses to ensure the carrying value is adequate, using currentestimates of future cash flows, taking into account the relevant investment return. If that assessmentshows that the carrying amount of the liabilities is inadequate, any deficiency is recognized as anexpense to the statement of comprehensive income initially by writing off the deferred policyacquisition expense and subsequently by recognizing an additional claims liability for claimsprovisions.

Reinsurers' share of provision for unpaid claims for adjustment expensesIncurred reinsurance recoveries are recorded as reductions of the claims incurred accounts.Expected reinsurance recoveries on unpaid claims and adjustment expenses are recognized asassets at the same time and using principles consistent with the Company's method for establishingthe related liability. A contingent liability exists with respect to reinsurance ceded which couldbecome a liability of the Company in the event that the reinsurer might be unable to meet itsobligations under the reinsurance agreements.

Property and equipment

Property and equipment is initially recorded at cost and subsequently measured at cost lessaccumulated amortization and accumulated impairment losses. Amortization is recognized in netincome and is provided on a straight-line basis over the estimated useful life of the assets as follows:

Leasehold improvements 10 yearsOffice equipment 10 yearsComputer equipment 5 yearsMotor vehicles 5 years

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

(continues)

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Fire Mutuals Guarantee Fund

The Company is a member of the Fire Mutuals Guarantee Fund ("the Fund"). The Fund wasestablished to provide payment of outstanding policyholders' claims if a member company becamebankrupt. As a result, the Company may be required to contribute assets to their proportionate sharein meeting this objective.

Income taxes

Income tax expense comprises of current and deferred tax. Current and deferred tax are recognizedin net income except to the extent that it relates to a business combination, or items recognizeddirectly in equity or in other comprehensive 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 in respect ofprevious years. Current income taxes are determined using tax rates and tax laws that have beenenacted or substantively enacted by the year-end date.

Deferred tax assets and liabilities are recognized where the carrying amount of an asset or liabilitydiffers from its tax base, except for taxable temporary differences arising on the initial recognition ofgoodwill and temporary differences arising on the initial recognition of an asset or liability in atransaction which is not a business combination and at the time of the transaction affects neitheraccounting or taxable profit or loss.

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

The amount of the deferred tax asset or liability is measured at the amount expected to be recoveredfrom or paid to the taxation authorities. This amount is determined using tax rates and tax laws thathave been enacted or substantively enacted by the year-end date and are expected to apply whenliabilities/(assets) are settled/(recovered).

(continues)

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Financial instruments

The Company classifies its financial instruments into one of the following categories based on thecharacteristics of the financial instruments and management's choices and intentions. Alltransactions related to financial instruments are recorded on a trade date basis. The Company'saccounting policy for each category is as follows:

Financial assets at fair value through profit or lossA financial asset is classified at fair value through profit or loss if it is classified as held-for-trading oris designated as such upon initial recognition. Financial assets are designated as fair value throughprofit or loss of the Company manages such investments and makes purchases and sale decisionsbased on their fair value in accordance with the Company's documented risk management orinvestment strategy. Upon initial recognition, attributable transaction costs are recognized in profit orloss as incurred. Financial assets at fair value through profit or loss are measured at fair value, andchanges therein are recognized in profit or loss.

Loans and receivablesThese comprise of amounts due from policyholders, reinsurers', facility association andmiscellaneous receivables. These assets are non-derivative financial assets resulting from thedelivery of cash or other assets by a lender to a borrower in return for a promise to repay on aspecified date or dates, or on demand. They are initially recognized at fair value plus transactioncosts that are directly attributable to their acquisition or issue and subsequently carried at amortizedcost, less any impairment losses. Impairments are recognized when there is objective evidence thatthe Company will be unable to collect all of the amounts due under the terms receivable. Onconfirmation that the amounts receivable will not be collectable, the gross carrying value of the assetis written off and the loss is recognized in net income.

Other financial liabilitiesOther financial liabilities include all financial liabilities and comprise of accounts payable andamounts due to other insurance companies. These liabilities are initially recognized at fair value netof any transaction costs directly attributable to the issuance of the instrument and subsequentlycarried at amortized cost.

(continues)

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Standards, amendments and interpretations not yet effective

There are no new standards, interpretations and amendments, effective for the first time fromJanuary 1, 2014 that have had a material effect on the financial statements.

Certain new standards, amendments and interpretations have been published that are mandatory forthe Company's accounting periods beginning on or after January 1, 2015 or later periods that theCompany has decided not to early adopt. The standards, amendments and interpretations that maybe relevant to the Company are:

IFRS 9 Financial Instruments is part of the IASB's wider project to replace IAS 39 'FinancialInstruments: Recognition and Measurement'. IFRS 9 retains but simplifies the mixedmeasurement model and establishes two primary measurement categories for financial assets,amortized cost and fair value. The basis of classification depends on the entity's business modeland the contractual cash flow characteristics of the financial asset. The standard is effective forannual periods beginning on or after January 1, 2018. The Company is in the process ofevaluating the impact of the new standard.

IAS 1 Presentation of Financial Statements is part of a major initiative to improve disclosurerequirements in IFRS financial statements. The amendments clarify the application of materialityto note disclosure and the presentation of line items in the primary statements provide options onthe ordering of financial statements and guidance on the presentation of other comprehensiveincome related to equity accounted investments. The effective date for these amendments isJanuary 1, 2016. The Company is in the process of evaluating the impact of these amendments.

IFRS 15 Revenue from Contracts with Customers is based on the core principles to recognizerevenue to depict the transfer of goods or services to customers in an amount that reflects theconsideration to which the entity expects to be entitled in exchange for those goods or services.IFRS 15 focuses on the transfer of control. IFRS 15 replaces all of the revenue guidance thatpreviously existed in IFRSs. The effective date for IFRS 15 is January 1, 2017. The Company isin the process of evaluating the impact of the new standard.

None of the new standards, interpretations and amendments, which are effective for the Company'saccounting periods beginning after January 1, 2015 and which have not been adopted early, areexpected to have a material effect on the Company's future financial statements.

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3. ACCOUNTING ESTIMATES AND JUDGMENTS

The Company makes estimates and assumptions about the future that affect the reported amountsof assets and other liabilities. Estimates and judgments are continually evaluated and based onhistorical experience and other factors, including expectations of future events that are believed tobe reasonable under the circumstances. In the future, actual experience may differ from theseestimates and assumptions.

The effect of a change in an accounting estimated is recognized prospectively by including it inincome in the period of the change, if the change affects that period only; or in the period of thechange and future periods, if the change affects both.

See notes 13 and 14 Provision for Unpaid Claims and Adjustment Expenses and InsuranceContracts for estimates and assumptions that have a significant risk of causing material adjustmentto the carrying amounts of assets and liabilities within the next financial year.

4. INVESTMENTS

The book and fair values of investments at December 31 are shown as follows:

Book Value Fair Value Book Value Fair Value

Held-for-TradingBonds issued by:

Federal 231,206 231,206 1,203,898 1,203,898Provincial 4,020,314 4,020,314 3,895,250 3,895,250Corporate 4,878,206 4,878,206 3,925,746 3,925,746

9,129,726 9,129,726 9,024,894 9,024,894

Equity InvestmentsCommon shares 3,769,830 3,769,830 3,031,511 3,031,511Preferred shares 10,221 10,221 10,221 10,221Equity pooled funds 555,920 555,920 603,805 603,805

4,335,971 4,335,971 3,645,537 3,645,537

Total investments 13,465,697 13,465,697 12,670,431 12,670,431

The maximum exposure to credit risk would be the fair value as shown above.

$ $2014 2013

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5. DUE FROM REINSURER

The continuity of amounts due from reinsurer are as follows:

2014 2013$ $

Balance, beginning of year 57,608 1,115,842Submitted to reinsurer 494,503 1,167,565Received from reinsurer (473,283) (2,225,799

Balance, end of year 78,828 57,608

At year-end, the Company reviewed the amounts owing from its reinsurer and determined that noallowance is necessary. All amounts are expected to be received within one year.

6. REINSURERS' SHARE OF UNEARNED PREMIUMS

The continuity of reinsurers' share of unearned premiums are as follows:

2014 2013$ $

Balance, beginning of year 33,566 35,178Submitted to reinsurer 1,512,302 1,703,852Premiums earned during the year (1,513,936) (1,705,464


7. DEFERRED POLICY ACQUISITION COSTS

The continuity of deferred policy acquisition costs are as follows:

2014 2013$ $

Balance, beginning of year 557,655 339,841Acquisition costs incurred 1,142,502 952,712Expensed during the year (1,099,763) (734,898)


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

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8. DEFERRED INCOME TAXES

The movement in 2014 deferred tax assets are:

Opening Closingbalance at Recognized in balance atJan 1, 2014 net income Dec 31, 2014

$ $ $

Deferred tax assetsProperty and equipment 9,504 2,496 12,000Claims liabilities 41,993 11,007 53,000

51,497 13,503 65,000

The movement in 2013 deferred tax assets are:

Opening Closingbalance at Recognized in balance atJan 1, 2013 net income Dec 31, 201

$ $ $

Deferred tax assetsProperty and equipment 6,784 2,720 9,504Losses carried forward 72,318 (72,318) -Claims liabilities 26,551 15,442 41,993

105,653 (54,156) 51,497

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9. PROPERTY AND EQUIPMENT

Leasehold Office Computer MotorLand Building Improvements Equipment Equipment Vehicles Total

Cost $ $ $ $ $ $ $Balance on December 31, 2013 180,000 580,691 239,948 101,534 119,908 40,932 1,263,013

Additions - 12,395 - 2,520 6,834 13,989 35,738Disposals - - - - - - -

Balance on December 31, 2014 180,000 593,086 239,948 104,054 126,742 54,921 1,298,751

Accumulated amortizationBalance on December 31, 2013 - - 172,018 76,896 96,000 16,372 361,286

Amortization expense - - 22,211 6,710 11,153 10,985 51,059Disposals - - - - - - -

Balance on December 31, 2014 - - 194,229 83,606 107,153 27,357 412,345

Net book value

December 31, 2013 180,000 580,691 67,930 24,638 23,908 24,560 901,727

December 31, 2014 180,000 593,086 45,719 20,448 19,589 27,564 886,406

During 2013 the Company purchased a property for future use. Currently the building is vacant and management hasno intention to occupy until the lease for the current office location expires in 2016. As such no depreciation was takenon the building until it is operating as intended.

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10. REINSURERS' SHARE OF PROVISION FOR UNPAID CLAIMSThe continuity of reinsurers' share of provision for unpaid claims are as follows:

2014 2013$ $

Balance, beginning of year 3,093,829 5,619,876New claims reserve 1,291,049 399,361Change in prior years reserve (1,461,745) (4,092,973Submitted to reinsurer 494,503 1,167,565

Balance, end of year 3,417,636 3,093,829

Expected settlementWithin one year 752,649 681,339More than one year 2,664,987 2,412,490

3,417,636 3,093,829

11. UNEARNED PREMIUMSThe continuity of unearned premiums are as follows: 2014 2013

$ $

Balance, beginning of year 3,672,571 3,412,240

Premiums written 7,776,771 7,406,559Premiums earned during year (7,582,626) (7,146,228)

Increase in reserve for unearned premiums 194,145 260,331


12. UNEARNED COMMISSION REVENUEThe continuity of unearned commission revenue is as follows: 2014 2013

$ $

Balance, beginning of year 29,984 34,733

Received from reinsurer and pools 60,431 55,756Commissions earned during year (60,539) (60,505)

Increase in reserve for unearned commission revenue (108) (4,749)


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13. PROVISION FOR UNPAID CLAIMS AND ADJUSTMENT EXPENSES

Changes in claim liabilities recorded in the statement of financial position for the years endedDecember 31, 2014 and 2013 and their impact on claims and adjustment expenses are as follows:

2014 2013$ $

Balance, beginning of year 6,320,766 8,309,727New claims reserve 5,779,425 4,133,739Change in prior years' reserve (720,585) (2,273,089)Paid claims

Current year (2,350,632) (2,036,760)Prior year (1,498,841) (1,812,851)

Balance, end of year, gross 7,530,133 6,320,766

Reinsurers' share of provision for unpaid claims (3,417,636) (3,093,829)


Expected settlementWithin one year 2,327,150 1,953,402More than one year 5,202,983 4,367,364

7,530,133 6,320,766

The determination of the provision for unpaid claims and adjustment expenses and the relatedreinsurers' share requires the estimation of reinsurance recoveries and future development ofclaims. The provision for unpaid claims and adjustment expenses and related reinsurers' share areestimates subject to variability, and the variability could be material in the near term. The variabilityarises because all events affecting the ultimate settlement of claims have not taken place and maynot take place for some time. Variability can be caused by receipt of additional claim information,changes in judicial interpretation of contracts, or significant changes in severity or frequency ofclaims from historical trends. The estimates are principally based on the Company's historicalexperience. Methods of estimation have been used which the Company believes producereasonable results given current information. The Company must participate in industry automobileresidual pools of business, and recognizes a share of this business based on its automobile marketshare. The Company records its shares of the liabilities provided by the actuaries of the pools.

An actuary is retained by the Company's Board of Directors to review the policy liabilities of theCompany. The actuary's responsibility is to carry out a valuation of the Company's policy liabilities inaccordance with accepted actuarial practices and report thereon to the Company. In performing thevaluation, the actuary makes assumptions as to the future loss ratios, trends, future rates of claimsfrequency and severity, inflation and both internal and external adjustment expenses, taking intoconsideration the circumstances of the Company. The actuary also makes use of the work of theexternal auditor in verifying the underlying data used in the valuation. The actuary's report outlinesthe scope of work performed and recommendation.

(continues)

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13. PROVISION FOR UNPAID CLAIMS AND ADJUSTMENT EXPENSES (continued)

The following is a summary of the insurance contract provisions and related reinsurance assets

Gross Re-Insurance NetDecember 31, 2014 $ $ $

Outstanding claims provisionProperty 2,145,470 1,088,101 1,057,369Automobile 2,678,485 1,223,484 1,455,001Liability 838,180 319,051 519,129Facility Association and other residual pools 761,998 - 761,998Provisions for claims incurred but not reported 1,106,000 787,000 319,000

Balance, end of year 7,530,133 3,417,636 4,112,497

Gross Re-Insurance NetDecember 31, 2013 $ $ $

Outstanding claims provisionProperty 641,755 227,830 413,925Automobile 2,962,027 1,673,562 1,288,465Liability 685,243 304,437 380,806Facility Association and other residual pools 800,741 - 800,741Provisions for claims incurred but not reported 1,231,000 888,000 343,000

Balance, end of year 6,320,766 3,093,829 3,226,937

14. INSURANCE CONTRACTS

Claim Development

The estimation of claim development involves assessing the future behaviour of claims, taking intoconsideration the consistency of the Company's claim handling procedures, the amount ofinformation available, the characteristics of the line of business from which the claim arises andhistorical delays in reporting claims. In general, the longer the term required for the settlement of agroup of claims the more variable the estimates. Short settlement term claims are those which areexpected to be substantially paid within a year of being reported.The tables that follow present the development of claims payments and the estimated ultimate costof claims for the claim years 2007 to 2014. The upper half of the tables shows the cumulativeamounts paid or estimated to be paid during successive years related to each claim year. Theoriginal estimates will be increased or decreased, as more information becomes known about theoriginal claims and overall claim frequency and severity.In 2011, the year of adoption of IFRS, only information from periods beginning on or after January 1,2007 is required to be disclosed. This is being increased in each succeeding additional year, untilten years of information is included.

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14. Insurance Contracts (continued)

Gross claims2007 2008 2009 2010 2011 2012 2013 2014 Total

$ $ $ $ $ $ $ $ $

Gross estimate of cumulativeclaims cost

End of year claim 3,620,324 6,011,118 7,770,472 5,015,330 5,082,931 4,779,163 4,133,796 5,810,242One year later 3,908,785 4,243,667 7,029,913 3,616,237 4,824,576 3,922,888 3,729,340Two years later 3,526,318 3,976,544 5,554,017 3,042,102 4,440,105 4,143,224Three years later 3,739,734 3,495,198 4,989,480 2,728,624 4,225,891Four years later 3,287,850 3,221,627 4,265,903 2,680,956Five years later 3,012,328 3,252,446 4,299,168Six years later 2,921,153 3,146,536Seven years later 2,896,043

Current estimate of cumulativeclaims cost 2,896,043 3,146,536 4,299,168 2,680,956 4,225,891 4,143,224 3,729,340 5,810,242 30,931,400

Cumulative payments 2,888,043 3,111,336 4,120,843 2,499,649 3,378,224 3,057,696 2,741,571 2,354,683 24,152,045

Outstanding claims 8,000 35,200 178,325 181,307 847,667 1,085,528 987,769 3,455,559 6,779,355

Outstanding claims 2006 and prior 750,778

Total gross outstanding claims 7,530,133

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14. Insurance Contracts (continued )

Net claims after reinsurance

2007 2008 2009 2010 2011 2012 2013 2014 Total$ $ $ $ $ $ $ $ $

Net estimate of cumulativeclaims cost

End of year claim 2,696,242 3,322,023 3,045,066 1,746,713 2,687,310 2,152,088 3,616,021 4,519,192One year later 2,842,880 2,817,912 2,729,811 1,522,745 2,908,070 2,169,393 3,342,043Two years later 2,458,951 2,719,360 2,510,890 1,390,625 2,603,233 2,376,384Three years later 2,504,680 2,583,338 2,390,404 1,377,582 2,525,511Four years later 2,288,294 2,458,915 2,320,389 1,338,466Five years later 2,262,010 2,492,700 2,369,654Six years later 2,209,835 2,449,052Seven years later 2,192,725

Current estimate of cumulativeclaims cost 2,192,725 2,449,052 2,369,654 1,338,466 2,525,511 2,376,384 3,342,043 4,519,192 21,113,027

Cumulative payments 2,192,725 2,430,852 2,287,329 1,244,587 2,099,156 1,834,184 2,594,811 2,354,683 17,038,327

Outstanding claims - 18,200 82,325 93,879 426,355 542,200 747,232 2,164,509 4,074,700

Outstanding claims 2006 and prior 37,797

Total net outstanding claims 4,112,497

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15. FEES, COMMISSIONS AND OTHER ACQUISITION EXPENSES

2014 2013

Agent commissions and benefits $ 721,390 $ 531,078Brokers commissions 215,772 146,938Commission paid to pools 49,698 44,801Sales salaries 111,668 110,000Commission revenue (59,304) (60,505)

$ 1,039,224 $ 772,312

16. INVESTMENT INCOME

Investment income was derived from the following:

2014 2013

Interest income $ 454,363 $ 340,251Dividend income 49,400 48,512Gain on sale of investments 103,851 39,595Market value adjustments 438,364 469,735Investment fees (60,292) (50,905)

$ 985,686 $ 847,188

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17. INCOME TAXES

Reasons for the difference between tax expense for the year and the expected income taxes basedon the statutory tax rate of 26.5% are as follows:

2014 2013$ $

Income before income taxes 353,203 938,325

Expected taxes based on the statutory rate of 26.5% 93,599 248,656Small business deduction of 11% (39,852) (55,000)Income from insuring farm related risks - (27,207)Non-capital losses of previous years applied to current year - (72,318)Other 2,409 13,402

-

Current income tax expense 56,156 107,533

Deferred tax expense (recovery)

Origination and reversal of temporary differences (13,503) 54,156

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18. PENSION PLAN

The Company makes contributions on behalf of its employees to “The Retirement Annuity Plan forEmployees of the Ontario Mutual Insurance Association and Member Companies”, which is a multi-employer plan. Each member company has signed an Ontario Mutual Insurance AssociationPension Plan Agreement. Eligible employees participate in the defined benefit plan and salesagents participate in the defined contribution plan. The defined benefit plan specifies the amount ofthe retirement benefit to be received by the employee based on the number of years the employeehas contributed and his/her final average earnings.

The Company funds the excess defined benefit plan based on the Company’s percentage ofpensionable earnings as calculated by the Pension Plan actuaries. The Pension Plan agreementstates that the Company is responsible for its share of any deficit as a result of any actuarialvaluation or cost certificate. The minimum funding requirement is the solvency valuation amountdetermined by the Pension Plan actuary on the valuation dates prescribed by the Pensions BenefitAct. In the event of a wind-up, voluntary withdrawal or bankruptcy, either by the Company or thegroup as a whole, the Company is responsible for its portion of all expenses and deficit related tosuch.

The amount contributed to the defined benefit plan for 2014 was $ 77,943 (2013 - $ 58,138). Thecontributions were made for current service and these have been recognized in income. TheCompany had a 1.42% share of the total contributions to the Plan in 2014.

An actuarial valuation of the Pension Plan as of December 31, 2010 indicated that the Company wasin a deficit position, resulting in a lump sum additional contribution to the defined benefit plan of$49,263 in 2011. In 2013 there was a contractual requirement to provide additional funding to thedefined benefit plan which resulted in a lump sum payment of $107,860. These contributions havebeen recognized in income. The next actuarial valuation to be filed under the Pension Benefit Act isas of December 31, 2016.

The expected contributions to the defined benefit plan and defined contribution plan for 2015 are$94,750 combined.

The defined benefit plan has been closed to future eligible employees effective December 31, 2012.The Company and all current employees who are accruing benefits under the defined benefit plancontinue to contribute to the defined benefit plan according to the existing terms of the agreement.

The amount contributed to the defined contribution plan for 2014 was $17,087 (2013 - $16,336). Thecontributions were made for current service and these have been recognized in income.

Future eligible employees are enrolled in a new defined contribution plan. The Company’s obligationwith respect to this plan is to make specified monthly contributions based on a percentage ofemployee’s eligible earnings. The amount contributed to the plan for 2014 was $2,798 (2013 - nil).

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19. RELATED PARTY TRANSACTIONS

The Company entered into the following transactions with key management personnel, which aredefined by IAS 24, Related Party Disclosures, as those persons having authority and responsibilityfor planning, directing and controlling the activities of the Company, including directors andmanagement:

CompensationSalaries, benefits and directors fees $ 486,243 $ 482,914Pension and other post-employment benefits 53,363 39,761

$ 539,606 $ 522,675

Premiums for key management personnel during 2014 amounted to approximately $84,580 (2013 -$132,500). There were no claims paid to key management personnel during 2014 (2013 - $24,637).

20. LEASE COMMITMENTS

The Company has a lease agreement for its current office space located in Waterford, Ontario. Thelease is for 10 years and commenced on January 1, 2007. Annual lease costs for the first 5 yearsare $51,000 and $54,100 for the last 5 years of the initial lease period, plus applicable taxes. Thereare two 5 year renewal options at terms to be negotiated. There are also lease agreements formiscellaneous office equipment and a vehicle.

Future minimum payments under these leases for the next 4 years are approximately as follows:

2015 $ 68,5002016 63,9002017 2,8002018 1,400

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21. FINANCIAL INSTRUMENTS AND INSURANCE RISK MANAGEMENT

Insurance risk management

The principal risk the Company faces under insurance contracts is that the actual claims and benefitpayments or the timing thereof, differ from expectations. This is influenced by the frequency ofclaims, 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 are available to coverthese liabilities.

The above risk exposure is mitigated by diversification across a large portfolio of insurance. Thevariability of risk 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 risk mitigation program. Retention limits for theexcess-of-loss reinsurance vary by product line.

Amounts recoverable from reinsurers are estimated 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.

The Company manages this risk via its underwriting and reinsurance strategy within an 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. Automobilepremiums are subject to approval by the Financial Services Commission of Ontario and thereforemay result in a delay in adjusting the pricing to exposed risk. Reinsurance is purchased to mitigatethe effect of the potential loss to the Company. Reinsurance is placed with Farm MutualReinsurance Plan Inc. (FMRP), a Canadian registered reinsurer.

The Company followed a policy of underwriting and reinsuring contracts of insurance which, in themain, limit the liability of the Company to an amount on any one claim of $230,000 in the event of aproperty claim, an amount of $350,000 in the event of an automobile claims, an amount of $350,000in the event of a liability claim, an amount of $20,000 in the event of a farmers' accident claim.

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.The risks associated with insurance contracts are complex and subject to a number of variableswhich complicate quantitative sensitivity analysis. The Company uses various techniques based onpast claims development experience to quantify these sensitivities. This included indicators such asaverage claim cost, amount of claims occurrence, expected loss ratios and claims development asdescribed in note 14.

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21. FINANCIAL INSTRUMENTS AND INSURANCE RISK MANAGEMENT (continued)

The table found at the end of Note 13, Provision for Unpaid Claims and Adjustment Expenses, setsout the concentration of unpaid claims and adjustment expenses by class of insurance.

A sensitivity analysis is based on the claims loss ratio which is calculated by taking net claimsincurred including adjustment expenses over net premiums earned. A 5% movement in the currentyear claims loss ratio would impact the statement of comprehensive income by approximately$301,000 (2013 - $270,000) before tax.

Fair Value

The Company has categorized its assets that are carried at fair value on a recurring basis, based onpriority of the inputs to valuation techniques used to measure fair value, into a three level fair valuehierarchy. Financial assets measured at fair value are categorized as follows:

Level 1: Fair value is based on unadjusted quoted prices for identical assets or liabilities in an activemarket.

Level 2: Fair value is based on quoted prices for similar assets or liabilities in active markets,valuation that is based on significant observable inputs or inputs that are derived principally for orcorroborated with observable market data through correlation or other means.

Level 3: Fair value is based on valuation techniques that require one or more significantunobservable inputs or the use of broker quotes. These unobservable inputs reflect the Company'sassumptions about the assumptions market participants would use in pricing the assets or liabilities.The Company does not have any amounts classified as Level 3.

Level 1 Level 2 TotalDecember 31, 2014 $ $ $Cash 933,489 - 933,489Bonds - 9,129,726 9,129,726Equities - 4,335,971 4,335,971

Total assets measured at fair value 933,489 13,465,697 14,399,186

There were no transfers between Level 1 and Level 2 for the years ended December 31, 2014and 2013.

Credit Risk

Credit risk is the risk of financial loss to the Company if a debtor fails to make payments of interestand principal when due. The Company is exposed to this risk relating to its debt holdings in itsinvestment portfolio and the reliance on reinsurers to make payment when certain loss conditionsare met.

(continues)

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The Company’s investment policy puts limits on the bond portfolio including portfolio compositionlimits, issuer type limits, bond quality limits, aggregate issuer limits, corporate sector limits andgeneral guidelines for geographic exposure. All fixed income portfolios are measured forperformance on a quarterly basis and monitored by management on a monthly basis.

The maximum exposure to credit risk and concentration of this risk is outlined in note 4.

Reinsurance is placed with FMRP, a Canadian registered reinsurer. Management monitors thecreditworthiness of FMRP by reviewing their annual financial statements and through ongoingcommunications. Reinsurance treaties are reviewed annually by management prior to renewal ofthe reinsurance contract.

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

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

Market Risk

Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate asa result of market factors. Market factors 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. Aninvestment policy is in place and its application is monitored by the Investment Committee and theBoard of Directors. Diversification techniques are utilized to minimize risk.

Currency risk

Currency risk is the risk that fair value or future cash flows of a financial instrument will fluctuatebecause of changes in foreign exchange values. The Company is not significantly exposed toforeign exchange rate risk.

The Company is exposed to currency risk through its holdings in global equity and fixed incomeinvestments. Management monitors its foreign currency exposure regularly and adjusts holdingswhen deemed necessary.

As at December 31, 2014, a 1% change in value of foreign currency would impact the value of theglobal equity and fixed income investments of approximately $19,000.

(continues)

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Interest rate risk

Interest rate risk is the potential for financial loss caused by fluctuations in fair value or future cashflows of financial instruments because of changes in market interest rates.

The Company is exposed to this risk through its interest bearing investments that include termdeposits and bonds.

Historical data and current information is used to profile the ultimate claims settlement pattern byclass of insurance, which is then used in a broad sense to develop an investment policy andstrategy. However, because a significant portion of the Company’s assets relate to its capital ratherthan 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 themedium to long-term with short term interest rate fluctuations creating unrealized gains or losses inother comprehensive income. There are no occurrences where interest would be charged onliabilities, 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 diversify the bondportfolio in such a way that the bond portfolio is laddered over a number of years. A portion of thebond portfolio would come due each year and be reinvested. This protects the Company fromfluctuations in the interest rates.

At December 31, 2014 a 1% move in interest rates, with all other variables held constant, couldimpact the market value of interest bearing investments by approximately $467,000.

Equity risk

Equity risk is the uncertainty associated with the valuation of assets arising from changes in equitymarkets. The Company is exposed to this risk through its equity holdings within its investmentportfolio.

The Company’s portfolio includes equity and fixed investment with fair values that fluctuate with thestock markets. A 10% movement in the stock markets would have an estimated affect on the fairvalues of approximately $377,000. For stocks that the Company did not sell during the period, thechange would be recognized in the asset value and in net income. For stocks that the Company didsell during the period, the change during the period and changes prior to the period would berecognized as net realized gains in income during the period.

The Company limits its equity holdings to less than 25% of the total portfolio value.

(continues)

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Liquidity risk

Liquidity risk is the risk that the Company will not be able to meet all cash outflow obligations as theycome due. The Company mitigates this risk by monitoring cash activities and expected outflows.The current liabilities arise as claims are made. There are no material liabilities that can be calledunexpectedly 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. Claimpayments are funded by current operating cash flow including investment income. There have beenno significant changes from the previous period in the exposure to risk or policies.

22. CAPITAL MANAGEMENT

The Company's objectives with respect to capital management are to maintain a capital base that isstructured to exceed regulatory requirements and to best utilize capital allocations.

The regulators measure the financial strength of property and casually insurers using a minimumcapital test (MCT). The regulators generally expect property and casualty companies to comply withcapital adequacy requirements. This test compares a Company's capital against the risk profile ofthe organization. The risk-based capital adequacy framework assesses the risk of assets, policyliabilities and other exposures by applying various factors. The regulator indicates that the Companyshould produce a minimum MCT of 150%. During the year, the Company has consistentlyexceeded this minimum. The regulator has the authority to request more extensive reporting andcan place restrictions on the Company's operations if the Company falls below this requirement anddeemed necessary.

The MCT for the Company at December 31, 2014 was 463% (2013 - 540%).

For the purpose of capital management, the Company has defined capital as surplus.

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Townsend Farmers' Mutual Fire Insurance Co.

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Transcript of Townsend Farmers' Mutual Fire Insurance Co.