ANNUAL REPORT
ATTAINING NEW HEIGHTS OF EXCELLENCE
2013
10 YEARS... We’ve come a long way
together!
Summary THE MMQ : 10 YEARS OF IMPRESSIVE ACCOMPLISHMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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MESSAGE FROM THE CHAIRMAN AND CHIEF EXECUTIVE OFFICER .. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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REPORT OF THE EXECUTIVE DIRECTOR AND HEAD OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . .
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COMMITTEES’ REPORTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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INDEPENDENT AUDITOR’S REPORT.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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ACTUARY’S CERTIFICATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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FINANCIAL STATEMENTS .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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BOARD OF DIRECTORS AND COMMITTEES’ MEMBERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 NETWORK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Our values EXCELLENCE TRANSPARENCY DYNAMISM EQUITY OPENNESS RESPECT Cover photo:
Pohénégamook (Témiscouata RCM) Photographer: Roland Thériault Grand prize winner of the MMQ’s 2014 photo contest
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Yamachiche (Maskinongé RCM) Photographer: Paul Carbonneau
Profile La Mutuelle des municipalités du Québec (MMQ) was created in 2003 under the Municipal Code of Québec and the Cities and Towns Act to meet the specific property and casualty insurance needs of municipalities. The MMQ is wholly-owned by the municipalities, Regional County Municipalities (RCMs) and intermunicipal boards that constitute its mutual members. The MMQ was born out of the municipal environment’s desire to be self-endowed with comprehensive and diversified long-term insurance. The MMQ distinguishes itself by its exclusive risk management program that allows for a reduced rate of claims and more stabilized premiums. The MMQ’s activities are governed by a Board of Directors made up of six mayors or wardens and three insurance experts, as well as by statutory and advisory committees responsible for assuring that business is properly conducted. The MMQ is an entirely Québec-based organization, with all of its assets belonging to its mutual members.
OUR TYPES OF COVERAGE Property Insurance Criminal Insurance
• Automobile Insurance • Civil Liability Insurance • Errors and Omissions Insurance • Loss of Income Insurance • • Boiler and Machinery Insurance • Umbrella Insurance • Legal Expense Insurance • C.21 Rider
Mission Enable municipalities, RCMs and intermunicipal boards of Québec to take advantage of the mutual principle and coach them in the search for and implementation of prevention measures so that by reducing the risks associated with their activities, they can benefit from privileged access to insurance products adapted to their needs and under advantageous conditions.
Governance Philosophy 1
THE MUTUAL MEMBERS’ FUNDAMENTAL AUTHORITY
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PRINCIPLES
The philosophy underlying governance at La Mutuelle des municipalités du Québec rests upon the fundamental authority of its mutual members who impart legitimacy and authority and to whom members of the Board of Directors must give an account of results.
In keeping with the mutualist culture, the philosophy of governance at La Mutuelle des municipalités du Québec is founded upon compliance with the law requirements, regulations and standards while drawing its strength from models of democracy, transparency, efficiency and vigilance.
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INTEGRITY
La Mutuelle des municipalités du Québec demands of its administrators, directors and employees unswerving commitment to honesty, integrity and equity when they promote its services and conduct its overall business.
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SOUND FINANCIAL MANAGEMENT
5
RISK MANAGEMENT
To ensure its institutional dynamics and development, La Mutuelle des municipalités du Québec takes great care looking after its decision-making procedures based upon sound financial management.
Risk is a day-to-day challenge underpinning institutional development. It is the mission of the Board of Directors to understand and approve strategies relating to risk management and it is up to the Directors to develop a dynamic and evolving environment and to implement appropriate policies and procedures. 2013 MMQ ANNUAL REPORT • 3
The MMQ:
10 years of impressive accomplishments 2003/2013
2013
The MMQ marks its 10th anniversary on November 17.
2012
The MMQ welcomes its 975th mutual member. Written premiums exceed the $30 million mark.
2011
The MMQ posts its best fiscal year ever, with net income before experience refunds totaling $6.8 million.
2010
The MMQ officially adopts six core values: Excellence, Transparency, Dynamism, Equity, Openness and Respect.
2009
Municipal election year: The MMQ launches an information campaign aimed at new elected representatives.
2008
A first experience refund is paid to mutual members.
2007
The MMQ passes the 900 mutual members mark.
2006
Launch of La MunicipaleTM – the first insurance policy specifically designed for municipalities.
2005
Written premiums reach the $20 million mark.
2004
The MMQ encompasses 800 mutual members and posts its first profit.
2003
The MMQ is created as an initiative of 8 municipal mayors, the Fédération québécoise des municipalités and the Ultima Brokerage Firm Network.
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Kamouraska (Kamouraska RCM) Photographer: Christian Madore
Benefits on contracts
6
Benefits to policyholders and net loss expenses
-1
4
-2
2
-3
0
Profit/Loss before experience refunds Income for the year before experience refunds
28
Evolution of net loss ratio per operating year (in %)
82.5
24
77,5
Mutual members equity (in $)
2011
2012
2013
2011
2012
2013
17,844,117
2010 2010
12,543,237
2009
996
2009
15,609,070 2008
968
2008
12,969,943 2007
947
2007
25,134,697
24,195,126
22,843,194
21,417,834
18,727,888
14,702,265
930
955
863
917
982
891
Number of mutual members
1275,0 1112,5 950,0
828
787,5 625,0
2004
411 2003
2013
2012
2011
300,0
2010
2009
2008
2007
2003
0
1437,5
462,5
2006
4
2004
8,572,701
8
2005
12
13,183,253
16
20,381,678
24
26,490,599
1600,0
Net earned premiums (in $)
20
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003 28
2006
0
25,0
2006
4
2,514,462
41.8 36.3
631,957
8
2005
51.9
12
2004
39.5
42,5
50.4
23,600
46.8
2003
47.0
2005
53.2
52.9
6,915,753
16 60,0
16,588,145
20
22,528,455
95,0
Evolution of net income before experience refunds and benefits on policies (in $ million)
20,524,055
2013
8
2012
1 0
2011
10
2010
2
2009
12
2008
14
3
2007
16
4
2006
18
5
2005
20
6
2004
22
2003
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2013 MMQ ANNUAL REPORT • 5
Message from the Chairman and Chief Executive Officer 1
Gérard Marinovich Chairman and Chief Executive Officer
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A DECADE HAS ALREADY PASSED, AND THE MMQ HAS GROWN AND MADE ITS MARK IN THE INDUSTRY, WHILE STAYING TRUE TO THE MISSION AND CORE VALUES THAT HAVE FUELLED ITS PROGRESS. I WILL ALWAYS BE EXTREMELY PROUD TO STATE THAT I WAS AMONG THOSE WHO HELPED CREATE THIS ORGANIZATION THAT IS SYNONYMOUS WITH SOLIDARITY, MUTUAL AID, SUCCESS AND EXCELLENCE.
In pursuit of its growth and posting net income before experience refunds superior to that of last year, the MMQ’s performance was truly excellent in 2013. By the end of the year, the Board of Directors had approved the payment of $3 million in experience refunds, bringing the total amount of these payouts since 2008 to $14.5 million. Our organization clearly continues to have the wind in its sails. At the end of fiscal 2013, the MMQ had 996 mutual members within its ranks, and this number has exceeded 1,000 as of January 1, 2014. I am delighted that our organization has attained this symbolic mark in the wake of celebrating its 10 th anniversary. This serves as yet another wonderful milestone among those that have marked our evolution over the years.
A decade of excellence We often hear it said how time flies. This holds particularly true within a context of success. The MMQ was born out of conviction and optimism 10 years ago, and since its earliest beginnings, it has been a continued success story. The story began in 2003, at a time when municipal insurance was unaffordable and extremely rare on the market. Backed by the Fédération québécoise des municipalités (FQM) and the Ultima Group, eight mayors submitted a request to the authorities for the creation of a mutual property and casualty insurance organization. As of its first year, 828 municipalities, RCMs and intermunicipal boards had become members of the MMQ, providing it with more than adequate critical mass to get off to a strong start. Following its inauguration, the order of the day for the MMQ was to translate the principles of risk management into concrete benefits. The value of the advice provided, newsletters, conferences and courses offered by the organization quickly became evident, and thanks to these forms of support, its mutual members came to better protect their property and civil liability. The loss curve underwent an inversion, paving the way for resounding results.
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Progressively, the benefits grew, as did the equity of mutual members. Pricing was stable, a climate of confidence was created, and after five years, the MMQ paid out its first experience refund as promised. It was mission accomplished. The concerns and frustrations of the past subsided, replaced by gratifying peace of mind. Today, the MMQ is an organization that has accumulated vast expertise in municipal insurance and is the number one insurer in the municipal world, with a market share of close to 80%. Our mutual has reached a level that seemed unattainable at the outset, and together, we have succeeded in excelling beyond our ambitions. Indeed, excellence was the word etched on my mind in September when the FQM presented the MMQ with the special Leadership Award to underline the mobilization and spirit of solidarity it has inspired since its creation. The MMQ is proof that the municipal world is made up of men and women who know how to recognize sustainable solutions and who understand the strength they can harness when they pull together.
Standing together for better and for worse We cannot look back on 2013 without the rail accident in Lac-Mégantic immediately coming to mind. This tragic event stirs profound sentiments of sympathy for those who lost loved ones and respect for the emergency responders who had to work in such unimaginable conditions. The incident also inspired great admiration for the elected officials who had to deal with the tragedy and the numerous municipalities that were actively involved in the recovery efforts by providing their assistance and support in multiple forms. If we stand together for better, then we do for worse as well. This accident served to raise a number of questions from a public security standpoint. The MMQ remains attentive to the evolution of the regulations governing the transportation of hazardous materials by train. We also support the presentations made by various municipal associations on this subject.
Chairman of the Board since February 25, 2014
2013 MMQ ANNUAL REPORT • 7
Vaudreuil-Dorion (Vaudreuil-Soulanges RCM) Photographer: Pierre Brasseur
Pursuing our commitment to good governance Year after year, MMQ works to reinforce its rules of governance. These efforts are aimed at guaranteeing that its activities are conducted with integrity and transparency. In that regard, a policy concerning sound commercial practices was adopted in 2013. I have underlined on numerous past occasions the rigour with which we carry out our work in the area of governance. Once again, I would like to reaffirm our discipline and our continuous commitment to assuring the excellence of our practices.
Renewal on the horizon Municipal elections like those held in November 2013 always signal the start of a very active period for the MMQ. The arrival of new elected representatives calls for the rapid and consistent promotion of the benefits of our formula, and this process is already off to a strong start. The 2013 vote also gave rise to another requirement – that of preparing the partial changing of the guard within the Board of Directors in May 2014. I am among those whose seat will become vacant, and I have been extremely proud to have been associated with the MMQ for close to 11 years. I am very optimistic about this pending renewal because it will bring new ideas and points of view to the table. Nevertheless, I trust that the next Board will continue to adhere to the culture developed over the past 10 years, and that it works to assure respect and reinforcement of our values and rules of governance.
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Above all, I wish the MMQ to remain an organization that is attentive and sensitive to the needs of its mutual members, and one that is fully focused on their satisfaction.
An expert organization The challenges awaiting the MMQ are many given the range of issues associated with municipal insurance. The diverse initiatives in compliance with the Municipal Powers Act and the increasingly numerous responsibilities being assumed by municipalities call for constant analysis and proactive strategies with respect to risk management. Moreover, considerable efforts remain to be done, in particular as regards loss prevention to reduce a good number of claims due to errors and omissions, mitigate damages caused by fire, and management of the effects resulting from the capriciousness of our climate. Backed by a highly competent team, our mutual has always succeeded in offering municipalities effective and fully adapted loss prevention tools. It must continue to deliver in that area because the needs are enormous, and it is essentially that role that has propelled the organization forward.
Acknowledgements As the MMQ prepares to embark on a new chapter in its history, I would like to take this opportunity to express my gratitude to the members of the Board of Directors, whose integrity and dedication I truly admire. Both the Board and our Statutory and Advisory Committees once again spared no effort in 2013 to work in the interests of mutual members.
I would also like to underline the departure of Messrs. Jean-Noël Ouellet and Pierre Mireault in 2013. Former Directors of the MMQ, these two dear colleagues continued to sit on the Insurance Committee, and I extend my sincere thanks to them for their valuable contribution.
I participated in the creation of the MMQ because I was convinced that it was the best solution to reducing the insurance problems plaguing municipalities. I remain certain today that there is no other organization as effective and reflective of the spirit of initiative of municipal representatives.
At the same time, I wish to pay tribute to our Executive Director and Head of Operations, Ms. Linda Daoust. Leading an organization demands the ability to adapt to change and to manage adeptly. Thanks to her remarkable perseverance, Ms. Daoust has succeeded in meeting the formidable challenges confronting the MMQ year after year, and as the organization has grown, she has inspired her team to effectively keep pace. The work that she has done to assure our sustained success is nothing short of exceptional.
I am absolutely delighted to have had the opportunity to contribute to the successful development of a mutual insurance organization that, over the past 10 years, has clearly proven its value and importance while posting impressive profitability. I am proud of what I have managed to accomplish, and I have great confidence in the future. The MMQ possesses all the tools needed to continue to serve as a flagship within the municipal milieu, and it is up to our valued mutual members to protect and preserve this success that they have helped forge and that is rightfully theirs.
Finally, I would like to thank our partners in the municipal milieu, our brokers, our reinsurers, and all of our other collaborators. Each, with their respective areas of expertise, has contributed invaluably to the development of the MMQ. Without their support, we would never be where we are today.
Proud of a mission accomplished For my part, my years within the ranks of the MMQ will remain indelibly etched on my mind. I had the support of a team of Directors, managers and insurance specialists who are highly competent and totally dedicated to the advancement of our mutual, and I will always have a profound feeling of attachment to them all.
Gérard Marinovich Chairman and Chief Executive Officer
Over the years, I was also gratified by the remarkable climate of harmony that reigns within the MMQ and helps fuel its success. Never did we ever lose sight of our mission.
Gaspé (La Côte-de-Gaspé RCM) Photographer: Mélanie Roussy
2013 MMQ ANNUAL REPORT • 9
Report of the
Executive Director and Head of Operations 2
Linda Daoust Executive Director and Head of Operations
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SOLID RESULTS, REVISED PRICING, THE ADDITION OF NEW COVERAGE, TARGETED INVESTMENTS IN RISK MANAGEMENT, AND THE ATTAINMENT OF COMPLETE AUTONOMY ARE AMONG THE MMQ’S PRINCIPAL ACHIEVEMENTS IN 2013. HOW BETTER TO MARK THE YEAR OF OUR 10TH ANNIVERSARY !
Our 10th anniversary year ended December 31, 2013 met our expectations in all respects, with a written premium volume totalling $33.1 million – up 4% from the previous year. In line with our forecasts, this growth is attributable to the arrival of 19 new mutual members and to the fact that the MMQ now offers boiler and machinery insurance.
offered us the opportunity to affirm our leadership within the municipal milieu. This association was also aimed at underlining the decisive role played by the FQM in the founding of the MMQ, and the essential part it continues to play by promoting the merits of accountability and autonomy in the area of property and casualty insurance.
Our results with respect to losses were highly positive once again in 2013. At the end of the year, the MMQ’s net loss ratio stood at 50.4%, representing an improvement of 2.8 points over the previous year. However, it is important to note that, like last year, property insurance was affected by several major fires. More specifically, five fires in 2013 resulted in damages valued at $10 million.
The Together for 10 years theme has been regularly used to illustrate how far we have come since 2003. At the same time, this theme is designed to reinforce the fact that, first and foremost, the MMQ’s success is attributable to its mutual members who have consistently invested in risk management and continued to demonstrate their loyalty.
Totaling marginally more than $1 million, the MMQ’s investment income showed a slight increase over 2012. This modest return is a result of our conservative investment policy and stable interest rates.
Revised coverage and rates
For its part, our net income for the year before experience refunds equaled $5 million, as compared to $4.7 million in 2012. After the payment of $3 million in experience refunds, net and overall income were added to the equity of mutual members, which stood at $22.5 million as of December 31, 2013. It should also be noted that the minimum capital adequacy requirements of the Autorité des marchés financiers (AMF) can vary in accordance with different regulatory factors. Nevertheless, the MMQ’s management maintains the organization’s capitalization at a high level, and thanks to this diligence, mutual members enjoy the benefits of greater security in the event of unfavourable conditions.
Together for a decade Not only are our 2013 financial results excellent, they are also consistent with the enviable performance the MMQ has been posting since its creation. In fact, premium volumes have grown constantly since 2003, losses are generally under control, and profitability has exceeded initial projections. That is quite a track record for our first decade of existence! The MMQ made abundant use of the municipal media to promote its 10th anniversary. It also served as official partner of the Fédération québécoise des municipalités (FQM) 2013 Congress, an event that
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The coverage offered by the MMQ was revised in 2013, and a number of modifications were made to La MunicipaleTM to make it an even more generous insurance policy that is better adapted to municipal needs. Optional excess civil liability insurance was also added. All these changes came into effect on January 1, 2014. In addition to these revisions, pricing was readjusted as well. Set in accordance with the results of the past 10 years and projections for the coming years, the MMQ’s new rates will translate into lower premiums in the majority of cases in 2014.
A fully autonomous mutual The MMQ implemented its own computer system in 2013. In so doing, it has created better synergy with the brokerage network and has accelerated the processing of transactions. The introduction of this system marked the completion of the repatriation of operational and administrative functions previously outsourced to the Ultima Group. Now assuming full control, the MMQ possesses all the levers to optimize its operational services. It is important to underline the excellent collaboration we have received from Ultima over the years. Thanks to this organization’s expertise, the MMQ has been able to build solid foundations, while obtaining highly professional support for the management of certain key functions.
President and Chief Executive Officer since February 25, 2014
2013 MMQ ANNUAL REPORT • 11
Sainte-Julienne (Montcalm RCM) Photographer: Michel Varin
The Ultima Group remains the MMQ’s exclusive distribution network. The extensive experience and presence of its insurance brokers within the municipal milieu are of vital importance in a market that is increasingly competitive. In 2013, the MMQ offered these brokers a series of seminars and various new reference tools to help preserve and increase the volume of mutual member premiums. As of December 31, 2013, the MMQ had 33 employees dedicated to assuring the effectiveness and efficiency of its activities. I would like to applaud these individuals for their remarkable spirit of collaboration that is at the root of our ability to provide our mutual members with the most attentive and professional service.
Targeted risk management efforts The MMQ pursued its risk management efforts in 2013 with investments of more than $900,000 to finance material and thermographic inspections, training sessions and support services. The highlight of the year in this area was the establishment of a three-year agreement under the terms of which our organization will lend its financial support to the new training program offered by the Association des directeurs municipaux du Québec. The role of municipal managers has considerably expanded over the past few years and now holds a strong risk potential in the area of civil liability. By investing in the competence of these managers, the MMQ is demonstrating its firm belief in the effectiveness of training in loss prevention. Such investments also affirm the MMQ’s commitment to contributing to the advancement of municipal managers, with who it interacts on a regular basis.
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Exercising rigour in compliance and governance Now a fully autonomous organization, the MMQ must take all the measures necessary to preserve the integrity of its financial and material resources in case of an adverse event. In 2013, a business continuity policy was added to the compliance directives already in place, as well as a policy concerning the risk of earthquakes. The MMQ also enriches its policies on good governance each year. In that regard, management closely watches the evolution of trends in Canada and abroad so as to assure that the organization is fully aligned with the most stringent norms.
Reflecting on new directions The year 2014 promises to be a busy one for the MMQ. First and foremost, we will have to continue to provide the highest quality services and to actively pursue our efforts in the area of risk management. We also need to promote the benefits of our offerings among new elected representatives. Furthermore, we have to take full advantage of our computer system to optimize our underwriting, compensation and accounting procedures. Serving as the figurehead of municipal insurance in Québec, the MMQ must, of course, work steadfastly to preserve its enviable status. Management is committed to establishing effective new courses of action to advance the organization’s development in line with its mission and distinct vocation. Where will we be in five years’ time? How will we pursue our growth? These are the questions that will guide the strategic planning exercise we will be undertaking in 2014. As part of this process, we will not be looking to transform the MMQ, but rather, to consolidate its assets so that it can remain a leader in its field.
Tribute to a pioneer In conclusion, I would like to thank the members of the Board of Directors for their unfailing support and invaluable guidance. I wish to pay particular tribute to Mr. Gérard Marinovich, one of the MMQ’s founding mayors who has served as Chairman and Chief Executive Officer of our organization since 2005. Mr. Marinovich is undeniably the MMQ’s most tireless promoter. His allegiance to the organization, his commitment, and his dedication are unbounded. In 2014, Mr. Marinovich will be taking his leave. His active presence, pure simplicity and shrewd judgement will be truly missed. In addition to having greatly influenced its culture, Mr. Marinovich played an integral role in making the MMQ a model of good governance, and he has certainly left an indelible mark on the organization. On a more personal note, I would like to extend my heartfelt gratitude to him for his confidence, his counsel, and his consistent mindfulness of the roles and responsibilities of everyone. The MMQ is privileged, indeed, to have been able to count on a leader as inspiring as Mr. Marinovich. I assure him that my team will perpetuate his heritage by working rigorously, by placing respect over and above all else, and by sparing no effort to ensure the satisfaction of our mutual members.
The MMQ’s first 10 years have been exciting and crowned with great success. Today, as the organization embarks on the next chapter in its history, my team and I are resolutely determined to make the next decade as flourishing as the first. Now fully autonomous, the MMQ is at the forefront of its market. Remaining there will require as much effort as it took to get there. Our commitment to success must be fuelled by a commitment to excellence. In the past 10 years, the MMQ has surpassed the most optimistic projections, and we are dedicated to maintaining our momentum, with our sights firmly set on an equally successful future.
Linda Daoust Executive Director and Head of Operations
Executive committee: From left to right: Anne Loubert, Corporate Controller, Colette St-Martin, Director, Compliance and Risk Management, Jean-Pierre Casoni, Head of Technology, Linda Daoust, Jean-François Charest, Director, Underwriting and Business Development, Martine Campeau, Director, Human Resources, Benoit Tourangeau, Director, Compensation, Louise Desjardins, Director, Communication and Public Relations
2013 MMQ ANNUAL REPORT • 13
Committees’ Reports Sainte-Agathe-des-Monts (Les Laurentides RCM) Photographer: Brygitte Foisy
The MMQ’s Board of Directors is made up of six mayors and three experts in the field of insurance. It is assisted by two Statutory Committees and two Advisory Committees. Comprised of Board members and other representatives, these Committees are responsible for assuring that business is conducted effectively and for supporting MMQ management. Following is an overview of the specific roles played by the Board committees and of their respective activities in 2013.
Ethics and Governance Pursuant to articles 285.13 and following of the Act respecting Insurance, the MMQ must have an Ethics Committee in place. This Statutory Committee’s principal responsibilities are prescribed by the Act. However, the Board of Directors can entrust the Committee with additional mandates that must not be assigned to other Committees. By virtue of this prerogative, the Board has charged the Ethics Committee with assuring the MMQ exercises sound governance practices. The Ethics and Governance Committee submitted its Annual Report to the Autorité des marchés financiers (AMF) in 2013 within the timeframe prescribed by law. This document, which includes a summary of Directors’ declarations, did not cite any cases of conflict of interest or self-dealing. The Committee accepted and had the latest version of the Directors’ Manual approved by the Board. In the middle of the year, it received the Report on Internal Controls prepared by the Compliance and Risk Management Department. The Committee was satisfied to see that the Report revealed no discrepancies with the AMF’s compliance guidelines. Moreover, the Committee laid the foundations of an integration program for all new future Directors, which is slated to be adopted in 2014. In 2013, the Committee also reviewed the competency matrix for the MMQ managers and the evaluations presented by management. It asked to receive individual evaluations annually. In addition, it was satisfied with the update of the succession plan for key positions, and it underlined the need for constantly selecting competent personnel with management potential for both permanent and temporary appointments. Finally, the Ethics and Governance Committee revised the self-evaluation program for Board members in 2013. It opted to delay its adoption in view of the considerable number of seats to be filled during fiscal 2014.
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Bonaventure (Bonaventure RCM) Photographer: Dylan Page
Audit and Investment
Mutual Member Risk Management
Pursuant to articles 298.1 and following of the Act respecting Insurance, the MMQ must have an Audit Committee in place. This Statutory Committee’s principal responsibilities are prescribed by the Act. However, the Board of Directors can entrust the Committee with additional mandates that must not be assigned to other Committees. By virtue of this prerogative, the Board has charged the Audit and Investment committee with assuring the MMQ exercises sound investment practices.
Risk management constitutes an integral part of the MMQ’s mission, and in order to fulfill its commitment to loss prevention, the organization maintains constant and close ties with its mutual members. The law does not prescribe the need to have a Mutual Member Risk Management Committee in place. However, the MMQ created this Committee to play an advisory role with respect to the execution of loss prevention activities.
At the beginning of the year, in response to the favourable opinions expressed by appointed actuary, Mr. Jean-Pierre Paquet, FCAS, FICA of Avalon Actuaries, and by the firm, Deloitte LLP acting as independent auditor, the Audit and Investment Committee submitted the financial statements for the year ended December 31, 2012 to the Board of Directors and recommended their adoption. In 2013, the Committee also examined the interim financial statements presented by the Controller. In addition, the Committee approved management’s recommendation to retain the services of a consulting firm to analyze the MMQ’s investments. Furthermore, it closely monitored the procedures in place to assure the integrity of financial data and the protection of mutual members’ files in support of the transfer operations necessary to put the MMQ’s new computer system into service.
Insurance The Insurance Committee is an advisory group created pursuant to article 41 of the MMQ’s Regulation 1.1. It provides technical advice to management concerning directions to be followed in the areas of underwriting and compensation. The Insurance Committee conducted periodic reviews of underwriting and compensation activities in 2013. In so doing, it was attentive to different management indicators, such as new memberships, business conservation rate, the rapidity with which endorsements are issued, the number of claim notices, the breakdown per insurance category, and the estimated value of settlements. The Committee also worked to assure the successful revision of the MMQ’s pricing and insurance policy. As per its recommendation, the rate grid and new wording of La MunicipaleTM were approved by the Board of Directors during the second quarter in anticipation of their coming into effect on January 1, 2014. Finally, the Committee endorsed the various changes made to the contract and the addition of optional excess civil liability insurance.
The Mutual Member Risk Management Committee conducted a quantitative review last year of municipal building inspections, thermographic inspections, training sessions, and of the interventions of risk management advisors. It also continued to examine the state of claims in order to identify specific trends. Moreover, the Committee analyzed various risks brought to its attention, including those for which there is no case of misconduct in jurisprudence. The structural compliance of telecommunication towers remains a preoccupation of the Mutual Member Risk Management Committee. Last year, it recommended sending a letter to the Régie du bâtiment du Québec, along with the distribution of specific advice to mutual members that possess such installations. On another front, it is important for mutual members to be able to benefit from the Fire Safety Act’s exoneration from liability clause. As such, the Committee called upon the Risk Management Department to pursue its efforts in promoting awareness and offering support so as to facilitate the implementation of fire safety risk management plans. As per the Committee’s wishes, the new Le Conseiller newsletter picked up on certain questions that could have a considerable bearing on the MMQ’s results. The link providing access to the newsletter was inserted in the public section of the Web site in order to underline the valuable expertise available to mutual members. The Mutual Member Risk Management Committee also closely monitored the impacts of the catastrophe in Lac-Mégantic, focusing particular attention on the evolution of the regulations on the transportation of hazardous materials by rail. Finally, it expressed its concern about underinsurance – a phenomenon that persists despite the MMQ’s efforts to promote awareness about the issue.
2013 MMQ ANNUAL REPORT • 15
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Independent Auditor’s Report To the mutual members of La Mutuelle des municipalités du Québec: We have audited the accompanying financial statements of La Mutuelle des municipalités du Québec, which comprise the statement of financial position as at December 31, 2013, the statement of comprehensive income, the statement of surplus and mutual members’ shares as well as the statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information. Baie-des-Sables (La Matanie RCM)
Management’s responsibility for the financial statements
Photographer: Marcel Cousineau Finalist in the 2014 MMQ photo contest
Management is responsible for the preparation and fair presentation of these financial statements in compliance with International Financial Reporting Standards, and for such internal controls as management deems is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s responsibility Our responsibility is to express an opinion 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 adhere to the rules of ethics and that we plan and perform the audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
16 • 2013 MMQ ANNUAL REPORT
We believe that the audit evidence that we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of La Mutuelle des municipalités du Québec as at December 31, 2013 and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards. Deloitte LLP 1 (signed) February 25, 2014 Brossard, Québec 1 CPA
auditor, CA, public accountancy permit No. A113142
Actuary’s Certificate I have evaluated the policy liabilities on the balance sheet of La Mutuelle des municipalités du Québec as at December 31, 2013 and their variation on the statements of earning for the year then ended in accordance with recognized actuarial practice in Canada, notably by proceed with the selection of the appropriate assumptions and valuation methods. In my opinion, the data used within the context of the valuation of these provisions are reliable and sufficient. I have verified the consistency of the valuation data with the corporations’s financial documents. In my opinion, the amount of the policy liabilities is an appropriate provision with respect to the totality of the obligations toward policyholders. Moreover, the results are presented fairly in the financial statements. Jean-Pierre Paquet, FICA, FCAS (signed) Avalon Actuaires inc. February 18, 2014
2013 MMQ ANNUAL REPORT • 17
Statement of
Comprehensive Income
For the year ended December 31, 2013
2013 ($) 2012 ($) Revenues Written premiums Gross premiums 33,129,029 31,744,825 Transferred premiums (5,859,967) (5,938,226) Net premiums Net change in unearned premiums
27,269,062 (778,463)
25,806,599 (671,902)
Net earned premiums Investment income (Note 12)
26,490,599 1,067,609
25,134,697 1,024,013
Total revenues
27,558,208
26,158,710
Policy benefits and expenses Policyholder benefits and claims expenses (Note 7) Benefits and transferred claims expenses (Note 7)
21,287,145 (7,932,661)
16,952,948 (3,583,957)
Policyholder benefits and claims expenses – net Commissions Loss prevention (Schedule A) Operating expenses (Schedule B)
13,354,484 4,852,397 916,835 3,431,992
13,368,991 4,660,938 903,103 2,553,471
Total policy benefits and expenses
22,555,708
21,486,503
Income for the year before experience refunds to mutual members
5,002,500
4,672,207
Experience refunds to mutual members (Note 13) Experience refunds to withdrawn mutual members (Note 13)
3,000,000 2,000,000 – (6,131)
3,000 000
1,993,869
Net income and comprehensive income attributable to mutual members
2,002,500
2,678,338
2013 ($)
2012 ($)
Surplus at beginning Withdrawal of mutual members during the year (Note 14) Net income and comprehensive income
20,425,855 500 2,002,500
17,747,317 200 2,678,338
Surplus at end
22,428,855
20,425,855
The accompanying notes are an integral part of these financial statements.
Saint-Antoine-sur-Richelieu (La Vallée-du-Richelieu RCM) Photographer: Pierre Gagné
Surplus and of Mutual Members’ Shares Statement of
For the year ended December 31, 2013
Mutual members’ shares at beginning Contributions from mutual members during the year (Note 14) Withdrawal of mutual members during the year (Note 14)
98,200 96,800 1,900 1,600 (500) (200)
Mutual members’ shares at end
99,600
98,200
22,528,455
20,524,055
Total mutual members’ equity The accompanying notes are an integral part of these financial statements.
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Statement of Financial Position As at December 31, 2013
2013 ($) 2012 ($) Assets Cash 886,901 324,698 Investments (Note 5) 47,098,005 45,353,071 Premiums receivable (Note 6) 10,409,990 9,834,605 Accounts receivable 494,124 859,634 Prepaid reinsurance premiums 884,524 – Reinsurers’ share in claims and settlement expenses paid 920,552 464,720 Reinsurers’ share in the provision for unpaid claims and settlement expenses (Note 7) 10,017,680 6,717,313 Prepaid expenses 78,797 58,635 Deferred commission costs (Note 8) 2,513,559 2,396,601 Fixed assets (Note 9) 109,794 156,945 Intangible assets (Note 10) 1,063,596 1,091,794
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74,477,522
67,258,016
Liabilities Provision for unpaid claims and settlement expenses (Note 7) Unearned premiums (Note 11) Premiums owed to reinsurers Accounts payable and accrued liabilities Experience refunds payable to mutual members (Note 13)
31,560,502 16,758,807 – 629,758 3,000,000
27,349,000 15,980,344 513,839 890,778 2,000,000
51,949,067
46,733,961
ss
ON BEHALF OF THE BOARD
Mutual members’ equity Surplus Mutual members’ shares (Note 14)
22,428,855 99,600
20,425,855 98,200
22,528,455
20,524,055
74,477,522
67,258,016
Gérard Marinovich, Executive Director and Head of Operations Jacques Bolduc, Treasurer
The accompanying notes are an integral part of these financial statements.
Percé (Le Rocher-Percé RCM)
2013 MMQ ANNUAL REPORT • 19
Statement of
Cash Flows
For the year ended December 31, 2013
2013 ($) 2012 ($) Cash flows from operating activities Net income 2,002,500 2,678,338 Items not affecting cash: Depreciation of fixed assets 84,158 64,440 Amortization of intangible assets 79,545 – Loss on the sale of fixed assets – 1,673
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Reinsurers’ share in the provision for unpaid claims and settlement expenses Deferred commission costs Unearned premiums Provision for unpaid claims and settlement expenses Interest earned Change in non-cash operating working capital items (Note 15) Cash flows from investing activities Acquisition of investments Proceeds from the sale of investments Interest received Acquisition of fixed assets Acquisition of intangible assets Proceeds from the sale of fixed assets Cash flows from financing activities Contributions from mutual members
Photographer: Claire Bisaillon
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2,744,451
(3,300,367) (384,313) (116,958) (100,786) 778,463 671,902 4,211,502 2,630,000 (1,067,609) (1,024,013) (1,300,765) 238,116 1,370,469
4,775,357
(35,341,934) 33,597,000 1,023,122 (37,007) (51,347) –
(34,452,223) 27,478,000 951,275 (48,850) (15,545) 765
(810,166)
(6,086,578)
1,900 1,600
Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning
562,203 (1,309,621) 324,698 1,634,319
Cash and cash equivalents at end
886,901
The accompanying notes are an integral part of these financial statements.
Sainte-Marguerite-du-Lac-Masson (Les Pays-d’en-Haut RCM)
2,166,203
324,698
Notes to the
Financial Statements
Saint-Joseph-des-Érables (Robert-Cliche RCM) Photographer: Mélanie Jacques
December 31, 2013
1
Description of the business La Mutuelle des municipalités du Québec was incorporated on November 17, 2003 under the Cities and Towns Act as well under the Municipal Code of Québec. The main activity of La Mutuelle des municipalités du Québec consists of underwriting property and casualty insurance products (P&C) for its mutual members. The head office of La Mutuelle des municipalités du Québec is located at 7100 Jean-Talon Street East, Suite 805, Montreal, Quebec, H1M 3S3, Canada.
Under the Income Tax Act (Canada) and the Taxation Act (Quebec), La Mutuelle des municipalités du Québec is exempt from federal and provincial income tax as well as from the compensation tax payable by financial institutions. The publication of these financial statements was authorized by the Board of Directors of La Mutuelle des municipalités du Québec on February 25, 2014.
2
Role of the designated actuary and the independent auditor The designated actuary is appointed by the Board of Directors of La Mutuelle des municipalités du Québec. The designated actuary is responsible for making sure that the assumptions and methods used for purposes of valuating policy liabilities comply with recognized actuarial practices, the legislation in force, and any regulations or guidelines in this field. The designated actuary must also express an opinion regarding the appropriateness of the policy liabilities as at the statement of financial position date with respect to the totality of obligations toward policyholders. This review, which seeks to verify the accuracy and completeness of the valuation data and the analysis of the assets, is an important element to be considered when establishing an opinion.
indemnifications, provisions for non-settlement-related expenses and settlement expenses, provisions for claims incurred but not declared as well as reinsurers’ share in such settlements. The premium liability represents the costs that will have to be incurred to acquire the premiums. The services of the independent auditor were retained by mutual members at the time of the annual general meeting. The engagement of the independent auditor consists in conducting an independent audit of the financial statements in accordance with Canadian generally accepted auditing standards. Within the context of this audit engagement, the independent auditor considers the work of the designated actuary and his report on the policy liabilities of La Mutuelle des municipalités du Québec. The independent auditor’s report indicates management’s responsibility for the financial statements, the auditor’s responsibility as well as his opinion on the financial statements.
Policy liabilities are made up of two components: the claims liability and the premium liability. The claims liability includes provisions for
2013 MMQ ANNUAL REPORT • 21
3
Significant accounting policies Statement of compliance The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) and reflect the following significant accounting policies.
Basis of preparation The financial statements, reported in Canadian dollars, have been prepared on a historical cost basis, as is explained in the following accounting policies. Historical cost is generally based on the fair value of the consideration given in exchange for the assets.
Cash and cash equivalents For the purposes of the statement of cash flows, cash and cash equivalents include cash and term deposits with maturities of three months or less from the acquisition date. As at December 31, 2013 and December 31, 2012, cash and cash equivalents consisted solely of cash.
Financial instruments Financial assets and liabilities are recognized when La Mutuelle des municipalités du Québec becomes a party to the contractual provisions of the financial instruments. They are initially recognized at fair value and their subsequent measurement depends on their classification, as described below. Their classification depends on the nature and purpose for which the financial instruments were acquired or issued, their characteristics and the designation of such instruments by La Mutuelle des municipalités du Québec. Cash Investments – Term deposits Investments – Bonds Premiums receivable Accounts receivable Reinsurers’ share in claims and settlement expenses Premiums owed to reinsurers Accounts payable and accrued liabilities Experience refunds to Mutual members payable
Loans and receivables Loans and receivables Held to maturity Loans and receivables Loans and receivables Loans and receivables Other liabilities
Effective interest method The effective interest method is a method of calculating the amortized cost of a financial instrument and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts future cash receipts (including transaction costs, premiums and discounts earned or incurred) through the expected life of an instrument, to the net carrying amount on initial recognition. Impairment of financial assets Financial assets measured at amortized cost are tested for impairment at the end of each financial reporting period. The financial assets are impaired when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial assets, the estimated future cash flows of the assets have been adversely affected. Objective evidence of impairment includes the following situations: • Significant financial difficulties of the issuer or counterparty; • A breach of contract, such as a default or delinquency in interest or principal payments; • It becoming probable that the borrower will enter bankruptcy or other financial reorganization; • The disappearance of an active market for that financial asset because of financial difficulties. For certain categories of financial assets, assets that are assessed not to be impaired individually are collectively assessed for impairment. Objective evidence of impairment for a portfolio could include La Mutuelle des municipalités du Québec’s past experience of collecting payments, an increase in the number of delayed payments in the portfolio past the average credit period as well as observable changes in national or local economic conditions that correlate with default on receivables.
Other liabilities Other liabilities
Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market or designated into another category and that are recognized at amortized cost using the effective interest method, less any impairment. Held to maturity Financial assets held to maturity are non-derivative financial assets with fixed or determinable payments and fixed maturities, other than loans and receivables, that La Mutuelle des municipalités du Québec has the positive intent and ability to hold until maturity. These financial assets are measured at amortized cost using the effective interest method, less any impairment. Other liabilities Other liabilities are recorded at amortized cost using the effective interest method and include all financial liabilities.
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Transaction costs Transaction costs related to financial assets held to maturity, other liabilities, and loans and receivables are added to the carrying amount of the asset or netted against the carrying amount of the liability and are then recorded in net income over the expected life of the instrument using the effective interest method.
The amount of the impairment loss recognized is the difference between the asset’s carrying amount and the present value of estimated future cash flows taking into account guarantees and sureties, discounted at the financial asset’s original effective interest rate. The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets. If, in a subsequent period, the amount of the impairment loss decreases, and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed through profit or loss to the extent that the carrying amount of the investment at the date the impairment is reversed does not exceed what the amortized cost would have been had the impairment not been recognized. Derecognition of financial assets La Mutuelle des municipalités du Québec derecognizes a financial asset when the contractual rights to the cash flows from the asset expire or when the financial asset and substantially all risks and rewards of ownership of the financial asset are transferred to another party. If La Mutuelle des municipalités du Québec neither transfers nor retains substantially all risks and rewards of ownership
and continues to control the transferred asset, it recognizes its retained interest in the asset and an associated liability for amounts it may have to pay. Derecognition of financial liabilities La Mutuelle des municipalités du Québec derecognizes financial liabilities when, and only when, La Mutuelle des municipalités du Québec’s obligations are discharged, cancelled or expire. The difference between the carrying amount of the financial liability derecognized and the consideration paid and payable is recognized in net income. Regular-way purchases or sales of financial assets Regular-way purchases or sales of held-to-maturity financial assets are recorded on the trade date, which is the date on which La Mutuelle des municipalités du Québec commits to buy or sell the asset. Offsetting of financial assets and liabilities Financial assets and liabilities are presented on a net basis when there is a legally enforceable right to set off the recognized amount and La Mutuelle des municipalités du Québec intends to settle on a net basis or to realize the asset and settle the liability simultaneously.
Fair value The fair values of cash, premiums receivable, accounts receivable, the reinsurers’ share in claims and settlement expenses paid, premiums owed to reinsurers, accounts payable and accrued liabilities, and experience refunds payable to mutual members approximate their carrying amounts due to their short-term maturities.
Fixed assets Fixed assets are held for administrative purposes. They are recognized at cost less their residual value and accumulated depreciation. Depreciation is calculated based on their estimated useful lives using the straight-line method over the following terms: Layout Furniture Data processing equipment
Term of the lease (5 years) 10 years 3 years
The estimated useful lives, residual values and depreciation method are reviewed at the end of each reporting period. The impact of any change in estimates is accounted for on a prospective basis.
Albanel (Maria-Chapdelaine RCM) Photographer: Réjean Larouche
2013 MMQ ANNUAL REPORT • 23
Derecognition of fixed assets A fixed asset is derecognized upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising from the disposal or retirement of a fixed asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognized in profit or loss.
Intangible assets Intangible assets with finite useful lives, which consist of software, and acquired separately are recognized at cost less accumulated amortization and accumulated impairment losses. Amortization is recognized on a straight-line basis over their estimated useful lives, which is seven years. The estimated useful life and amortization method are reviewed at the end of each reporting period, with the effect of any changes in estimates being accounted for on a prospective basis. Intangible assets begin to be amortized as soon as they are ready for use. Derecognition of intangible assets An intangible asset is derecognized on disposal or when no future economic benefits are expected from its use or disposal. Gains or losses arising from derecognition of an intangible asset, measured as the difference between the net disposal proceeds and the carrying amount of the asset, are recognized in net income when the asset is derecognized.
Impairment of fixed assets and intangible assets At the end of each reporting period, La Mutuelle des municipalities du Québec reviews the carrying amounts of its fixed assets and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If such an indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss, if any. When it is not possible to estimate the recoverable amount of an individual asset, La Mutuelle des municipalités du Québec estimates the recoverable amount of the cash-generating unit to which the asset belongs. When a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual cashgenerating units, or otherwise they are allocated to the smallest group of cash-generating units for which a reasonable and consistent allocation basis can be identified. The recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognized immediately in profit or loss.
24 • 2013 MMQ ANNUAL REPORT
When an impairment loss subsequently reverses, the carrying amount of the asset (or a cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset (or cash-generating unit) in prior years. A reversal of an impairment loss is recognized immediately in net income.
Balances related to premiums a) Premiums and unearned premiums Premiums are recorded when they are written and recognized on the statement of comprehensive income over the period covered by the insurance policy.
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estimate of the total cost to settle all claims occurring before the closing of the financial statements, regardless of whether or not they were reported to La Mutuelle des municipalités du Québec. The provision for unpaid claims and settlement expenses has been established in accordance with the generally accepted actuarial principles under the standards set by the Canadian Institute of Actuaries. Since this provision is necessarily based on estimates, the final value may differ from the estimates. A provision for claims and settlement expenses is included for claims incurred but not reported based on past experience. The established methods for making the estimates are periodically revised and updated, and all adjustments are reflected in the year’s results. These adjustments are attributable to events related to the final settlement of claims but which have not yet occurred and which perhaps may not occur for some time. These adjustments may also be caused by additional information concerning the claims, changes in the interpretation of the contracts by the courts or major variances in relation to historical trends in terms of the seriousness or frequency of claims. Consequently, claims and settlement expenses are recognized when incurred. A provision is determined for external and internal settlement expenses.
Saint-Donat-de-Rimouski (La Mitis RCM) Photographer: Gino Caron Finalist in the 2014 MMQ photo contest
Unearned premiums represent the portion of written premiums related to the remaining coverage period up to fiscal year-end. b) Deferred commission costs Commissions associated with the earning of premiums are deferred and amortized over the duration of the related policies insofar as they are deemed recoverable, after having taken into account the claims and the related expenses as well as any expected investment income.
Balances related to losses
The best estimates for incurred, but not reported, claims liabilities on a gross and net basis have been determined based on various actuarial methods, mainly the Bornhuetter-Ferguson method. This method uses the historical development of incurred and reported claims, based on reserves on a case-by-case basis plus benefits paid, per year of accident in order to anticipate changes in claims. It considers the concept of earned premiums to assess future developments, making it possible to introduce a measure of risk exposure and to use an indication of the loss anticipated on the future loss experience. Different assumptions are used to estimate the unreported claims liability on a gross and net basis: the discount rate, the margin for unfavourable variances and the loss ratio. When the undiscounted claims liability is established, it is adjusted to present value. The claims liability is discounted using a rate based on the rate of return of investments held by La Mutuelle des municipalités du Québec, from which a 0.25% margin is deducted. This discount rate is 2.03% as at December 31, 2013 (1.99% in 2012). Actuarial standards require that a margin for unfavourable variances be considered to take into consideration the uncertainty level of the assumptions used. The rates used to establish the margins for unfavourable variances as at December 31, 2013 vary from 5% (5% in 2012) for short-term risks, such as for property and automobiles, and 12.5% (12.5% in 2012) for long-term risks, such as civil liability, errors and omissions. As mentioned previously, the method used to establish the claims liability is based on a loss ratio. As at December 31, 2013, this ratio varies from 10% to 75% (19% to 70% in 2012).
a) Provision for unpaid claims and settlement expenses The provision for unpaid claims and settlement expenses is the
2013 MMQ ANNUAL REPORT • 25
Saint-Côme (Matawinie RCM) Photographer: Serge Raymond
b) Reinsurers’ share in the provision for unpaid claims and settlement expenses The reinsurance amounts that are expected to be collected in relation to claims and settlement expenses are recorded as assets in accordance with the reinsurance contracts and based on principles consistent with the recognition of the provision for unpaid claims and settlement expenses. The margin for unfavourable variances applied for reinsurance is 1% as at December 31, 2013 (1% in 2012).
Investment income Interest earned on a financial asset is recognized when it is probable that the economic benefits will flow to La Mutuelle des municipalités du Québec and that the amount of revenues can be reliably measured. Interest is recognized on a time basis, based on the amount of unpaid capital and the applicable effective interest rate. Experience refunds declared by the financial institution and calculated on interest received is recognized when the right to receive such income has been established.
Experience refunds to mutual members Experience refunds are presented in the statement of comprehensive income on the date that they are declared by the Board of Directors. At that time, experience refunds are recorded as experience refunds payable to mutual members on the statement of financial position. Experience refunds disbursed to mutual members that withdraw before the end of the eligibility period are deducted from the current period charge.
Use of estimates The preparation of financial statements in accordance with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the year. Actual results could differ from management’s best estimates. The most significant estimates are related to the determination of:
26 • 2013 MMQ ANNUAL REPORT
• the provision for unpaid claims and settlement expenses as well as the reinsurers’ share; • the estimated useful lives of fixed assets and intangible assets. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods.
Critical judgements in applying accounting policies The following are the critical judgements, apart from those involving estimates, that the directors have made in the process of applying the accounting policies of La Mutuelle des municipalités du Québec. Useful lives of fixed assets and intangible assets La Mutuelle des municipalités du Québec reviews the estimated useful lives of fixed assets at the end of each reporting period. During the current year, management determined that no useful lives need to be modified. Impairment of financial assets At the end of each reporting period, La Mutuelle des municipalités du Québec determines if there is objective evidence of the impact of one or more events that occurred after the initial recognition of the financial assets on the estimated future cash flows of the assets. During the year considered, management determined that no such objective evidence exists. Held-to-maturity financial assets Management has reviewed the financial assets held to maturity of La Mutuelle des municipalités du Québec based on its capital and liquidity requirements and has confirmed that La Mutuelle des municipalités du Québec has the positive intention and ability to hold these assets to maturity. The financial assets held to maturity are the municipal bonds presented in Note 5.
Mont-Laurier (Antoine-Labelle RCM) Photographer: Blandine Boulianne
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Change in accounting policies Application of new accounting standards IFRS 7, Financial Instruments: Disclosures The amendment concerns the presentation of additional disclosures on compensation agreements to enable financial statement users to understand the impact of such arrangements on the financial position of La Mutuelle des municipalités du Québec. The amendments to IFRS 7 require entities to disclose information about rights of offset and related arrangements (such as collateral posting requirements) for financial instruments under an enforceable master netting agreement or similar arrangement. La Mutuelle des municipalités du Québec has made the additional disclosures required in Note 6. IFRS 13, Fair Value Measurement This standard brings further clarification on fair value measurement and disclosures on measuring fair value when fair value measurement is required or permitted by another IFRS. La Mutuelle des municipalités du Québec has made the additional disclosures required in Note 5.
Future accounting changes The IASB published phase I of IFRS 9, Financial Instruments, which replaces IAS 39, Financial Instruments: Recognition and Measurement, for the classification and valuation of financial assets and liabilities. Among other things, the standard requires that financial assets be measured at amortized cost or fair value on the basis of the entity’s business model for managing its assets. It also changes the accounting for financial liabilities measured using the fair value option. On November 19, 2013, the IASB removed the mandatory effective date of January 1, 2015. A new date will be set when all phases of the IFRS 9 project are nearly complete. In addition, the December 16, 2011 amendment also states that entities will not have to restate comparative figures. However, additional disclosure on the effects of this standard will be required. Early adoption is permitted. La Mutuelle des municipalités du Québec is currently assessing the impact of this new standard on its financial statements.
On December 16, 2011, the IASB issued an amendment to IAS 32, Financial Instruments: Presentation. The changes clarify the application of rules for offsetting financial assets and liabilities. The following concepts have been clarified: legally enforceable right of set-off, application of simultaneous realization and settlement, offsetting a guaranteed amount and the unit of accounting for application of the offsetting obligations. This amendment will apply to financial statements for periods beginning on or after January 1, 2014. The amendments must be applied retrospectively. Early adoption is permitted. La Mutuelle des municipalités du Québec is currently assessing the impact of these amendments on its financial statements. In May 2013, the IASB published a narrow scope amendment to IAS 36, Impairment of Assets. The amendment entitled Recoverable Amount Disclosures for Non-Financial Assets proposes to require additional disclosures about the recoverable amount of impaired assets if that amount is based on fair value less costs of disposal and also clarifies the IASB’s intention concerning the disclosures about the recoverable amount following application of IFRS 13, Fair Value Measurement. The provisions set out in this amendment will be applied to financial statements for periods beginning on or after January 1, 2014. Early adoption is permitted. La Mutuelle des municipalités du Québec is currently assessing the impact of this amendment on its financial statements. The IASB publishes annual improvements in order to amend certain standards. The annual improvements consist of adjustments or minor clarifications to standards. In December 2013, the IASB published the 2010-2012 and 2011-2013 improvement cycles covering seven and four standards, respectively. The provisions provided for in these improvements will be applied to financial statements for periods beginning on or after July 1, 2014. La Mutuelle des municipalités du Québec is currently assessing the impact of these amendments on its financial statements.
2013 MMQ ANNUAL REPORT • 27
5
Investments
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Nominal value
Fair Carrying value amount
December 31, 2013 Loans and receivables Term deposits, $9,000,000 redeemable at all times, bearing interest at 1.15% to 1.60%, maturing from February 2014 to July 2015
23,600,000
Held to maturity Municipal bonds, stipulated interest rates of 1.40% to 5.40%, effective interest rates of 1.32% to 5.31%, maturing from February 2014 to January 2021
23,296,000 23,668,175 23,498,005
46,896,000 47,268,175 47,098,005
December 31, 2012 Loans and receivables Term deposits, $17,600,000 redeemable at all times, bearing interest at the rate of 1.14% to 1.41%, maturing from March 2013 to July 2015
22,600,000
22,600,000
22,600,000
Held to maturity Municipal bonds, stipulated interest rates of 2.25% to 5.40%, effective interest rates of 1.34% to 5.31%, maturing from January 2013 to January 2021
22,487,000
23,275,962
22,753,071
45,087,000 45,875,962 45,353,071
($) ($) ($)
23,600,000
23,600,000
Hierarchy of recurring fair value measurements Disclosures regarding financial instruments must be presented as a hierarchy that categorizes the inputs to valuation models used to value financial assets and liabilities. The hierarchy gives the highest priority to readily available unadjusted quoted prices in active markets for identical assets or liabilities and lowest priority to unobserved inputs. The three levels of the hierarchy are described below: Level 1 – Fair value measurement based on quoted prices in active markets (unadjusted) for identical assets or liabilities. Level 2 – Fair value measurement based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 – Fair value measurement based on significant unobservable inputs that are supported by little or no market activity and incorporate management’s best estimates. The fair value of municipal bonds for which the market is not active is determined by independent valuation services that take into consideration the return or market price of financial instruments that have comparable conditions, such as quality, maturity and type of investment. Municipal bonds are classified at Level 2. The fair value of term deposits approximates their carrying amount due to the weak interest rate fluctuations and their relatively short maturities. There were no transfers between levels in 2013 and 2012.
28 • 2013 MMQ ANNUAL REPORT
6
Premiums receivable In accordance with the provisions of an enforceable netting agreement, La Mutuelle des municipalités du Québec accounts for premiums receivable and commissions payable on a net basis. The gross amounts are as follows:
2013 ($)
2012 ($)
Financial assets (gross) Premiums receivable
12,247,270
11,570,123
Offset financial liabilities Commissions payable
(1,837,280)
(1,735,518)
Net amount presented in the statement of financial position
10,409,990
9,834,605
La Sarre (Abitibi-Ouest RCM) Photographer: Bryan Trottier Finalist in the 2014 MMQ photo contest
2013 MMQ ANNUAL REPORT • 29
7
Claims and settlement expenses The change in the provision for claims and settlement expenses as well as reinsurers’ share in the claims and settlement expenses included in the statement of financial position, together with its impact on the claims and settlement expenses shown in the statement of comprehensive income for the years are as follows: Gross Transferred
Net
December 31, 2013 Provision for unpaid claims and settlement expenses at beginning
27,349,000
6,717,313
20,631,687
Increase (decrease) in estimated losses and expenses related to claims incurred: – during the current year – during previous years
24,706,074 (3,418,929)
8,453,529 (520,868)
16,252,545 (2,898,061)
21,287,145
7,932,661
13,354,484
7,373,233 9,702,410
2,044,215 2,588,079
5,329,018 7,114,331
17,075,643
4,632,294
12,443,349
Provision for unpaid claims and settlement expenses at end
31,560,502
10,017,680
21,542,822
December 31, 2012 Provision for unpaid claims and settlement expenses at beginning
24,719,000
6,333,000
18,386,000
Increase in estimated losses and expenses related to claims incurred: – during the current year – during previous years
16,066,186 886,762
3,074,320 509,637
12,991,866 377,125
16,952,948
3,583,957
13,368,991
5,552,898 8,770,050
944,759 2,254,885
4,608,139 6,515,165
14,322,948
3,199,644
11,123,304
Provision for unpaid claims and settlement expenses at end
27,349,000
6,717,313
20,631,687
Amounts paid for claims incurred: – during the current year – during previous years
Amounts paid for claims incurred: – during the current year – during previous years
($) ($) ($)
Loss ratio sensitivity analysis Given that a loss ratio is used to establish the provision for unpaid claims and settlement expenses, a 5% increase or decrease in the loss ratio would result in an increase or decrease in the provision for unpaid claims and settlement expenses, net of the reinsurers’ share, of approximately $310,000 as at December 31, 2013 ($341,000 as at December 31, 2012).
Saint-Marc-de-Figuery (Abitibi RCM)
30 • 2013 MMQ ANNUAL REPORT
Photographer: Jocelyne Bilodeau
Estimated ultimate claims: (in thousands of dollars) At end of year of occurrence
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Total
– one year later
4,389 6,972 5,665 7,382 8,992 9,689 12,680 11,034 12,992 16,255
– two years later
3,723 6,689 5,446 7,883 9,642 11,920 11,998 10,656 11,131
– three years later
3,692 6,664 5,367 8,170 11,626 11,624 11,855 10,128
– four years later
3,793 6,670 5,902 9,424 11,879 11,590 11,644
– five years later
3,741 6,824 6,278 9,200 11,651 11,560
– six years later
3,991 7,025 6,318 9,167 11,481
– seven years later
4,004 6,993 7,587 9,174
– eight years later
4,032 6,891 7,506
– nine years later
4,032
– ten years later
4,032
Current estimate of cumulative claims
4,032 6,864 7,506 9,174 11,481 11,560 11,644 10,128 11,131 16,255 99,775
Less: Cumulative payments
4,005 6,796 7,384 8,495 10,851 10,248 9,703 7,576 7,842 5,332 78,232
Provision for unpaid claims And settlement expenses – net
27
6,864
68
122
679
630
1,312
1,941
2,552
3,289 10,923 21,543
Reinsurers’ share in the provision for unpaid claims and settlement expenses 10,018 Provision for unpaid claims and settlement expenses – gross
31,561
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Deferred commission costs
2013 ($)
2012 ($)
Balance at beginning
2,396,601
2,295,815
Commission costs deferred during the year Amortization of deferred commission costs during the year
4,969,355 4,761,724 (4,852,397) (4,660,938)
Balance at end
116,958
100,786
2,513,559
2,396,601
S
r
2013 MMQ ANNUAL REPORT • 31
9
Fixed assets 2013 ($)
Carrying amounts Layout Furniture Data processing equipment
2012 ($)
10,218 45,181 54,395
60,042 50,299 46,604
109,794
156,945
Data processing Cost Layout Furniture equipment Total ($) ($) ($) ($) Balance as at January 1, 2012 140,232 58,601 31,452 230,285 Acquisitions – 6,891 41,959 48,850 Disposals – (2,756) – (2,756) Balance as at December 31, 2012 Acquisitions
140,232 –
62,736 1,029
73,411 35,978
276,379 37,007
Balance as at December 31, 2013
140,232
63,765
109,389
313,386
Accumulated depreciation Balance as at January 1, 2012 (41,056) (6,118) (8,138) Depreciation expense (39,134) (6,637) (18,669) Elimination related to disposal – 318 – Balance as at December 31, 2012 Depreciation expense
Maria (Avignon RCM) Photographer: Alain Boudreau
32 • 2013 MMQ ANNUAL REPORT
(55,312) (64,440) 318
(80,190) (49,824)
(12,437) (6,147)
(26,807) (28,187)
(119,434) (84,158)
Balance as at December 31, 2013 (130,014)
(18,584)
(54,994)
(203,592)
10
Intangible assets
2013 ($)
2012 ($)
Carrying amounts Acquired separately Software
1,063,596
1,091,794
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Cost Software ($) Balance as at January 1, 2012 1,076,249 Acquisitions 15,545 Balance as at December 31, 2012 1,091,794 Acquisitions 51,347 Balance as at December 31, 2013
1,143,141
Accumulated amortization Software ($) Balance as at January 1, 2012 – Amortization expense – Balance as at December 31, 2012 Amortization expense Balance as at December 31, 2013
– 79,545
79,545
As at December 31, 2012, intangible assets had not yet begun to be amortized since the software was not ready for use.
11
Unearned premiums
2013 ($)
2012 ($)
Balance at beginning
15,980,344
Net written premiums during the year Net earned premiums during the year
27,269,062 25,806,599 (26,490,599) (25,134,697)
Balance at end
15,308,442
778,463
671,902
16,758,807
15,980,344
12
Investment income
2013 ($)
2012 ($)
Loans and receivables Interest Experience refunds on interest received
344,645 315,672 15,075 19,923
359,720 335,595
Held to maturity Interest
707,889
688,418
1,067,609
1,024,013
2013 MMQ ANNUAL REPORT • 33
13
Experience refunds to mutual members The payment of experience refunds must be approved by the Board of Directors. The amount of the experience refunds is based on the historic performance of La Mutuelle des municipalités du Québec and on the conclusions of the dynamic capital adequacy test prepared annually by the designated actuary. Among other things, this test determines whether La Mutuelle des municipalités du Québec has the financial capacity to meet adverse situations while remaining financially viable. On November 15, 2013, the Board of Directors approved experience refunds of $3,000,000 for the year ended December 31, 2013 ($2,000,000 for the year ended December 31, 2012). To be eligible for experience refunds for the year ended December 31, 2013, a mutual member must: • Be the holder of an insurance policy that took effect between December 31, 2008 and December 30, 2009, inclusively;
The formula used for calculating each eligible mutual member’s share is a two-step process: • The first portion of $1,500,000 in experience refunds is distributed to eligible mutual members in proportion to the total amount of premiums paid during the period of December 31, 2007 to December 30, 2011; • The second portion of $1,500,000 in experience refunds is based on the mutual member’s contribution to the profitability of La Mutuelle des municipalités du Québec. The latter is established as a function of the insurance records’ quality based upon the loss experience of the corresponding period, which must be below a maximum threshold. Experience refunds for mutual members that withdraw before the end of the eligibility period are presented separately in the statement of comprehensive income.
• Keep its insurance policy in effect between December 31, 2013 and December 30, 2014.
14
Mutual members’ shares Membership and initial contribution
Withdrawal
To become a mutual member of La Mutuelle des municipalités du Québec, a municipality must adopt a resolution in which it adheres to the Agreement under section 465.1 and thereafter of the Cities and Towns Act and section 711.2 and thereafter of the Municipal Code of Québec signed on April 3, 2003, which is deemed to form an integral part of said resolution, take out insurance with La Mutuelle des municipalités du Québec and pay the initial contribution of $100.
According to the Municipal Code of Québec and the Cities and Towns Act, a mutual member may not withdraw from La Mutuelle des municipalités du Québec within five years of joining La Mutuelle des municipalités du Québec.
The initial contribution is non-refundable.
A mutual member who withdraws from La Mutuelle des municipalités du Québec remains subject to any special contribution as determined by the Board of Directors within a period of two years following the withdrawal. If applicable, the contribution is based on the premium paid by this mutual member and its agencies prior to the withdrawal.
Every member has the right to be invited to the meetings of La Mutuelle des municipalités du Québec, to attend such meetings, and to cast a vote in addition to performing any function within La Mutuelle des municipalités du Québec.
Annual contribution The Board of Directors can set the amount of the annual contribution, as necessary. If no annual contribution is determined, the amount is considered to be zero.
Special contribution
In addition, a mutual member may not withdraw from La Mutuelle des municipalités du Québec without providing 12 months’ prior notice to general management.
In all cases, the departure of a mutual member must be approved by the Autorité des marchés financiers in accordance with the Municipal Code of Québec and the Cities and Towns Act.
2013
2012
996
982
99,600
98,200
The Board of Directors may order that a special contribution be paid, as necessary. This contribution is divided among the mutual members in proportion to the amount of the premium written by the mutual member and its agencies.
Number of mutual members Contributions from Mutual members ($)
Suspension or expulsion
During the year ended December 31, 2013, nineteen mutual members (sixteen mutual members in 2012) joined La Mutuelle des municipalités de Québec and five mutual members (two mutual members in 2012) withdrew.
The Board of Directors may order the suspension or expulsion of a mutual member pursuant to the terms and conditions set out in By-law 1.1 of La Mutuelle des municipalités du Québec.
34 • 2013 MMQ ANNUAL REPORT
15
Additional cash flow information 2013 ($)
2012 ($)
Premiums receivable Accounts receivable Reinsurers’ share in claims and settlement expenses Prepaid expenses Premiums owed (prepaid) to reinsurers Accounts payable and accrued liabilities Experience refunds payable to mutual members
(575,385) 409,997 (455,832) (20,162) (1,398,363) (261,020) 1,000,000
(532,698) (109,523) (60,796) (55,559) 214,955 281,887 499,850
(1,300,765)
238,116
Change in non-cash operating working capital items
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of attai n S ne w he ig i ng hts
16
Commitments La Mutuelle des municipalités du Québec has concluded a distribution agreement for its insurance products upon payment of a 15% commission on gross written premiums. The agreement expires on December 31, 2026.
La Mutuelle des municipalités du Québec has agreed to pay a total of $177,445 under service agreements expiring on various dates until 2015. Payments due in the forthcoming years are as follows:
La Mutuelle des municipalités du Québec has concluded an agreement with the Association des Directeurs Municipaux du Québec under which it will be required to pay an amount of up to $75,000 annually, mainly for professional development activities. This agreement expires in 2015. It also has commitments with the Fédération québécoise des municipalités (FQM) to pay up to $100,000 annually to maintain the liaison committee and related visibility. This agreement expires in 2014. La Mutuelle des municipalités du Québec has also committed to pay the FQM $45,000 annually to obtain visibility at its conferences. This agreement expires in 2015.
2014
2015 37,942
($)
La Mutuelle des municipalités du Québec has concluded an agreement to acquire a data management operating permit and program for processing damage insurance activities. The contract also includes software adaptation, data migration and maintenance. This agreement expires in December 2015. Future payments will amount to $247,613 and will be allocated as follows:
139,503
La Mutuelle des municipalités du Québec leases automotive equipment and premises under operating leases that expire on various dates until June 2024. Future rental payments will total $2,019,492 and include the following payments over the next five years: ($)
2014
227,046
2015 174,019
2016
167,324
2017
169,025
2018
170,726
2019 à 2024
1,111,352
($)
2014
121,977
2015 125,636
The costs relating to these operating leases recognized totalled $171,526 in 2013 ($162,630 in 2012). These costs are presented as administrative expenses and as policyholder benefits and settlement expenses.
17
Contingencies In the normal course of business, various claims are pending against La Mutuelle des municipalités du Québec. Such claims are often subject to much uncertainty and their outcome cannot be predicted. According to management, adequate provision has been
made for these claims and their settlement should not have a significant adverse effect on La Mutuelle des municipalités du Québec’s future operating results or financial position.
2013 MMQ ANNUAL REPORT • 35
Frampton (La Nouvelle-Beauce RCM)
18
Capital management
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of c e n e xce ll e
La Mutuelle des municipalités du Québec manages its capital funds in such manner as to comply with capital adequacy as required under An Act respecting insurance (R.S.Q. c. A-32) and its financial commitments to stakeholders in the settlement of claims). The regulatory capital differs from the mutual members’ equity as stated in the statement of financial position owing to the fact that it is weighted as a function of the risk associated with the financial situation and insurance activities. Under An Act respecting insurance, La Mutuelle des municipalités du Québec is required to maintain adequate capital funds to ensure sound and prudent management practices. The Autorité des marchés financiers has issued a guideline that limits the minimum capital funds standard according to the minimum capital test (MCT), represented by the ratio of available capital over the minimum required capital (the solvency ratio). The available capital corresponds to mutual members’ equity. The minimum required capital comes from the assessment of the risk of financial assets and liabilities related to policies by the application of various capital factors. La Mutuelle des municipalités du Québec has set the minimal target ratio at 175%, as filed with the Autorité des marchés financiers. (in thousands of dollars) Total available capital
2013 ($)
2012 ($)
22,201
20,524
6,401
5,906
Capital surplus
15,800
14,618
Percentage of MCT
347 %
348 %
Total capital required
As at December 31, 2013, La Mutuelle des municipalités du Québec was in compliance with MCT requirements.
36 • 2013 MMQ ANNUAL REPORT
19
Risk management related to financial instruments and insurance risk Risk management policies and objectives In the normal course of business, La Mutuelle des municipalités du Québec is exposed to a variety of financial risks, namely credit, liquidity, interest rate, market and insurance and reinsurance risks. The Board of Directors is in charge of understanding and approving the financial risk management strategies, and management is in charge of implementing these strategies. La Mutuelle des municipalités du Québec’s goal with regard to financial risks is to optimize the risk-return ratio within defined limits throughout all its activities. Risk control is carried out through the application of policies, strategies as well as sound and cautious management procedures that are blended into all of La Mutuelle des municipalités du Québec’s operations. The Board has created an ethics and governance committee, an audit and investment committee, and an insurance and prevention committee to identify, understand, communicate and manage La Mutuelle des municipalités du Québec’s risk exposure. In August 2012, La Mutuelle des municipalités du Québec adopted an integrated risk management policy, which structures and integrates upstream actions to be taken for all types of risk to which it is exposed. La Mutuelle des municipalités du Québec has an investment policy whose objectives are prioritized as follows: the safeguarding of capital from risks of losses, neutralizing poor matching of capital with needs for liquidity, maximizing rates of return while minimizing annual fluctuations. The investment policy is updated annually or more frequently, if the situation warrants. The risk exposure, objectives, procedures and risk management processes have not changed significantly during the year, with the exception of the above-mentioned item.
Financial risks a) Credit risk Credit risk arises from potential losses involving a borrower’s or a counterparty’s failure to fulfill its contractual duties when impending and outstanding. A counterparty can be any person or entity whose cash resources or other valuable considerations are considered forthcoming in order to extinguish a liability or obligation owed to La Mutuelle des municipalités du Québec.
Investments All term deposits are held by Desjardins. La Mutuelle des municipalités du Québec considers that the credit risk relating to this financial institution is low for the same reasons as mentioned above. The primary objective of the investment policy is to safeguard capital funds. To meet this objective and comply with the applicable regulatory provisions, La Mutuelle des municipalités du Québec favours investing in instruments whose credit risk rating is low. The investment policy makes it possible to acquire bonds issued or guaranteed by the federal, provincial or municipal government, with preference being given to Quebec municipalities. Municipal bond issuers have no credit rating on the market, making it impossible to measure their credit risk. As at December 31, 2013, its entire bond portfolio was made up of bonds from Quebec municipalities. As at December 31, 2013, four municipalities account for 38% of the bond portfolio (three municipalities accounted for 34% in 2012). Since adopting the new investment policy on December 11, 2012, La Mutuelle des municipalités du Québec has set quantitative limits on the concentration of any one security compared to the overall mandatory bond portfolio. Accounts receivable Accounts receivable include interest and taxes receivable. The credit risk associated with interest receivable is the same as for term deposits and municipal bonds. Due from reinsurers Failure on the part of reinsurers to fulfill their obligations could result in losses for La Mutuelle des municipalités du Québec. La Mutuelle des municipalités du Québec does business with more than one reinsurer, thereby reducing its concentration risk. In addition, more than 100% of the reinsurers with which it does business are certified reinsurers having a credit rating of A- or better, which serves to reduce the credit risk.
Credit risk also includes concentration risk. Concentration risk arises when there is a concentration of investments in entities with similar characteristics, or when a substantial investment is made with a single entity.
Premiums receivable All premiums are receivable from the only broker mandated by La Mutuelle des municipalités du Québec. La Mutuelle des municipalités du Québec has no knowledge of information leading it to believe that the dealer with whom it deals may be faced with insolvency problems. As at December 31, 2013 and December 31, 2012, no premiums receivable were outstanding.
Based on the valuation performed by La Mutuelle des municipalités du Québec, cash, investments, accounts receivable, amounts receivable from reinsurers and premiums receivable are the main items that may represent a credit risk.
Maximum credit risk The maximum credit risk exposure associated with financial instruments is equivalent to the carrying amount of the financial assets presented in the statement of financial position.
Cash All cash is held by Desjardins, a reputable financial institution in Quebec with an excellent credit rating. La Mutuelle des municipalités du Québec considers that the credit risk related to this financial institution is low. La Mutuelle des municipalités du Québec does not actively manage the concentration risk related to cash.
2013 MMQ ANNUAL REPORT • 37
b) Liquidity risk Liquidity risk represents the possibility that La Mutuelle des municipalités du Québec may not be able to gather sufficient cash resources, when required and under reasonable conditions, to meet its financial obligations. The investment policy uses the timeframe established to settle claims in the dynamic capital adequacy testing to establish acceptable investment terms. The liquidity risk for current financial items is low. Cash, premiums receivable, accounts receivable and the reinsurers’ share in claims
As at December 31, 2013 (in thousands of dollars)
and settlement expenses are sufficient to allow La Mutuelle des municipalités du Québec to meet its financial obligations to settle accounts payable and accrued liabilities, experience refunds payable to mutual members and premiums owed to reinsurers. Liquidity risk mainly relates to the provision for unpaid claims and settlement expenses, net of the reinsurers’ share. The following tables present an estimate of amounts established for each settlement period and the matching of investment terms.
Less than 1 to 2 3 to 4 More than 12 months years years 5 years
Provision for unpaid claims and settlement expenses, net of the reinsurers’ share (undiscounted amount)
11,485
4,597
4,648
1,399
Term deposits Bonds
22,600 7,662
1,000 7,946
– 4,933
– 2,755
Total
30,262
8,946
4,933
2,755
As at December 31, 2012 (in thousands of dollars) Provision for unpaid claims and settlement expenses, net of the reinsurers’ share (undiscounted amount) 11,017 4,494 4,396 1,276 Term deposits Bonds
22,600 4,997
– 7,662
– 5,420
– 4,408
Total
27,597
7,662
5,420
4,408
(Arthabaska RCM) Photographer : Francis Paquet
38 • 2013 MMQ ANNUAL REPORT
decrease or increase in the burden of losses and the settlement expenses. A 1% change in the discount rate would have a $302,000 impact on the provision for unpaid claims and settlement expenses as at December 31, 2013 ($249,000 as at December 31, 2012). Management estimates that an immediate hypothetical 1.0% parallel increase in interest rates would decrease the fair value of bonds by approximately $509,000 as at December 31, 2013 ($526,000 as at December 31, 2012). Conversely, a 1.0% decrease in interest rates would increase the fair value of bonds by approximately $509,000 as at December 31, 2013 ($526,000 as at December 31, 2012).
Insurance risk La Mutuelle des municipalités du Québec was created for general insurance purposes and in order to manage risk for member municipalities as well as their agencies.
Sainte-Aurélie (Les Etchemins RCM) Photographer: Claude Parent
The risk in any insurance contract is the possibility that an insured event will occur, together with the uncertainty as to the value of the resulting claim. Due to the very nature of an insurance contract, this risk is random and therefore unpredictable. However, overall, these risks follow probability trends making it possible to manage insurance risk. There are three possible types of insurance risk in the normal course of business: product design and pricing risk, underwriting risk and claims settlement risk.
c) Market risk Market risk occurs when the value of an investment fluctuates because of changes in market prices, whether those changes are caused by factors specific to the investment or its issuer, or by factors affecting all instruments traded in the market. La Mutuelle des municipalités du Québec seeks to minimize this risk by making investments whose market risks are low. The policy of La Mutuelle des municipalités du Québec is to hold on to its bond investments to maturity, thereby limiting market risk. d) Interest rate risk Interest rate risk occurs when interest rates fluctuate and negatively affect the financial position of La Mutuelle des municipalités du Québec, which occurs when market interest rates increase. Interest rate risk is mainly due to term deposit investments. The policy of La Mutuelle des municipalités du Québec is to invest in term deposits that are redeemable at all times or maturing in less than two years. Interest rate risk is also attributable to bond investments. The policy of La Mutuelle des municipalités du Québec is to hold on to its bond investments to maturity, thereby limiting market risk since a fluctuation in interest rates would not change the nominal value received upon maturity of the bond. Information on the maturity of interest-bearing investments is presented in the Liquidity risk section in this note. e) Interest rate sensitivity When the time value of money is taken into consideration to establish provisions for unpaid claims and settlement expenses, an increase or decrease in the capitalization rate may result in a
Product design and pricing risk Product design and pricing risk is the financial risk of losses related to insurance operations, namely, when commitments exceed those that were anticipated or when such commitments exceed the price that was set for such products. La Mutuelle des municipalités du Québec is a niche market insurer specializing in the municipal sector. It has acquired insurance expertise in this sector for both insurance products and their application. Since its creation, the insurance committee has validated changes to underwriting parameters or the pricing schedule and submitted this to the Board, as well as any additions, extensions or deletions of guarantees, therefore monitoring profitability. La Mutuelle des municipalités du Québec’s exposure to insurance risk concentration is mitigated by portfolio diversification in various geographical areas and lines of business. La Mutuelle des municipalités du Québec has exposure to catastrophic losses and has sought protection by signing reinsurance treaties limiting the losses that could result from each event to $250,000 and providing a guarantee of up to $40 million. Underwriting risk Underwriting risk is the risk resulting from the selection and acceptance of risks to be insured. Under its statutes, La Mutuelle des municipalités du Québec’s sole purpose is to insure municipal risks in Quebec. This specialization provides greater stability and predictability, thereby reducing the anti-selection risk. Moreover, to minimize risks, insurance policies are underwritten in accordance with La Mutuelle des municipalités du Québec’s management practices taking its risk tolerance and underwriting standards into account.
2013 MMQ ANNUAL REPORT • 39
The insurance program is available to local municipalities with a population of less than 30,000, regional county municipalities and inter-municipal boards. Most local municipalities insured with La Mutuelle des municipalités du Québec have fewer than 5,000 inhabitants and there is no urban concentration.
Grande-Vallée (La Côte-de-Gaspé RCM) Photographer: Marc-Antoine Dufresne
La Mutuelle des municipalités du Québec offers property insurance, civil liability insurance, automobile insurance as well as complementary coverage. The insurance portfolio is stable, with a retention rate of more than 99% since its creation. Notwithstanding the fact that a mutual member becomes a member for an initial five-year period, La Mutuelle des municipalités du Québec issues 12-month insurance contracts that are reviewed annually upon their renewal. Following the initial five-year period, if a mutual member wishes to withdraw, 12 months’ advance notice must be provided to La Mutuelle des municipalités du Québec. These rules allow La Mutuelle des municipalités du Québec to invest substantially in risk management while also enabling it to acquire in-depth knowledge of each municipality being insured. Given its very high rate of market penetration, La Mutuelle des municipalités du Québec underwrites a dozen new business opportunities annually in accordance with the standards of La Mutuelle des municipalités du Québec as well as prices in effect. Moreover, La Mutuelle des municipalités du Québec has created two committees to oversee underwriting activities. The insurance technical committee reviews, on a weekly basis, the more complex applications submitted by brokers representing mutual members. This committee consists of the following members: the Underwriting and Business Development manager, the Underwriting supervisor, the Indemnification manager, the Indemnification department head and the general manager and chief operating officer. The committee reaches a decision regarding applications following their analysis. On another level, the Board of Directors’ insurance committee, chaired by a Board member and composed of internal staff as well as external members, makes proposals to the Board of Directors on such matters as changes to the underwriting guide. As mentioned previously, underwriting risk is also mitigated by a comprehensive risk management program. All mutual members undergo periodic inspections and new risks are inspected upon request to enable underwriters to make informed decisions. Claims settlement risk The claims settlement risk is influenced by the frequency and seriousness of claims as well as by the uncertainty in estimating future claims payments. Property insurance – The largest claims relating to property insurance involve fires, water damage and natural risks such as storms, floods and earthquakes. As most fires in municipal buildings are electrical in origin, an electrical panel inspection program has been implemented by La Mutuelle des municipalités du Québec’s thermography expert. This way, each risk is verified by a building inspector (TPI). Training is given by our fire protection advisor to encourage mutual members to regularly monitor the condition of their buildings. Civil liability – Civil liability claims often involve a bodily injury suffered on city property, in particular after falling on a sidewalk
40 • 2013 MMQ ANNUAL REPORT
or having an accident while taking part in a recreational activity. Firefighting activities also result in a large number of claims. Due to climate change, environmental risks such as sewer backups and ditch overflows are likely to increase. The general civil liability-related risks are mitigated by the risk management program. An expert in the prevention of recreational and sport accidents is available to mutual members to plan activities or the use of specialized equipment and to put in place risk mitigation measures. The experts go on site to assess the location, establish relevant standards and best practices or to provide training regarding matters involving high or particular risks. Where firefighting activities are concerned, municipalities that have a fire risk coverage diagram and that have put in place the measures in their implementation plan in accordance with the established timetable will be granted immunity under the Fire Safety Act. In addition, the fire safety expert travels around the regions to support mutual members in implementing their diagram. La Mutuelle des municipalités du Québec also has an environmental specialist who informs municipalities regarding the application of the many legislative parameters relating to environmental matters. Errors and omissions – Most claims relating to errors and omissions result from alleged errors relating to the issuance of permits or the awarding of a contract being contested by certain
bidders. La Mutuelle des municipalités du Québec has developed a range of training activities given by internal experts or in collaboration with municipal associations. Automobile insurance – This risk is rather low since, in Quebec, automobile risk is limited to property. Bodily injuries are covered by government insurance.
the department analysts spare no effort in preparing reliable financial data, this is not an exact science and surpluses or deficiencies in provisions may occasionally occur in spite of the control methods put in place to limit them. Moreover, insurers will always have to face changes in legal decisions, which can sometimes complicate the outcome of disputes anticipated. Any loss of more than $100,000 is examined by the executive committee.
Theft and embezzlement – Given the nature of mutual members’ activities, theft is not a major concern for La Mutuelle des municipalités du Québec.
Additional provisions for claims incurred but that have not yet been reported and provisions for claims that have arisen and been reported but for which inadequate provisions exist are also recognized.
Equipment breakdown – Generally, the frequency of equipment breakdown claims is low. Furthermore, the risk is offset by the inspection program implemented pursuant to An Act respecting pressure vessels and by the regular inspections carried out on other insured property.
Reinsurance
La Mutuelle des municipalités du Québec prepares many publications on risk management, which are emailed to mutual members, posted on its website, or included in specialized magazines for the municipal sector. Training activities are held annually in meeting rooms in most regions and via web conference so as to reach as many mutual members as possible. Causes of uncertainty in estimating future claims payments In addition to managing the underwriting risk resulting from the selection and acceptance of risk to be insured, the reserve valuation risk is monitored specifically. Provisions for claims payable must be established as soon as the claim is reported. La Mutuelle des municipalités du Québec has a reserves policy to which analysts refer daily. These reserves are valued individually for each case by the indemnification department. In addition to a regular follow-up, each file is reviewed annually by the department manager. Although
In June 2013, the reinsurance treaties were amended in such a way that La Mutuelle des municipalités du Québec will cover 33% of the $750,000 portion in cost of claims between $250,000, and $1,000,000 on all claims with a total value over $1,000,000. As a result, La Mutuelle des municipalités du Québec will bear up to $497,500 on a net basis in claims per event (for claims over $1,000,000) whereas the amount had been capped at $250,000 before June 1, 2013. The significance of claims is limited by reinsurance treaties in which each loss or event is limited to $250,000. Moreover, La Mutuelle des municipalités du Québec optimizes its reinsurance strategies to limit certain exposure. Beyond this retention, a grouping of excess, catastrophic and facultative loss treaties makes it possible to bring together the reinsurance capacity needed for the operations of La Mutuelle des municipalités du Québec.
Saint-Cuthbert (D’Autray RCM)
2013 MMQ ANNUAL REPORT • 41
Rivière-Éternité (Le Fjord-du-Saguenay RCM) Photographer: Jeff Grose
Reinsurance operations do not relieve La Mutuelle des municipalités du Québec of its obligations toward policyholders. La Mutuelle des municipalités du Québec has treaties in all lines of business, which, in addition to its retention of $250,000, provide a limit of $15 million. It also has a catastrophe treaty for property and automobile insurance with a limit of $25 million in excess of $15 million. Moreover, for buildings valued at more than $5 million, La Mutuelle des municipalités du Québec has a facultative-obligatory excess of loss treaty with a $30 million limit. The insurance limits per claim authorized by reinsurers are as follows: ($)
Equipment breakdown 5,000,000 Civil liability – excluding automobile 3,000,000 Civil liability – automobile 5,000,000 Errors and omissions 3,000,000 Embezzlement 1,000,000 Automobile – material damage 1,000,000 Buildings and content 5,000,000 La Mutuelle des municipalités du Québec does not negotiate directly with the reinsurance market. It is represented by reinsurance brokers. The following criteria are used to select reinsurers:
a) Any professional reinsurer involved in the reinsurance programs of La Mutuelle des municipalités du Québec must have a Standard & Poor’s and/or A.M. Best’s rating of A- or better on the date the treaty in question takes effect. b) A reinsurer’s total commitment for all reinsurance treaties in effect throughout an entire year cannot exceed 25% of the total amount of all commitments of all reinsurers involved in all reinsurance treaties. c) Where treaties relating to “All branches in excess of claims,” “Property according to risk in excess of claims,” and “Facob property in excess of claims” are concerned, at least 90% of the commitments transferred or reinsured will have to be with certified reinsurers. d) “Certified reinsurer” refers to any reinsurer recognized as being “certified” by the Autorité des marchés financiers and/or the Office of the Superintendent of Financial Institutions and/or any reinsurer that declares on La Mutuelle des municipalités du Québec’s reinsurance riders in which it is participating, that the reinsurance accepted is recognized as “insuring risks in Canada” in accordance with Part XIII of the Insurance Companies Act (Canada). Moreover, La Mutuelle des municipalités du Québec does not use non-traditional transferred reinsurance treaties such as obligations in the event of a disaster.
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Compensation of key management personnel Compensation of key management personnel, i.e., the directors and executive committee members, are detailed in the table below:
42 • 2013 MMQ ANNUAL REPORT
2013 ($)
2012 ($)
Short-term benefits Executive committee Directors’ fees
1,106,859 48,733
885,511 52,369
Notes to the
Financial Statements
December 31, 2013
2013 ($) Schedule A – Loss prevention Prevention advisors 491,906 Prevention event 154,110 Professional fees 111,998 Travel expenses 93,679 Relations with mutual members 65,142
2012 ($)
916,835
903,103
511,735 151,450 66,144 98,253 75,521
Schedule B – Operating expenses Salaries and corporate benefits Outsourcing of accounting and IT services IT service expenses Professional fees Creative writing Rent and administrative expenses Depreciation of fixed assets (Note 9) Amortization of intangible assets (Note 10) Advertising Business partnerships Travel expenses Conferences Entertainment expenses Dues and subscriptions Committee expenses Insurance(s) Stationery and printing Bank charges Loss on the sale of fixed assets Assigned risk-sharing plan
1,616,631 1,184,618 571,352 499,981 198,395 83,865 144,351 140,737 118,577 83,793 105,578 97,248 84,158 64,440 79,545 – 77,565 80,155 75,449 29,628 66,200 43,309 63,891 49,362 57,345 26,703 53,740 53,238 51,250 59,250 43,770 42,074 28,186 15,882 818 730 – 1,673 (4,809) (3,215)
3,431,992
10 YEA R
S
o r e s po nfs i actio nb l e
2,553,471
The schedules are an integral part of the notes to the financial statements.
Métabetchouan-Lac-à-la-Croix (Lac-Saint-Jean-Est RCM) Photographer: Sandy Larouche
2013 MMQ ANNUAL REPORT • 43
Board of Directors JACQUES RIOPEL Administrator Mayor of Saint-Marc-de-Figuery and Reeve of the Abitibi RCM
RICHARD LEHOUX Vice-Chairman Mayor of Saint-Elzéar and Reeve of La Nouvelle-Beauce RCM
MICHEL GILBERT Administrator Mayor of Mont-Saint-Hilaire 5
DANIELLE HENRI ALLARD Administrator Reeve of Montcalm RCM
LINDA DAOUST 1 Secretary and Executive Director 2 and Head of Operations 3
JACQUES BOLDUC Treasurer Consulting Actuary
RÉMI MOREAU Administrator Editor in Chief, Insurance and Risk Management Magazine HEC Montréal
GÉRARD MARINOVICH Chairman and Chief Executive Officer 4 Mayor of Eastman 5
RAYMOND MEDZA Administrator Retired Executive Director of the Insurance Bureau of Canada
1 Non-administrator 2 Until February 25, 2014 3 President and Chief Executive Officer since February 25, 2014
4 Chairman of the Board since February 25, 2014 5 Until November 3, 2013
GUY DIAMOND Administrator Mayor of Charette 5 Absent during photo session
Committees’ members STATUTORY COMMITTEES
ADVISORY COMMITTEES
Ethics and Governance
Audit and Investment
Insurance
Raymond Medza (Chairman) Michel Gilbert Richard Lehoux Gérard Marinovich Rémi Moreau
Jacques Bolduc (Chairman) Guy Diamond Danielle Henri Allard Jacques Riopel
Rémi Moreau (Chairman) Michel Giroux 1 Danielle Henri Allard Richard Lehoux Pierre Mireault 1, 5 Jean-Noël Ouellet 1, 5
1 Former MMQ administrator 2 Mayor of Weedon until November 3, 2013 3 President, DLR services conseils
4 General Director, of Les Îles-de-la-Madeleine 5 Until May 3, 2013
44 • 2013 MMQ ANNUAL REPORT
Mutual Member Risk Management Michel Gilbert (Chairman) Guy Diamond Jean-Claude Dumas 2 Michel Fernet 3 Gérard Marinovich Hubert Poirier 4 Jacques Riopel
La Mutuelle des municipalités du Québec forms a team with insurance broker members of Groupe Ultima, combining networked expertise in municipality insurance with 30 years of experience. These brokerage firms blanket Québec from end to end such that each mutual member may localize its needs for the most appropriate coverage and best suited counselling.
Experience Serving MMQ Mutual Members
The Ultima Brokerage Firm
Network
Cabinet en assurance de dommages
EDITOR IN CHIEF Louise Desjardins, Director, Communications and Public Relations EDITOR Manon Allaire CREATIVE DESIGN AND PRODUCTION Lajeunesse communication marketing PRINTING Quadriscan
ISBN 978-2-9811401-5-9 Legal Deposit – Bibliothèque et Archives nationales du Québec, 2014 Legal Deposit – Library and Archives Canada, 2014
2013 MMQ ANNUAL REPORT • 45
Your peace of mind may rest easy,
the MMQ is standing by.
A TRUSTWORTHY INSURANCE MUTUAL SERVING QUÉBEC’S MUNICIPALITIES La Mutuelle des municipalités du Québec 7100 Jean-Talon Street East, Suite 805, Montréal, Québec H1M 3S3 Telephone: 1-866-662-0661 Fax: 1-800-808-8418 mutuellemmq.com
info@mutuellemmq.com