Annual Financial Statement 2013

Dufferin MutualInsurance CompanyFinancial StatementsFor the year ended December 31, 2013

Contents

Independent Auditor's Report 2

Financial Statements

Statement of Financial Position 3

Statement of Operations and Unappropriated Members' Surplus 4

Statement of Comprehensive Income and Accumulated Other Comprehensive Income 5

Statement of Cash Flows 6

Notes to Financial Statements 7 - 31

Schedule of Operating Expenses 32

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms

Tel: 905 270-7700 Fax: 905 270-7915 Toll-free: 866 248 6660 www.bdo.ca

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Independent Auditor's Report

To the Policyholders of Dufferin Mutual Insurance Company

We have audited the accompanying financial statements of Dufferin Mutual Insurance Company,which comprise the statement of financial position as at December 31, 2013 and the statementsof operations and unappropriated members' surplus, comprehensive income and accumulatedother comprehensive income and cash flows for the year then ended and a summary ofsignificant accounting policies and other explanatory information.

Management's Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financialstatements in accordance with International Financial Reporting Standards, and for such internalcontrol as management determines is necessary to enable the preparation of financialstatements 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. Weconducted our audit in accordance with Canadian generally accepted auditing standards. Thosestandards require that we comply with ethical requirements and plan and perform the audit toobtain reasonable assurance about whether the financial statements are free from materialmisstatement.

An audit involves performing procedures to obtain audit evidence about the amounts anddisclosures in the financial statements. The procedures selected depend on the auditor'sjudgment, including the assessment of the risks of material misstatement of the financialstatements, whether due to fraud or error. In making those risk assessments, the auditorconsiders internal control relevant to the entity's preparation and fair presentation of thefinancial statements in order to design audit procedures that are appropriate in thecircumstances, but not for the purpose of expressing an opinion on the effectiveness of theentity's internal control. An audit also includes evaluating the appropriateness of accountingpolicies used and the reasonableness of accounting estimates made by management, as well asevaluating the overall presentation of the financial statements.

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

Opinion

In our opinion, the financial statements present fairly, in all material respects, the financialposition of Dufferin Mutual Insurance Company as at December 31, 2013 and its financialperformance and its cash flows for the year then ended in accordance with InternationalFinancial Reporting Standards.

Chartered Accountants, Licensed Public AccountantsMississauga, OntarioFebruary 20, 2014

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kdass

Rob BDO

Dufferin Mutual Insurance CompanyStatement of Financial Position

December 31 2013 2012

Assets

Cash $ 1,605,467 $ 3,423,334Accounts receivable 1,584,644 2,229,095Reinsurer's share of unearned premiums (Note 5) 382,516 615,168Investments (Note 3) 9,159,951 7,934,610Unpaid claims recoverable from reinsurer (Note 5) 13,079,017 14,435,007Deferred acquisition expenditures (Note 5) 693,775 973,847Property and equipment (Note 4) 863,909 894,783Deferred tax asset (Note 6) 26,854 26,854

$ 27,396,133 $ 30,532,698

Liabilities

Accounts payable and accrued liabilities $ 187,707 $ 313,120Unearned premiums (Note 5) 2,951,882 4,401,508Unearned commissions 126,230 209,157Due to reinsurer 141,160 80,443Income taxes payable 38,328 21,347Unpaid claims (Note 5) 17,832,842 19,832,171

21,278,149 24,857,746

Members' equityUnappropriated members' surplus 5,553,772 4,921,746Accumulated other comprehensive income 564,212 753,206

6,117,984 5,674,952

$ 27,396,133 $ 30,532,698

On behalf of the Board:

Director

Director

The accompanying notes are an integral part of these financial statements.3

kdass

Dufferin Signatures

Dufferin Mutual Insurance CompanyStatement of Operations and Unappropriated Members' Surplus

For the year ended December 31 2013 2012

RevenuePremiums written $ 5,648,932 $ 8,658,027Change in unearned 1,216,975 (138,883)Less: reinsurance ceded (2,382,445) (2,921,279)

Net premium earned 4,483,462 5,597,865Service charge income 87,517 119,652

4,570,979 5,717,517

Expenses Gross incurred losses and claims expenses 3,031,726 4,329,603Reinsurance recoveries (1,298,193) (1,937,836)Commissions expense 939,008 1,203,497Operating expenses (Schedule Page 32) 1,584,253 1,729,145

4,256,794 5,324,409

Underwriting profit 314,185 393,108

Other income Investment income (Note 7) 393,537 378,998

Income before income taxes 707,722 772,106

Income taxesCurrent 49,000 21,347Deferred 26,696 56,006

75,696 77,353

Net income for the year 632,026 694,753

Unappropriated members' surplusBalance, beginning of year 4,921,746 4,226,993

Balance, end of year $ 5,553,772 $ 4,921,746


Dufferin Mutual Insurance CompanyStatement of Comprehensive Income and Accumulated Other

Comprehensive Income


Net income for the year $ 632,026 $ 694,753

Other comprehensive incomeUnrealized gains (losses) on available for sale assets,

net of income taxes payable (receivable) of $(24,344) (2012 - $5,377) (171,954) 41,501

Transfer of realized (gains) losses on available for sale assets to statement of operations net of income taxes (receivable) payable of $2,352 (2012 - $(7,715)) (17,040) (59,547)

Total other comprehensive income (loss) (188,994) (18,046)

Comprehensive income for the year $ 443,032 $ 676,707

Accumulated other comprehensive income, beginning of year $ 753,206 $ 771,252

Other comprehensive income (loss), for the year (188,994) (18,046)

Accumulated other comprehensive income, end of year $ 564,212 $ 753,206


Dufferin Mutual Insurance CompanyStatement of Cash Flows


Cash provided by (used in)

Operating activitiesNet income for the year $ 632,026 $ 694,753Adjustments for:

Amortization 42,508 59,610Deferred income taxes 26,696 56,006Unpaid claims, net of recoverable from reinsurer (643,339) 218,117Unearned premiums and commissions, net of

reinsurer's share of unearned premiums (1,299,901) 49,369Gain on disposal of investments (50,284) (67,262)

(1,292,294) 1,010,593

Changes in working capital and insurance contract related balancesAccounts receivable 644,451 176,050Accounts payable and accrued liabilities (125,413) 5,858Income taxes payable 16,981 21,347Deferred acquisition expenditures 280,072 52,233Due to reinsurer 60,717 (26,026)

876,808 229,462

Cash flows related to income taxesIncome taxes paid 12,547 (20,711)

Total cash inflows (outflows) from operating activities (402,939) 1,219,344

Investing activitiesSale of investments 593,061 785,084Purchase of investments (1,996,355) (751,588)Acquisition of property and equipment (11,634) (5,370)

Total cash inflows (outflows) from investing activities (1,414,928) 28,126

Increase (decrease) in cash during the year (1,817,867) 1,247,470

Cash, beginning of year 3,423,334 2,175,864

Cash, end of year $ 1,605,467 $ 3,423,334


Dufferin Mutual Insurance CompanyNotes to Financial Statements

December 31, 2013

1. Nature of Operations and Summary of Significant Accounting Policies

Reporting entity

Dufferin Mutual Insurance Company (the "Company") was incorporated without share capitalunder the laws governed in Ontario on May 15, 1895. The Company is licensed to writeproperty, auto and liability insurance in Ontario. The Company's products are marketedthrough independent agents and brokers located throughout Ontario. The Company islicensed in Ontario and the Company's registered office is 712 Main Street East, Shelburne,Ontario.

These financial statements have been authorized for issue by the Board of Directors onFebruary 20, 2014.

Basis of preparation

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

These financial statements were prepared under the historical cost convention, as modified bythe revaluation of available-for-sale financial assets.

The financial statements are presented in Canadian dollars ("CDN"), which is also theCompany's functional currency.

The preparation of financial statements in compliance with IFRS requires management tomake certain critical accounting estimates. It also requires management to exercise judgmentin applying the Company’s accounting policies. The areas involving a higher degree ofjudgment of complexity, or areas where assumptions and estimates are significant to thefinancial statements are disclosed in Note 2.

Significant accounting policies

Insurance contracts

In accordance with IFRS 4, Insurance Contracts, the Company has continued to apply theaccounting policies it applied in accordance with pre-changeover Canadian GenerallyAccepted Accounting Principles ("GAAP").

Balances arising from insurance contracts primarily include unearned premiums, unpaidclaims recoverable from reinsurer, reinsurer's share of unearned premiums, due to reinsurer,unpaid claims, and deferred acquisition expenditures.

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December 31, 2013

1. Nature of Operations and Summary of Significant Accounting Policies (continued)

Significant Accounting Policies (continued)

(a) Premiums and unearned premiums

Premiums written comprise the premiums on contracts incepting in the financial year.Premiums written are exclusive of taxes levied on premiums.

The Company earns premium income evenly over the term of the insurance policy usingthe pro rata method. The portion of the premium related to the unexpired portion of thepolicy at the end of the fiscal year is reflected in unearned premiums.

(b) Reinsurer's share of unearned premiums

The reinsurer's share of unearned premiums are recognized as an asset using principlesconsistent with the Company's method for determining the unearned premium liability.

(c) Deferred acquisition expenditures

Acquisition costs are comprised of agents' commissions, premium taxes, associationfees and certain identified business development costs considered to be directly relatedto the premiums written and therefore are allowed to be deferred. These costs aredeferred and amortized over the terms of the related policies to the extent that they areconsidered to be recoverable from unearned premiums, after considering the relatedanticipated claims and expenses.

(d) Unpaid claims

Individual loss estimates are provided on each claim reported. In addition, provisions aremade for adjustment expenses, changes in reported claims and for claims incurred butnot reported, based on past experience and business in force. The estimates areregularly reviewed and updated, and any resulting adjustments are included in currentincome. Claims liabilities are carried on a discounted basis (see note 5).

(e) Liability adequacy test

At each reporting date the Company performs a liability adequacy test on its insuranceliabilities less deferred acquisition expenditures to ensure the carrying value is adequate,using current estimates of future cash flows, taking into account the relevant investmentreturn. If that assessment shows that the carrying amount of the liabilities is inadequate,any deficiency is recognized as an expense to the statement of operations andunappropriated members' surplus initially by writing off the deferred acquisitionexpenditure and subsequently by recognizing an additional liability for the provision forunpaid claims.

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December 31, 2013


Significant Accounting Policies (continued)

(f) Unpaid claims recoverable from reinsurer

The Company enters into reinsurance contracts in the normal course of business in orderto limit potential losses arising from certain exposures. Reinsurance premiums areaccounted for in the same period as the related premiums for the direct insurancebusiness being reinsured. Reinsurance liabilities, comprised of premiums payable for thepurchase of reinsurance contracts, are included in accounts payable and accruedliabilities and are recognized as an expense when due.

Expected reinsurance recoveries on unpaid claims and adjustment expenses arerecognized as assets at the same time and using principles consistent with theCompany's method for establishing the related liability.

Financial instruments

The Company classifies its financial instruments into one of the following categories based onthe purpose for which the asset was acquired or liability incurred. All transactions related tofinancial instruments are recorded on a settlement date basis. The Company's accountingpolicy for each category is as follows:

(a) Loans and receivables

These assets are non-derivative financial assets resulting from the delivery of cash orother assets by a lender to a borrower in return for a promise to repay on a specified dateor dates, or on demand. They are initially recognized at fair value plus transaction coststhat are directly attributable to their acquisition or issue and subsequently carried atamortized cost, using the effective interest rate method, less any impairment losses.

Impairment provisions are recognized when there is objective evidence (such assignificant financial difficulties on the part of the counterparty or default or significantdelay in payment) that the Company will be unable to collect all of the amounts dueunder the terms receivable, the amount of such a provision being the difference betweenthe net carrying amount and the present value of the future expected cash flowsassociated with the impaired receivable. For amounts due from policyholders andreinsurer, such provisions are recorded in a separate allowance account with the lossbeing recognized in net income. On confirmation that the amounts receivable will not becollectable, the gross carrying value of the asset is written off against the associatedprovision.

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December 31, 2013


Financial Instruments (continued)

(b) Available-for-sale investments

Non-derivative financial assets not included in the above categories are classified asavailable-for-sale and comprise investments in equity instruments and debt securities.These instruments are initially recognized at fair value plus transaction costs that aredirectly attributable to their acquisition. Subsequently they are carried at fair value,unless they do not have a quoted market price in an active market and fair value is notreliably determinable. When they do not have a quoted market price in an active marketand fair value is not reliably determinable, they are carried at cost.

Changes in fair value are recognized as a separate component of other comprehensiveincome. Where there is a significant or prolonged decline in the fair value of anavailable-for-sale financial asset, which constitutes objective evidence of impairment, thefull amount of the impairment, including any amount previously recognized in othercomprehensive income, is recognized in net income.

Purchases and sales of equity instruments are recognized on settlement date with anychange in fair value between trade date and settlement date being recognized inaccumulated other comprehensive income.

On sale, the amount held in accumulated other comprehensive income associated withthat asset is removed from equity and recognized in net income. Interest on debtsecurities classified as available-for-sale is calculated using the effective interest methodand is included in net income.

(c) Other financial liabilities

Other financial liabilities include all financial liabilities and comprise accounts payableand accrued liabilities, and other short-term monetary liabilities. These liabilities areinitially recognized at fair value net of any transaction costs directly attributable to theissuance of the instrument and subsequently carried at amortized cost using the effectiveinterest rate method, which ensures that any interest expense over the period torepayment is at a constant rate on the balance of the liability carried in the statement offinancial position. Interest expense in this context includes initial transaction costs andpremiums payable on redemption, as well as any interest payable while the liability isoutstanding.

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December 31, 2013


Property and equipment

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

Building 2.5%Parking lot 8.0%Equipment and fixtures 20.0% - 30.0%

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

Impairment of non-financial assets

Non-financial assets are subject to impairment tests whenever events or changes incircumstances indicate that their carrying amount may not be recoverable. Where thecarrying value of an asset exceeds its recoverable amount, which is the higher of value in useand fair value less costs to sell, the asset is written down accordingly.

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

Where it is not possible to estimate the recoverable amount of an individual asset, theimpairment test is carried out on the asset's cash-generating unit, which is the lowest group ofassets in which the asset belongs for which there are separately identifiable cash flows.

Impairment charges are included in net income.

Income taxes

Income tax expense comprises current and deferred tax. Current and deferred tax arerecognized in net income except to the extent that it relates to a business combination, oritems recognized directly in equity or in other comprehensive income.

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December 31, 2013


Income taxes (continued)

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

Deferred tax assets and liabilities are recognized where the carrying amount of an asset orliability differs from its tax base, except for taxable temporary differences arising on the initialrecognition of goodwill and temporary differences arising on the initial recognition of an assetor liability in a transaction which is not a business combination and at the time of thetransaction affects neither accounting or taxable profit or loss.

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

The amount of the deferred tax asset or liability is measured at the amount expected to berecovered from or paid to the taxation authorities. This amount is determined using tax ratesand tax laws that have been enacted or substantively enacted by the year-end date and areexpected to apply when the liabilities / (assets) are settled / (recovered).

Standards, amendments and interpretations not yet effective

Certain new standards, amendments and interpretations have been published that aremandatory for the Company’s accounting periods beginning on or after January 1, 2013 orlater periods that the Company has decided not to early adopt. The standards, amendmentsand interpretations that will be relevant to the Company are:

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December 31, 2013


Standards, amendments and interpretations not yet effective (continued)

IFRS 9 Financial Instruments is part of the IASB's wider project to replace IAS 39 FinancialInstruments: Recognition and Measurement. IFRS 9 retains but simplifies the mixedmeasurement model and establishes two primary measurement categories for financialassets: amortized cost and fair value. The basis of classification depends on the entity'sbusiness model and the contractual cash flow characteristics of the financial asset. Thestandard is effective for annual periods beginning on or after January 1, 2015. The Companyis in the process of evaluating the impact of the new standard.

IAS 32 Financial Instruments: Presentation was amended to clarify the meaning of “currentlyhas a legally enforceable right to set-off”. The amendments also clarify the application of theIAS 32 offsetting criteria to settlement systems such as central clearing house systems whichapply gross settlement mechanisms that are not simultaneous. The Company is yet to assessthe full impact of this amendment to IAS 32 and will adopt the standard for the annual periodbeginning on January 1, 2014.

There are no other IFRSs or IFRIC interpretations that are not yet effective that would beexpected to have a material impact on the Company.

2. Critical Accounting Estimates and Judgments

The Company makes estimates and assumptions about the future that affect the reportedamounts of assets and liabilities. Estimates and judgments are continually evaluated andbased on historical experience and other factors, including expectations of future events thatare believed to be reasonable under the circumstances. In the future, actual experience maydiffer from these estimates and assumptions.

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December 31, 2013

2. Critical Accounting Estimates and Judgments (continued)

Estimates

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

The estimates and assumptions that have a significant risk of causing material adjustment tothe carrying amounts of assets and liabilities within the next financial year are discussedbelow.

Unpaid claims

The estimation of the provision for unpaid claims and the related reinsurer’s share are theCompany’s most critical accounting estimates. There are several sources of uncertainty thatneed to be considered by the Company in estimating the amount that will ultimately be paid onthese claims. The uncertainty arises because all events affecting the ultimate settlement ofclaims have not taken place and may not take place for some time. Changes in the estimateof the provision can be caused by receipt of additional claim information, changes in judicialinterpretation of contracts, or significant changes in severity or frequency of claims fromhistorical trends. The estimates are based on the Company's historical experience andindustry experience. More details are included in Note 5.

Judgments

Impairment of available-for-sale investments

The Company determines that available-for-sale investments are impaired when there hasbeen a significant or prolonged decline in fair value below its cost. The determination of whatis significant or prolonged requires judgment. In making this judgment the Companyconsiders among other factors, the normal volatility in market price, the financial health of theinvestee and industry and sector performance. Had the Company considered all declines infair value to be significant or prolonged, the Company would have suffered an additional lossof $151,054 in its 2013 financial statements (2012 - $10,320), being the transfer of the entireamount in accumulated other comprehensive income related to available-for-sale investmentsto net income.

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December 31, 2013

3. Financial Instrument Classification

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

Availablefor sale

Loans andreceivables

Otherfinancialliabilities Total

December 31, 2013Cash $ 1,605,467 $ - $ - $ 1,605,467Investments 9,159,951 - - 9,159,951Accounts receivable - 1,584,644 - 1,584,644Accounts payable and accrued

liabilities - - (187,707) (187,707)Due to reinsurer - - (141,160) (141,160)

$ 10,765,418 $ 1,584,644 $ (328,867)$ 12,021,195

December 31, 2012Cash $ 3,423,334 $ - $ - $ 3,423,334Investments 7,934,610 - - 7,934,610Accounts receivable - 2,229,095 - 2,229,095Accounts payable and accrued

liabilities - - (313,120) (313,120)Due to reinsurer - - (80,443) (80,443)

$ 11,357,944 $ 2,229,095 $ (393,563)$ 13,193,476

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December 31, 2013

3. Financial Instrument Classification (continued)

The following table provides fair value information of investments by type of security andissuer. The maximum exposure to credit risk would be the fair value as shown below.

Available-for-sale

2013 2012Fair

ValueFair

Value

Bankers acceptances $ - $ 13,000 Bonds and debentures issued by:

Canadian federal 909,937 992,741Canadian provincial 4,053,491 3,526,583Corporate 2,196,454 1,797,990

7,159,882 6,317,314

Common shares 2,000,069 1,604,296$ 9,159,951 $ 7,934,610

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

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

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

- Level 3 fair value measurements are those derived from valuation techniques that includeinputs for the asset or liability that are not based on observable market data (unobservableinputs).

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December 31, 2013

3. Financial Instrument Classification (continued)

Financial assets recorded at fair value by the level of the fair value hierarchy:

Level 1 Level 2 Level 3 TotalDecember 31, 2013Bonds and debentures $ - $ 7,159,882 $ - $ 7,159,882Common shares 2,000,069 - - 2,000,069Total $ 2,000,069 $ 7,159,882 $ - $ 9,159,951

Level 1 Level 2 Level 3 TotalDecember 31, 2012Bankers acceptances $ 13,000 $ - $ - $ 13,000Bonds and debentures - 6,317,314 - 6,317,314Common shares 1,604,296 - - 1,604,296Total $ 1,617,296 $ 6,317,314 $ - $ 7,934,610

Transfers between levels are considered to have occurred at the date of the event or changein circumstances that caused the transfer. There were no transfers between Level 1 and Level2 for the years ended December 31, 2013 and 2012. There were also no transfers in and outof Level 3.

Maturity profile of bonds held is as follows:

Within 1year

2 to 5 years

6 to 10 years

Over 10years Fair Value

December 31, 2013 $ 619,738 $ 2,724,694 $ 3,501,864 $ 313,586 $ 7,159,882Percent of Total 8.66% 38.06% 48.90% 4.38% 100%

December 31, 2012 $ 225,434 $ 2,349,231 $ 3,278,939 $ 463,710 $ 6,317,314Percent of Total 3.57% 37.19% 51.90% 7.34% 100%

The effective interest rate of the bonds portfolio held at December 31, 2013 is 4.4% (2012 -4.9%).

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December 31, 2013

4. Property and Equipment

Land and building Parking lot

Equipment and fixtures Total

CostBalance at January 1, 2012 $ 1,435,803 $ 34,121 $ 449,593 $ 1,919,517

Additions - - 5,370 5,370Balance atDecember 31, 2012 1,435,803 34,121 454,963 1,924,887

Additions - - 11,634 11,634Disposals - - (222,473) (222,473)

Balance at December 31, 2013 $ 1,435,803 $ 34,121 $ 244,124 $ 1,714,048

Accumulated AmortizationBalance atJanuary 1, 2012 $ 525,694 $ 34,121 $ 410,679 $ 970,494

Amortization 28,246 - 31,364 59,610Balance atDecember 31, 2012 553,940 34,121 442,043 1,030,104

Amortization 28,246 - 14,262 42,508Disposals - - (222,473) (222,473)

Balance atDecember 31, 2013 $ 582,186 $ 34,121 $ 233,832 $ 850,139

Net book value:

December 31, 2012 $ 881,863 $ - $ 12,920 $ 894,783

December 31, 2013 $ 853,617 $ - $ 10,292 $ 863,909

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December 31, 2013

5. Insurance Contracts

Reinsurer's share of unearned premiums

2013 2012

Balance, beginning of the year $ 615,168 $ 853,846Reinsurance ceded 777,605 1,099,299Reinsurance expensed in year (1,010,257) (1,337,977)

Balance, end of the year $ 382,516 $ 615,168

Unpaid claims recoverable from reinsurer

2013 2012

Balance, beginning of the year $ 14,435,007 $ 14,582,693

New claims reserve 3,123,323 3,365,190Change in prior years' reserve (2,694,272) (2,167,795)Submitted to reinsurer (1,785,041) (1,345,081)

Balance, end of the year $ 13,079,017 $ 14,435,007

Deferred acquisition expenditures

2013 2012

Balance, beginning of the year $ 973,847 $ 1,026,080

Acquisition expenses incurred 977,306 973,847Expensed during the year (1,257,378) (1,026,080)

Balance, end of the year $ 693,775 $ 973,847

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

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December 31, 2013

5. Insurance Contracts (continued)

Unearned premiums

2013 2012

Balance, beginning of the year $ 4,401,508 $ 4,501,303

Premiums written 5,648,932 8,658,027Premiums earned during year (7,098,558) (8,757,822)

Balance, end of the year $ 2,951,882 $ 4,401,508

Claims and adjustment expenses

Changes in claim liabilities recorded in the statement of financial position and their impact onclaims and adjustment expenses are as follows:

2013 2012

Unpaid claims liabilities - beginning of year – net of reinsurance $ 5,397,164 $ 5,179,047

Decrease in estimated losses and expenses, for losses occurring in prior years (2,653,239) (1,959,770)

Provision for losses and expenses on claims occurring in the current year 2,009,900 2,177,887

Unpaid claims – end of year - net 4,753,825 5,397,164Reinsurer’s share 13,079,017 14,435,007

$ 17,832,842 $ 19,832,171

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

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December 31, 2013


Claim development

The estimation of claim development involves assessing the future behaviour of claims, takinginto consideration the consistency of the Company's claim handling procedures, the amount ofinformation available, and the characteristics of the claim. In general, the longer the termrequired for the settlement the more variable the estimates. Short settlement term claims arethose which are expected to be substantially paid within a year of being reported. Historically,substantially all of the Company’s claims have long settlement terms.

The tables that follow present the development of claims payments and the estimated ultimatecost of claims for the claim year 2007 to 2013. The upper half of the tables shows thecumulative amounts paid or estimated to be paid during successive years related to eachclaim year. The original estimates will be increased or decreased, as more informationbecomes known about the original claims and overall claim severity.

In 2011, the year of adoption of IFRS, only information from periods beginning on or afterJanuary 1, 2007 is required to be disclosed. This is being increased in each succeedingadditional year, until ten years of information is included.

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December 31, 2013


Gross claims ('000's)

Accident YearReporting Date 2007 2008 2009 2010 2011 2012 2013 TotalAt end of accident year $ 4,997 $ 6,776 $ 5,371 $ 14,902 $ 6,595 $ 7,491 $ 7,0091 year later 6,362 4,512 4,107 12,438 4,804 6,4982 years later 4,789 4,138 4,494 12,021 3,1673 years later 6,086 3,954 3,769 10,9944 years later 6,036 3,909 3,5895 years later 5,141 3,9196 years later 4,178Current estimate of ultimate cost 4,178 3,919 3,589 10,994 3,167 6,498 7,009 39,354Cumulative payments 4,160 3,829 3,159 3,581 2,320 2,871 1,876 21,796Outstanding claims $ 18 $ 90 $ 430 $ 7,413 $ 847 $ 3,627 $ 5,133 $ 17,558Liability for all prior accident years 275Total gross outstanding claims $ 17,833

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Net of reinsurance ('000's)

Accident YearReporting Date 2007 2008 2009 2010 2011 2012 2013 TotalAt end of accident year $ 1,796 $ 2,024 $ 2,393 $ 3,752 $ 3,223 $ 3,759 $ 3,3071 year later 3,423 2,925 2,428 3,574 2,684 3,2222 years later 1,804 2,758 2,381 3,288 2,2373 years later 2,036 2,582 2,212 2,8474 years later 1,921 2,547 2,1425 years later 1,847 2,5626 years later 1,664Current estimate of ultimate cost 1,664 2,562 2,142 2,847 2,237 3,222 3,307 17,981Cumulative payments 1,645 2,529 1,987 2,142 1,733 2,086 1,297 13,419Outstanding claims $ 19 $ 33 $ 155 $ 705 $ 504 $ 1,136 $ 2,010 $ 4,562Liability for all prior accident years 192Total net outstanding claims $ 4,754

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December 31, 2013

6. Income Taxes

The significant components of tax expense included in net income are composed of:

2013 2012

Current tax expenseBased on current year taxable income $ 49,000 $ 21,347

Deferred tax expense (recovery)Origination and reversal of temporary differences $ (1,366) $ (3,574)Non-deductible claims (3,902) (1,251)Loss carryforwards - 66,947Transfer of realized gains (losses) on available for sale

investments 2,352 7,715Change in unrealized gains (losses) on available for sale

investments 24,344 (5,377)Adjustment for over/under provision 5,268 (8,454)

26,696 56,006

Total income tax expense $ 75,696 $ 77,353

The significant components of the tax effect of the amounts recognized in othercomprehensive income are composed of:

2013 2012

Current tax expense (recovery)Change in unrealized gain / (losses) on available-

for-sale investments $ (24,344) $ 5,377Reclassification of realized (gains) / losses on

available-for-sale investments (2,352) (7,715)

$ (26,696) $ (2,338)

24


December 31, 2013

6. Income Taxes (continued)

Reasons for the difference between tax expense for the year and the expected income taxesbased on the statutory tax rate of 26.50% (2012 – 26.50%) are as follows:

2013 2012

Net income for the year $ 707,722 $ 772,106

Expected taxes based on the statutory rate 187,546 204,608Non deductible expenses 3,704 3,563Effect of small business deduction (90,378) (84,932)Effect of farmers' and fishermen's insurer exemption (27,973) (31,116)Capital Minimum Tax credits applied - (1,543)Ontario transitional credits (562) (6,685)Other 3,359 (6,542)

Total income tax expense $ 75,696 $ 77,353

The movements in 2013 deferred tax liabilities and assets are:

Openingbalance

at Jan 1,2013

Recognizein net

incomeRecognize

in OCI

Closingbalance

at Dec 31,2013

2013Deferred tax assetNon-deductible claims $ 29,649 $ (3,902)$ - $ 25,747Fair value adjustment - (26,696) 26,696 -Other (2,794) 3,902 - 1,1082013 deferred tax asset $ 26,855 $ (26,696)$ 26,696 $ 26,855

The movements in 2012 deferred tax liabilities and assets are:

Openingbalance

at Jan 1,2012

Recognizein net

income

Recognize

in OCI

Closingbalance

at Dec 31,2012

2012Deferred tax assetLoss carryforward $ 66,947 $ (66,947)$ - $ -Non-deductible claims 28,398 1,251 - 29,649Fair value adjustment - (2,338) 2,338 -Other (14,823) 12,028 - (2,795)2012 deferred tax asset $ 80,522 $ (56,006)$ 2,338 $ 26,854

25


December 31, 2013

7. Investment Income

2013 2012

Interest income $ 307,271 $ 281,188Dividend income 56,457 48,518Realized gains on disposal of investments 50,284 67,261Investment expenses (20,475) (17,969)

$ 393,537 $ 378,998

8. Related Party Transactions

The Company entered into the following transactions with key management personnel, whichare defined by IAS 24, Related Party Disclosures, as those persons having authority andresponsibility for planning, directing and controlling the activities of the Company, includingdirectors and management:

2013 2012

Compensation Short term employee benefits and directors' fees $ 172,765 $ 199,426

Premiums 62,507 74,898Claims paid 850 19,042

9. Capital Management

The Company’s objectives with respect to capital management are to maintain a capital basethat is structured to exceed regulatory requirements and to best utilize capital allocations.Reinsurance is utilized to protect capital from catastrophic losses as the frequency andseverity of these losses are inherently unpredictable. To limit their potential impact, theCompany purchases reinsurance, the details of which are outlined in Note 5. For the purposeof capital management, the Company has defined capital as its unappropriated members'surplus.

The regulators measure the financial strength of property and casualty insurers using aminimum capital test ("MCT"). The regulators require property and casualty companies tocomply with capital adequacy requirements. This test compares a company's capital againstthe risk profile of the organization. The risk-based capital adequacy framework assesses therisk of assets, policy liabilities and other exposures by applying various factors that aredependent on the risks associated with the company's assets. Additionally, an interest raterisk margin is included in the MCT by assessing the sensitivity of the company's interest-sensitive assets and liabilities to changes in interest rates. The regulators indicate that theCompany should produce a minimum MCT of 150%. During the year, the Company hasconsistently exceeded this minimum. The regulator has the authority to request moreextensive reporting and can place restrictions on the Company's operations if the Companyfalls below this requirement and deemed necessary.

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December 31, 2013

10. Insurance and Financial Risk

Insurance risk management

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

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

Amounts recoverable from reinsurer are estimated in a manner consistent with theoutstanding claims provision and are in accordance with the reinsurance contracts. Althoughthe Company has reinsurance arrangements, it is not relieved of its direct obligations to itspolicyholders and thus a credit exposure exists with respect to ceded insurance, to the extentthat the reinsurer is unable to meet its obligations assumed under such reinsuranceagreements.

The Company writes insurance primarily over a twelve month duration on a claims madebasis.

The Company follows a policy of underwriting and reinsuring contracts of insurance which, inthe main, limit the liability of the Company to the first $170,000, and limit the liability of theCompany to the first $150,000. The Company cedes 40% (2012 - 40%) of auto premiumswritten and recovers 40% (2012 - 40%) of auto losses from its reinsurer under a quota sharetreaty.

In addition, the Company has obtained reinsurance having an upper amount of $4,000,000,which limits the Company's liability to the first $375,000 in the event of a series of claimsarising out of a single occurrence.

The Company is exposed to a pricing risk to the extent that unearned premiums areinsufficient to meet the related future policy costs. Evaluation is performed regularly toestimate future claims costs, related expenses, and expected profit in relation to unearnedpremiums. There was no premium deficiency at December 31, 2013.

The risks associated with insurance contracts are complex and subject to a number ofvariables which complicate quantitative sensitivity analysis. The Company uses varioustechniques based on past claims development experience to quantify these sensitivities. Thisincludes indicators such as average claim cost, amount of claims occurrence, expected lossratios and claims development as described in Note 5.

27


December 31, 2013

10. Insurance and Financial Risk (continued)

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

Property claims Auto claims Liability claims2013 2012 2013 2012 2013 2012

5% increase in loss ratiosGross $ 155,785 $ 224,388 $ 97,115 $ 162,834 $ 28,387 $ 38,984Net 123,000 182,730 32,932 78,909 7,919 22,964

5% decrease in loss ratiosGross $(155,785) $(224,388) $ (97,115) $(162,834) $ (28,387) $ (38,984)Net (123,000) (182,730) (32,932) (78,909) (7,919) (22,964)

There have been no significant changes from the previous year in the exposure to risk orpolicies, procedures and methods used to measure the risk.

Financial risk

Credit risk

Credit risk is the risk of financial loss to the Company if a debtor fails to make payments ofinterest and principal when due. The Company is exposed to this risk relating to its debtholdings in its investment portfolio and reliance on the reinsurer to make payment whencertain loss conditions are met.

The Company's investment policy puts limits on the bond portfolio including portfoliocomposition limits, issuer type limits, bond quality limits, aggregate issuer limits and corporatesector limits. Funds should be invested in bonds and debentures of Federal, Provincial orMunicipal Government and corporations rated A or better. All fixed income portfolios aremeasured for performance on a quarterly basis and monitored by management on a monthlybasis.

Reinsurance is placed with Farm Mutual Reinsurance Plan Inc. ("FMRP"), a Canadianregistered reinsurer. Management monitors the creditworthiness of FMRP by reviewing theirannual financial statements and through ongoing communications. Reinsurance treaties arereviewed annually by management prior to renewal of the reinsurance contract.

Accounts receivable are short-term in nature consisting of a large number of policyholders,and are not subject to material credit risk. Regular review of outstanding receivables isperformed to ensure credit worthiness.

There have been no significant changes from the previous year in the exposure to risk orpolices, procedures and methods used to measure the risk.

28


December 31, 2013


Financial Risk (continued)

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

The Company's investment policy operates within the guidelines of the Insurance Act. Aninvestment policy is in place and its application is monitored by the Board of Directors.Diversification techniques are utilized to minimize risk. The Policy limits the investment inCanadian equities to 25% and international equities to 0% thereof.

There have been no significant changes from the previous year in the exposure to risk orpolices, procedures and methods used to measure the risk.

Currency riskCurrency risk relates to the Company operating in different currencies and converting nonCanadian earnings at different points in time at different foreign exchange levels whenadverse changes in foreign currency exchange rates occur.


Interest rate riskInterest rate risk is the potential for financial loss caused by fluctuations in fair value or futurecash flows of financial instruments because of changes in market interest rates. TheCompany is exposed to this risk through its interest bearing investments (GICs, bonds).

Historical data and current information is used to profile the ultimate claims settlement patternby class of insurance, which is then used in a broad sense to develop an investment policyand strategy for its investments held in support of its claims liabilities. This allows theCompany to effectively manage a portion of its interest rate risk. However, because asignificant portion of the Company’s assets relate to its capital rather than liabilities, the valueof its interest rate based assets exceeds its interest rate based liabilities. As a result theCompany is exposed to significant interest rate risk. Generally, the Company’s investmentincome related to its available-for-sale financial investment portfolio will move with interestrates over the medium to long-term with short-term interest rate fluctuations creatingunrealized gains or losses in other comprehensive income.

At December 31, 2013 a 1% move in interest rates, with all other variables held constant,could impact the market value of bonds by $386,875 (2012 - $251,761). A 1% change in theinterest rate used to discount the Company's claims liabilities could have an offsetting impacton net claims liabilities of $60,127 (2012 - $76,507) with all other variables held constant.These changes would be recognized in other comprehensive income for the available-for-saleportfolio, otherwise they would be reflected in net income.


29


December 31, 2013


Financial risk (continued)

Equity risk

Equity risk is the uncertainty associated with the valuation of assets arising from changes inequity markets. The Company is exposed to this risk through its equity holdings within itsinvestment portfolio.

The Company's portfolio includes Canadian stocks with fair values that move with the TorontoStock Exchange Composite Index. A 10% movement in the stock market with all othervariables held constant would have an estimated effect on the fair value of the Company'scommon shares of $200,007 (2012 - $160,430).


Liquidity risk

Liquidity risk is the risk that the Company will not be able to meet all cash outflow obligationsas they come due. The Company mitigates this risk by monitoring cash activities andexpected outflows. The Company's current liabilities arise as claims are made. TheCompany does not have material liabilities that can be called unexpectedly at the demand of alender or client. The Company has no material commitments for capital expenditures andthere is no need for such expenditures in the normal course of business. Claim payments arefunded by current operating cash flow including investment income.


11. Pension Plan

The Company makes contributions to the Ontario Mutual Insurance Association ("OMIA")Pension Plan, which is a multi-employer plan, on behalf of members of its staff. The plan is amoney purchase plan, with a defined benefit option at retirement available to someemployees, which specifies the amount of the retirement benefit plan to be received by theemployees based on length of service and rates of pay. Under the terms of the OntarioMutual Insurance Association Pension Plan, the Company is liable for the obligations of othercompanies participating in the pension should they be unable to satisfy their respectivefunding requirements.

30


December 31, 2013

11. Pension Plan (continued)

The Company is one of a number of employers who have pooled the assets and liabilities ofthe pension plan to take advantage of economies of scale in making investment decisions andin minimizing expenses. The information to account for the plan as a defined benefit plan isnot readily available for each company to determine its share of the assets and liabilities of theplan. In the event of a wind-up or withdrawal from the plan, the Company is responsible for itsportion of the deficit and all expenses as determined by the plan actuary.

The amount contributed to the plan for 2013 was $157,309 (2012 - $58,605). Thecontributions were made for current service and these have been recognized in net income.The current service amount is determined by the plan actuary using the projected accruedbenefit actuarial cost method. These contributions amount to 1.4% of the total contributionsmade to the Ontario Mutual Insurance Association Pension Plan by all participating entitiesduring the current fiscal year.

Expected contributions to the plan for the next annual reporting period amount to $157,000,which is based on payments made to the multi-employer plan during the current fiscal year.

During the year, the Company paid a contribution of $110,037 as part of an agreement toreduce the plan deficit based on the 2010 actuarial valuation and prevailing low interest rates.This amount represents the Company’s proportionate share of the total $7,800,000contribution to the Ontario Mutual Insurance Association Pension Plan as agreed to by theplan members.

12. Rate Regulation

The Company's automobile insurance rates are subject to approval by the Financial ServicesCommission of Ontario ("FSCO"). Application for automobile rate increases are presented toFSCO by FMRP on behalf of members of OMIA. FSCO approves these rates based oninformation submitted.

31

Dufferin Mutual Insurance CompanySchedule of Operating Expenses


Advertising $ 7,501 $ 17,924Amortization 42,508 59,610Association fees and training 47,281 47,019Computer services 174,560 171,835Employee benefits 286,168 203,793Facility office costs 958 4,056Inspection of risks and fire prevention 17,087 19,600Occupancy costs 121,471 123,607Postage and telephone 31,254 44,158Printing, stationery and office 27,107 34,695Professional fees 91,479 90,825Provincial premium tax 26,776 32,500Salaries and directors' fees 564,974 737,150Statistics and assessments 39,504 31,112Sundry 14,406 13,546Travel 91,219 97,715

$ 1,584,253 $ 1,729,145

32

Documents

Annual Financial Statement 2013