Results of Operations
Investment Income
Manitoba Public Insurance invests money it sets aside for future claim payments and other liabilities. Investment income reduces rates that would otherwise be payable by policyholders. The revenue earned from investment income was enough to reduce the average Basic premium in 2007/08 by $96.51.
The total current value of the corporation’s investment portfolio was $2.2 billion as of February 29, 2008. The bond portfolio, which accounts for 74.6 per cent of the investment portfolio, is invested in three types of bonds:
- Marketable bonds, mainly issued by the governments of Manitoba and other provinces, including floating rate notes (41.6 per cent of the total portfolio market value);
- Non-marketable bonds issued by Manitoba municipalities, school divisions and health care facilities and purchased through the Manitoba Department of Finance (20.0 per cent); and
- Real return bonds providing returns linked to the rate of inflation and issued by the Government of Canada (13.0 per cent).
Manitoba Public Insurance contracts five external investment managers to administer its Canadian equity portfolio, which represents 15.3 per cent of the total investment portfolio. The corporation also has 3.9 per cent of its portfolio in United States equities managed by two external investment managers. Through the Manitoba Department of Finance, the corporation uses forward contracts to offset the effect of currency movement changes on its U.S. dollar denominated assets. Short-term investments account for 5.8 per cent of the investment fund, and venture capital and private equity investments represent 0.3 per cent of the portfolio’s carrying value.
The total portfolio, on a market value basis, returned 4.0 per cent during the fiscal year. Unrealized losses of $26.8 million, which are included in the Accumulated Other Comprehensive Income, contributed to the lower return on investments. Marketable bonds returned 4.8 per cent, non-marketable bonds 6.9 per cent, floating rate notes 5.0 per cent and real return bonds 3.5 per cent. Canadian equities returned 3.4 per cent over the same time period, and U.S. equities declined by 12.9 per cent, including the currency hedge. Over a four-year period, the investment portfolio has achieved an annualized return of 6.9 per cent. Total investment income for the year, net of impairments, was $125.5 million, including bond interest payments, dividends and realized gains on sales of bonds and equities.
Retained Earnings
Corporate retained earnings are comprised of the accumulation of net income or losses from inception to February 29, 2008 for the Basic, Extension and Special Risk Extension (SRE) lines of business.
The corporation’s Board of Directors has approved risk-based capital adequacy target levels by line of business to maintain financial stability. In addition, specific levels of retained earnings have been appropriated to support two major corporate initiatives:
- The Immobilizer Incentive Strategy – a program designed to protect at-risk vehicles from theft; and
- The Extension Development Fund, which was established to defray the costs of projects undertaken to maximize the opportunities presented by the 2004 merger of Manitoba Public Insurance and the Division of Driver and Vehicle Licensing.
The corporation supports the use of the Minimum Capital Test (MCT) as a risk-based method developed by the Office of the Superintendent of Financial Institutions (OSFI) to assess the corporation’s financial risk and determine the capital adequacy of reserves held in retained earnings. This methodology assigns risk factors to the company’s assets and policy liabilities. It is used to determine whether federally regulated property and casualty insurance companies are maintaining adequate capital to absorb unexpected losses. OSFI expects these regulated companies to establish a target capital level, and maintain ongoing capital, no less than the supervisory target of 150 per cent of the capital required by the MCT. Most federally regulated property and casualty insurance companies carry significant retained earnings over the minimum required by OSFI (2007 average was 235 per cent of MCT).
The corporation’s external actuary annually calculates the MCT by line of business to assist the Board of Directors in reviewing and establishing appropriate target levels. A discussion of the relevant target levels and issues by line of business follows.
BASIC INSURANCE
Basic’s retained earnings are comprised of the Rate Stabilization Reserve (RSR) and the Immobilizer Incentive Fund (IIF). The corporation’s Board of Directors’ current target level range is 50 per cent to 100 per cent of MCT or $107 million to $214 million. The Public Utilities Board of Manitoba (PUB) by its Order 150/07 continues to reject MCT as the methodology for reviewing and establishing the Basic RSR for rate-setting purposes. The PUB target as stated in its order is $69 million to $106 million and includes the IIF for purposes of assessing RSR adequacy. The PUB Order directed the corporation to pay a 10 per cent rebate at an estimated cost of $62.7 million to bring the RSR closer to the PUB’s target range.
As at February 29, 2008, Basic retained earnings totalled $145.0 million ($161.3 million previous year). Of that total, RSR made up $127.1 million ($128.1 million previous year), which is net of the $62.7 million rebate ordered by the PUB, and the IIF totalled $17.9 million ($33.2 million previous year).
Canada’s two other provincial monopoly automobile insurers – the Insurance Corporation of British Columbia (ICBC) and Saskatchewan Government Insurance (SGI) – use MCT as the basis for setting retained earnings targets for their Basic lines of business. ICBC has set a target of 100 per cent of MCT and SGI has set a target range of 100 per cent to 125 per cent of MCT.
The corporation’s external actuary, based on his report for the 2007 Basic Insurance Dynamic Capital Adequacy Test (DCAT), identifies three plausible scenarios where Basic retained earnings become negative and has concluded that the future financial condition of this line of business is not satisfactory.
The corporation has significant concerns that the future financial strength of the Basic insurance plan has been compromised by the PUB’s actions with respect to the RSR target. The corporation’s ability to provide Manitobans with continued rate stability has been weakened by the PUB’s actions.
Funding for the RSR is derived from the annual operations of the Basic insurance plan. In prior years, retained earnings exceeding the targets set for the Extension and SRE lines of business were transferred to the Basic RSR as additional funding to achieve the target level set by the corporation’s Board. These transfers have ceased with the order from the PUB that limits the RSR to levels that are fully funded to the PUB’s target levels.
In 2005, the corporation established the IIF by appropriating $40 million from the Basic RSR. In 2006, an additional $10 million was appropriated. The fund provides financial assistance for vehicle owners to install electronic immobilizers and covers the administrative costs of the program. Activity during the current fiscal year reduced the fund to $17.9 million. Additional information is provided in the Notes to Financial Statements (Note 18).
EXTENSION INSURANCE
The corporation’s Board of Directors’ current target level for Extension retained earnings is 200 per cent of MCT. Based on this target the corporation’s external actuary has concluded, in the 2007 Extension DCAT report, that the future financial condition of this line of business is satisfactory.
As at February 29, 2008, the retained earnings balance was $50.9 million compared to $46.4 million the previous year. This balance is $15.9 million higher than the current target level of $35.0 million. The Extension Development Fund, established March 1, 2007, was $35.4 million at the end of the current year. Additional information is provided in the Notes to Financial Statements (Note 19).
SPECIAL RISK EXTENSION (SRE)
The corporation’s Board of Directors’ current target level for SRE retained earnings is 200 per cent of MCT. Based on this target the corporation’s external actuary has concluded, in the 2007 SRE DCAT report, that the future financial condition of this line of business is satisfactory.
As at February 29, 2008, the retained earnings balance was $52.8 million compared to $64.6 million the previous year. This balance is $15.8 million higher than the current target level of $37.0 million.
Accumulated Other Comprehensive Income
Accumulated Other Comprehensive Income (AOCI) reflects the unrealized gains or losses related to available for sale assets. The table below shows how unrealized gains and losses have been treated at the transition date and subsequently during the year.
| $000 |
 |
AOCI at
March 1, 2007
(Transition Date) |
|
Unrealized Gains
(Losses) to
February 29, 2008 |
|
Realized (Gains) Losses
transferred to
Net Income to
February 29, 2008 |
|
ACCI at
February 29, 2008 |
|
|
| TYPE OF CLAIM |
|
|
|
|
|
|
|
|
|
| Canadian Equities |
40,258 |
4,255 |
(36,932) |
7,581 |
| U.S. Equities |
7,755 |
(28,786) |
8,290 |
(12,741) |
| Bonds and Other |
32,262 |
(2,244) |
(1,690) |
28,328 |
|
| Total |
|
80,275 |
|
(26,775) |
|
(30,332) |
|
23,168 |
|
|
CHANGES IN ACCOUNTING STANDARDS
In 2005, the Canadian Institute of Chartered Accountants (CICA) issued Section 1530 Comprehensive Income, Section 1531 Equity, Section 3855 Financial Instruments – Recognition and Measurement, and Section 3865 Hedges. The following is a summary of the changes to Canadian accounting standards that have an impact on its financial reporting. These new accounting standards apply to interim and annual financial statements that relate to fiscal years starting on or after October 1, 2006. The corporation has adopted these standards in its fiscal year commencing March 1, 2007.
Entities are required to classify all financial assets and financial liabilities:
- Held for Trading
- Available for Sale
- Held to Maturity
This classification determines how subsequent changes in the fair value of the financial instruments are recorded and reported in either net income or other comprehensive income. Following initial classification, an entity is not allowed to reclassify a financial instrument into or out of the Held for Trading category. Sale of more than an insignificant amount of Held to Maturity investments, resulting from a change in intent or ability, causes a tainting of the classification of those investments and the remaining Held to Maturity investments should be reclassified as Available for Sale.
Financial instruments are measured at fair value and reported on the balance sheet as such except for Held to Maturity investments, which continue to be measured at amortized cost, and investments in equity instruments that do not have a quoted market price in an active market, which are measured at cost. Changes in fair value for financial instruments classified as Held for Trading are to be recognized in net income. Changes in fair value for financial instruments classified as Available for Sale are recognized in other comprehensive income.
A new financial statement, the Statement of Comprehensive Income, is produced and reported with the same prominence as the other financial statements. This statement presents surplus and other components that are recognized in determining comprehensive income. Comprehensive income includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. Those financial instruments classified as Available for Sale have the changes in fair value recognized in other comprehensive income until the asset is sold or impaired. AOCI is disclosed as a separate item within the company’s equity.
Recognition and measurement of financial instruments, classified as Available for Sale, has had a significant impact on the corporation’s financial statements as these investments, recorded at a book value of $1,532,739,000 at February 28, 2007, were increased to their fair value of $1,613,014,000 at March 1, 2007. This increase of $80,275,000 has been recorded as AOCI. No changes resulted from the classification of the Held to Maturity financial assets or loans and receivables which are still being carried at amortized cost.
As a consequential effect of applying these new standards, the claims liabilities were recalculated using a market rate at March 1, 2007 resulting in an increase to the claims liabilities of $22,948,000. Changes resulting from the recalculation have been recorded as transition adjustments in opening Basic Rate Stabilization Reserve and opening balance of retained earnings for the competitive lines of business.
...Risk Management
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