AnnuAl RepoRt2012

our VALuES

EXCELLENCETRANSPARENCY

DYNAMISMEQUITY

OPENNESSRESPECT

mESSAgE from thE chAirmAn And chiEf ExEcutiVE officEr  4

rEport of thE ExEcutiVE dirEctor And hEAd of opErAtionS  6

committEE rEportS  10

indEpEndEnt Auditor’S rEport  12

ActuAry’S cErtificAtE  13

finAnciAL StAtEmEntS  14

boArd of dirEctorS And committEES’ mEmbErS  38

nEtwork  39

Summary

Cover page photo : Saint-Valentin, Haut-Richelieu RCMPhotography: Photo Hélico, Yves Tremblay

Governance

philosophy 1. thE mutuAL mEmbErS’ fundAmEntAL

Authority 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.

2. principLES In keeping with the mutualist culture, the philosophy of

governance at La Mutuelle des municipalités du Québec is founded upon compliance with the requisites of law, regulations and standards while drawing its strength from models of democ­racy, transparency, efficiency and vigilance.

3. 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.

4. hEALthy finAnciAL AdminiStrAtion To ensure its institutional dynamics and development,

La Mutuelle des municipalités du Québec takes great care in looking after its decision­making procedures based upon sound financial management.

5. riSk mAnAgEmEnt Risk is a day­to­day 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.

MissionEnable 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.

profileIn 2003, La Mutuelle des municipalités du Québec (MMQ) became a fully­owned corporate body governed under the Municipal Code of Québec (R.S.Q. c. C­27.1) and the Cities and Towns Act (R.S.Q. c. C­19), an entity that was placed under the ownership of its mutual members, namely local municipalities and regional county municipalities (RCMs) and intermunicipal boards. The Mutual is the birth child of their members’ will to be self­endowed with long­term available insurance offering the possibility of stabilizing insurance premiums by means of comprehensive loss prevention programs.

MMQ governance is guided by its Board of Directors made up of representatives from municipalities and the insurance industry. Its activities are framed within two statutory committees and two advisory committees entrusted with overseeing their varied operational vocations. Their outstanding achievement is to be found in the Mutual’s exclusively interactive risk management program that enables the organization to support mutual members’ prevention initiatives and efforts.

MMQ offers a continuously evolving range of products that include property and casualty insurance, automobile, boiler and machinery* coverages and a host of complementary protections. These products are distributed via a network of 125 insurance brokerage sales outlets found in all regions throughout Québec.

*As of January 1, 2013

Cloridorme (La Côte-de-Gaspé RCM)

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The year 2012 was indeed another vintage year for the MMQ, with growth remaining the order of the day and our market share nearing 80%. Our position also continued to be very positive in terms of our rate of claims, which, although having risen slightly, is still low in light of the risk profile of municipal administrations and their prior history with respect to property and casualty insurance. Undeniably, the $8 million that we invested in nine years to help mutual members prevent losses has made all the difference.

Overall income during the past fiscal year was satisfactory, although inferior to that posted in 2011, which was at a peak level. However, having placed priority on increasing the equity of mutual members at the end of the last record year, the Board was able to approve an experience refund that was up by $500,000 at the end of 2012. A sum of $2 million was paid to mutual members, bringing the total of refunds paid out since 2008 to $11.5 million. Thanks to our traditional prudence, we remain in an excellent position to meet the challenges of more difficult years. The bottom line is that the MMQ is here to stay!

Message from the

Chairman and Chief executive officer

incrEASingLy EffEctiVE goVErnAncEIn addition to being on a very solid financial footing, the MMQ boasts a governance structure that has proven to be highly effective. During the past year, we developed a number of new mechanisms aimed at assuring our stability and the excellence of our practices. An integrated institutional risk management policy and another governing the man agement of compliance were adopted in 2012, and the Board of Directors amended the General Regulation in order to specify the amount of global compensation payable to Directors. The roles of statutory and advisory committees were reviewed as well as were the integrity and competence criteria prescribed for their members. Furthermore, new rules were defined concerning the duration and number of mandates that may be held.

The MMQ operates in accordance with a set of coherent policies and regulations which assure mutual members that their organization is managed in full compliance with the regulatory requirements and guide­lines to which it is subject. Ultimately, our continuous commitment to improving our governance testifies to our dedication to integrity.

our prudent management practices and the preventive measures implemented by our mutual members once again came together in perfect synergy in 2012, clearly testifying to the strength of the mmQ. our organization is solid and our success sustained, fuelled by steadfast respect for our proven principles and values.

Gérard Marinovich Chairman and Chief Executive Officer

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A fLAgShip to bE SAfEguArdEdOn November 17, 2012, we embarked upon our 10th year of activity. Over the years, our ability to curtail losses has enabled us to post results that were not only unanticipated, but served to blur our recollection of the unfavourable conditions that characterized municipal insurance prior to 2003. In fact, for years, limited guarantees, dramatically fluctuating premiums, and the obligation to accept high deductibles constituted the menu being offered to municipal administrations.

With the creation of the MMQ, a new order was established. In solidarity, we appropriated this organization and entrusted it with the mission of helping us better manage our risks in order to improve our insurance results. We also chose to adopt a prudent philosophy that advocates the redistribution of experience refunds when our surpluses are sufficient, rather than varying pricing based on claims. The MMQ has succeeded in making municipal insurance profitable because it approaches it differently. We need to always keep that in mind!

With time, we see that we must remember the foundations of our solution, particularly in a market that is growing increasingly competitive engendered by our success. It is imperative that we resist the sirens’ song – on the one hand to avoid being confronted again with the unfavourable conditions of the past, and on the other, to safeguard the MMQ as a vital flagship of the municipal milieu.

En routE to our 10t h AnniVErSAryMarking our first decade of existence this year, our aspirations are as lofty today as they were when our organization was born. Our desire to create a solid Mutual offering a sustainable solution to the insurance problems of municipal administrations has been realized. We must now spare no effort to preserve its profitability and increase its critical mass – most notably by forging an even closer bond with our brokers.

We recognize that success is not solely defined by posting glowing results. Members demand much more from their Mutual. As such, we will do all that we can to ensure that we meet their expectations through our improvement efforts. To that end, our values of excellence, transparency, dynamism, fairness, openness and respect will continue to fuel all of our actions.

Coinciding with our 10th anniversary, the period that will follow the municipal elections will be one of the high points of 2013. Among the activities underlining our first decade, several will focus on the new cohort of Mayors and Wardens, with our goal being to gain their confi­dence and acknowledgement of the fact that the MMQ is the best organization to entrust with the protection of their heritage.

onE big fAmiLyThere is certainly no shortage of competence and solidarity within the MMQ family. All members of our family deserve our sincere gratitude and recognition.

I would like to thank my colleagues on the Board of Directors for their unfailing spirit of collaboration and their dedication to serving the interests of mutual members. I should point out that our Directors adopted a resolution this past year by virtue of which the Board will henceforth only have one Vice­Chairman position, which will continue to be assumed by Mr. Richard Lehoux, Mayor of Saint­Elzéar and Warden of the La Nouvelle­Beauce RCM. I commend his former counterpart, Mr. Jacques Bolduc, Actuary, who now holds the position of Treasurer.

I would also like to underline the excellent work carried out in 2012 by our statutory committees in the area of governance. Of course, I salute the vigilance of our advisory committees as well that are charged with periodically monitoring our different performance indicators.

For her part, our Executive Director and Head of Operations, Ms. Linda Daoust, and her dedicated team did an outstanding job to ensure that we could successfully conduct our fundamental activities while continuing to chart our development. Their contribution has been truly indispensable.

In addition, I extend my gratitude to the brokerage firms affiliated with the Ultima Group, who apply their extensive expertise with municipalities in representing us. In light of the ever­changing insurance needs of municipal administrations, their exceptional knowledge and advice is greatly appreciated.

Finally, I would like to thank our mutual members for their loyalty. Their strong sense of attachment enables the MMQ to pursue its growth, open up its increasingly attended training workshops to more participants, and to enhance its service offerings.

SightS SEt on thE futurE with pridE And rESoLVEIt is certainly gratifying to be moving forward in the knowledge that the MMQ has enjoyed such tremendous success. We must spare no effort to ensure that all of its mutual members continue to share a common sense of pride, and that we can continue to grow so as to make an even greater contribution. The MMQ has liberated us from the insurance problems of the past. Let us stay true to the principles that brought us to where we are today, and let’s not allow anyone to ever put the value of these principles into question.

Gérard MarinovichChairman and Chief Executive Officer

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Report of the

executive Directorand Head of operations

thanks to the sustained growth it has posted for close to a decade now, the mmQ serves as the Québec leader today in the area of municipal insurance. An efficient, mature and successful organization, the mmQ is now, more than ever, focusing on its development, with its sights firmly set on the future.

kEy finAnciAL rESuLtSThe MMQ’s mutual membership grew from 968 to 982 over the past fiscal year. Gross written premium volume totalled $31.7 million as at December 31, 2012, representing an increase of 4% as compared to 2011, while net written premiums equalled $25.8 million, also marking a slight increase from the previous reporting period. With the addition of $1,024,013 in investment revenues, total revenues were at $26.2 million, as compared to $25.2 million in 2011.

Although the net loss ratio rose from 41.8% in 2011 to 53.2% in 2012, the year’s results are in line with the average ratio over the past eight years of operations. Several major fires occurred in municipal buildings at the beginning of the year, resulting in a decline in property insurance results. For its part, the value of automobile settlements rose somewhat as compared to 2011, and liability insurance results followed the same trend. With regards to this category, the costs associated with consecutive firefighting claims diminished. Modest, but encouraging, this decrease is in all likelihood attributable to the progress made in the implementation of risk coverage plans.

Operating expenses, excluding commissions associated with the acquisition of premiums and investments in loss prevention, rose by 12% in 2012 vis­à­vis 2011. This increase is notably due to the addition of new employees and to the cost of Web hosting.

Our net income for the year, before experience refunds, stood at $4.7 million, compared to $6.8 million in 2011. This difference is mainly attributable to the increased number of claims and to the need to amass significant reserves to cover claims in the process of being settled and losses that occurred but were not reported.

finAnciAL StAtuS At yEAr-EndWith respect to assets, the MMQ’s investments totalled $45.4 million, up by $6.9 million over 2011. Our portfolio is composed of term deposits and municipal bonds, which generated an average return in 2012 of 2.4%.

Linda Daoust Executive Director andHead of Operations

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Premiums receivable, net of commission to be paid, stood at $9.8 million, attributable to the fact that a major portion of policies are renewed on December 31 of each year. Our assets also include an investment of $1.1 million in the development of our information system. This acquisition will be amortized over the years to come.

In terms of liabilities, our provisions for unpaid claims and settlement expenses totalled $27.3 million, representing an increase of $2.6 million over fiscal 2011. This increase is due to a greater number of claims in the process of being settled.

Finally, deducting a sum of $2 million in experience refunds, mutual members’ equity climbed to $20.5 million, up by $2.7 million from 2011. Thanks to this level of capitalization that exceeds regulatory requirements, the MMQ now possesses the financial flexibility required to further its development.

oVErViEw of opErAtionAL ActiVitiESA remodelled structure to remain at the forefrontEach year, new risks are posed as a result of the diversification of activities conducted within the municipal environment. In order to be able to act even more effectively prior to the occurrence of losses, it became clear that it would be more advantageous to merge the risk management and underwriting teams.

Moreover, the underwriting group is henceforth responsible for leading business development efforts. Within today’s increasingly competitive context, the MMQ must continue to grow and find ways to maximize the experience refunds paid to its mutual members. To do so, we intend to work even more closely with our brokerage network, providing it with new soliciting tools and superior coverage options to meet the needs of municipal administrations.

Extended inspection effortsIn addition to the efforts deployed by staff building inspectors, the MMQ relies on the support of a thermography specialist and, most

recently, of a fire prevention technician. In all, the team visited close to 1,400 municipal buildings in 2012, with remote regions also receiving greater coverage.

Enriched training offeringsThe MMQ’s training program underwent further development in 2012, with the addition and enhancement of numerous courses. A total of 72 free sessions were offered, including some in partnership with the Fédération québécoise des municipalités (FQM) and the Association des directeurs municipaux du Québec (ADMQ). At the end of the year, the MMQ adopted a resolution by virtue of which its mutual members will enjoy an appreciable discount on the courses offered by the ADMQ to accredited municipal administrators over the next three years.

introduction of new benefitsA number of improvements were introduced just in time for the many December 31 renewals. For example, the earthquake benefit ceiling was raised from $2 million to $5 million, with no additional cost involved. A new credit rewarding exemplary property and automobile insurance files was also introduced, and optional boiler and machinery coverage, formerly underwritten by a partner insurer, will be added to the range of house products as of 2013.

prompt and expert compensationThe steadfast work of the Compensation Department is certainly worthy of note, particularly its efforts aimed at maximizing the rate of file closures. Constantly working on the front line, this expert team is dedicated to limiting problems for mutual members by offering them judicious advice and timely and attentive response, even when the damage amounts to less than the deductible. This team is also responsible for propagating the MMQ’s values so as to ensure that all of its mandated suppliers provide the same level of quality service at the best possible price.

mutuAL mEmbErS’ EQuity (in $)

17,844,117

12,543,237

16,588,14515,609,070

6,915,753

2,514,462631,957

20,524,055

2004 2005 2006 2007 2008 2009 2010 2011 2012

12,969,943

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Les Éboulements (Charlevoix RCM)

oVErViEw of functionAL ActiVitiESpromoting best practices and communicationsThree deserving initiatives were recognized in 2012 under the banner of the MMQ Risk Management Awards. The Bécancour RCM earned first prize for its efforts to accelerate the deployment of its firefighting services. Second prize went to the Pierre­De Saurel RCM for its actions related to cyclist safety, while the Municipality of McMasterville received third prize for its effective building preservation initiatives.

In order to promote more timely risk management and stimulate exchange with its mutual members, the MMQ made its debut on Twitter in 2012. This initial foray into the world of social media coincided with our discontinuation of paper versions of regular publications. Primarily undertaken out of our concern for the environment, this decision was also made to increase online traffic at www.mutuellemmq.com, which serves as a gateway to a full spectrum of valuable advice in the area of risk management.

governance and complianceIn addition to being subject to the laws and regulations governing municipal entities, the MMQ must respect the numerous legal, regulatory and normative obligations imposed on property and casualty insurers, particularly with respect to solvency and management. It must also adopt principles and guidelines for how it conducts its activities. In this regard, the MMQ now has a department devoted exclusively to compliance in order to consolidate the work carried out in recent years and to pursue its successful development.

In 2012, an inventory of rules to which the MMQ is subject as an organization was completed. At the same time, continuity plans associated with some 100 critical situations were documented in a formal policy.

technologyThe work aimed at equipping the MMQ with its own data processing system made significant headway in 2012, with development efforts advancing at a good pace and system functionalities having been presented to our personnel and our brokerage firms. User training and migration of our policy portfolio is expected to be carried out over the course of 2013.

human resourcesContinuing its pursuit of complete autonomy, the MMQ created a new department charged with planning, organizing, directing and controlling the management of human resources. Its role consists primarily of assuring that the organization always has a sufficient, talented and effec­tive workforce to count on which embodies the MMQ’s values. Indeed, these elements are indispensable for the preservation of excellent service and sustained growth.

focuSEd on AdVAncEmEntIn addition to assuring the continued success of its regular activities, the MMQ has concentrated its focus on a number of other specific areas of endeavour over the past few years. Internal organization, tech­nology, governance, compliance and organizational risk management are among the spheres in which significant progress has been made, and we are committed to pursuing our efforts during 2013 since each of these areas is essential to our development.

In fact, remaining focused on advancement will continue to be a pivotal strategy in the coming years. Although we have enjoyed ideal conditions in the recent past, with municipal insurance having been relinquished

EVoLution of nEt LoSS rAtioBy operating year (in %)

2004 2005 2006 2007 2008 2009 2010 2011 2012

52.947

36.339.5

46.851.9

82.5

41.8

53.2

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Saint-Michel-de-Bellechasse (Bellechasse RCM)

by traditional insurers, the market is changing markedly today, most notably in terms of growing competition.

As is common practice within all successful organizations, the MMQ intends to re­evaluate its offerings in order to optimize its competitive­ness. The fact that we have performance data on hand regarding a voluminous municipal insurance portfolio created 10 years ago will enable us to generate reliable results. We certainly do not want to enter blindly into a price war. We must analyze the activities of mutual members, develop benefits accordingly, and establish appropriate risk management plans so as to be able to pursue profitable growth.

The MMQ was established in response to prevailing rate escalations. In effect, the factors that make it hard for municipal insurance to achieve profitability were previously neglected. The challenge confronting the MMQ’s management team in 2013 is finding the proper balance between risk, competitive rates, attractive experience refunds and maintaining favourable insurance conditions in the long­term.

highLy ApprEciAtEd contributionSMany people joined forces in 2012 to ensure that the MMQ remains a successful organization worthy of confidence. I would like to underline their highly appreciated contributions.

Chairman and CEO, Mr. Gérard Marinovich, and his fellow Directors served as inspiring guides throughout 2012. I thank them for their invaluable counsel and ongoing support.

For their part, the MMQ’s employees were steadfastly dedicated to offering reliable and attentive service. Whether it be in the office or on the ground, their commitment to personifying the organization’s values is truly commendable.

I would also like to acknowledge the Ultima Group’s member brokerage firms. Throughout the course of the past year, they continued to actively extend the MMQ’s presence into the various regions of Québec.

Moreover, the FQM and ADMQ, our principal partners in the municipal milieu, once again offered their extensive expertise and guidance to help ensure that the MMQ remains well connected in its market. Their contribution is also very much appreciated.

Last, but certainly not least, the MMQ’s mutual members remained a great source of motivation. They regularly look to their Mutual when planning the construction of a sports facility, undertaking road work, or when interpreting an environmental regulation, for example. The 1,400 or so requests for advice registered in 2012 testify to just what extent risk management has been integrated into their culture.

A houSE of grEAt VALuEThanks to its substantial business volume within its specialized market niche, the MMQ has become a prominent organization with an enviable reputation. I and my team are proud to join the members of the Board of Directors in celebrating our organization’s 10th anniversary in 2013. Under the theme, Together for the Past Decade, we will be launching a series of initiatives aimed at promoting the accomplishments of mutual members. A house of great value, the MMQ is solid and enduring. Let’s take pleasure in asserting its excellence loud and clear so that future generations of municipal elected officials and administrators recognize the significance of having such a valuable asset, and that they see to its sustainability.

I joined the MMQ at a time when we were just laying its foundations. Since then, I have been incessantly nourishing a passion for this organi­zation born out of the Québec municipal world’s initiative. Working hand­in­hand with our dedicated personnel and our brokerage network, I am committed to fostering the MMQ’s development so that it can continue to excel on all fronts and that mutual members can always feel right at home in our house.

Linda DaoustExecutive Director and Head of Operations

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Committee Reports

The MMQ’s Board of Directors is made up of six incumbent mayors and three insurance experts. It is assisted by two statutory committees as prescribed by the Insurance Act, along with two advisory committees. Made up of Board members and other representatives, these commit­tees are responsible for determining the policies governing business operations, assuring that business is conducted effectively, and supporting MMQ management. Special committees may also be formed as needed.

Following is an overview of the specific roles played by Board committees and of their respective activities in 2012.

StAtutory committEESEthics and governanceThe Ethics and Governance Committee is responsible for adopting the appropriate rules related to proper conduct, ethics and conflicts of interest, as well as for assuring the application of these rules. The Committee also works to maintain a democratic, transparent, efficient and ethical governance culture by ensuring that the appropriate man­ agement frameworks and mechanisms are in place for compliance with applicable laws and regulations, as well as with Autorité des marchés financiers (AMF) guidelines. Finally, it oversees the annual self­evaluation process for Directors and committee members.

In 2012, the Ethics and Governance Committee submitted its Annual Report to the Autorité des marchés financiers. This document, which includes a summary of Directors’ annual declarations, did not cite any cases of conflict of interest or self­dealing.

During the past year, the Committee also supervised the development of the Integrated Organizational Risk Management and Compliance Management Policies, both of which were adopted by the Board of Directors. In addition to revising the Directors’ Manual in the area of governance, it reviewed and adopted the general descriptions of the statutory and advisory committees. These descriptions henceforth define the composition of the committees, the duration and successive number of mandates, along with the probity and competence criteria applicable to committee members.

Finally, the Ethics and Governance Committee reviewed the self­evaluation form for Directors and committee members.

Audit and investmentThe Audit and Investment Committee is responsible for conducting a thorough review of all financial statements prior to their submission to the Board of Directors. It is also mandated to ensure that all financial risk control and management mechanisms are respected. Moreover, the Committee must report any incident or situation that could harm the MMQ’s financial health to the Board of Directors or the Autorité des marchés financiers if necessary. Finally, it is charged with analyzing the return of investments and with assisting senior manage­ment with functions related to the application and evolution of the Investment Policy.

At the beginning of the year, in response to the favourable opinions expressed by appointed actuary, Mr. Jean­Pierre Paquet, FCAS, FICA, of Avalon Actuaries, and by the firm Deloitte s.e.n.c.r.l., acting as external auditor, the Committee recommended that the Board of Directors adopt the financial statements for the fiscal year ending December 31, 2011. It then completed a review of the financial statements for each quarter of 2012. The Audit and Investment Committee also oversaw the addition of a quantitative limit to the Investment Policy so as to prevent any risk of concentration. This change was subsequently adopted by the Board of Directors.

AdViSory committEESinsuranceThe Insurance Committee assists senior management with all modifications to underwriting parameters, rates filed, the coverage offered to mutual members, as well as changes to compensation policies. The Committee also sees to it that all underwriting and compensation activities reflect the MMQ’s values. In the event of any dispute concerning a claim settlement or refusal of coverage, the Committee is responsible for reviewing the cases and assuring the fairness of the decisions rendered. Moreover, the Committee can make recommendations to the Board of Directors with regard to the decisions made by the Underwriting and Compensation Departments.

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In 2012, the Insurance Committee periodically monitored underwriting activities, paying particular attention to various different management indicators. It analyzed the state of claims based on the number of claim notices, the breakdown per category of insurance, and the estimated value of settlements. The Committee also validated the various decisions made by the Technical Committee and monitored the progress of development work on the MMQ’s computer system.

Finally, the Insurance Committee supported senior management’s decision to merge the Underwriting and Risk Management Depart­ments of mutual members. At the end of the year, the Committee approved the different modifications made to La Municipale TM – more specifically, the addition of boiler and machinery coverage as of January 1, 2013.

mutual member risk managementThe Mutual Member Risk Management Committee’s mission is to help management define the directions for preventing claims. The Committee recommends tools to offer mutual members, approves training programs, and it evaluates the results of proposed preventive measures. It also recommends the degree of the MMQ’s intervention required in legislative, regulatory, legal and other pertinent matters.

The members of the Committee unanimously accepted its new name as proposed by senior management. This new designation was adopted to avoid any confusion with organizational risk management.

The Committee conducted a quantitative review last year of the activities of risk management advisors, inspectors, and of the thermog­raphy technician. The group also examined the state of claims in order to identify specific trends. Claims involving telecommunication towers belonging to mutual members were the focus of particular attention given their potential impact on liability insurance results.

Furthermore, the Committee continued to examine the repercussions of fire risk coverage plans on consecutive firefighting claims. It insisted on the need to promote awareness among mutual members about the risks posed by stormwater management. Finally, the Committee gave its approval to the supervision of mutual member risk management activities by the Underwriting Department.

Entrelacs (Matawinie RCM)

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Independent Auditor’s Report

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

opinionIn 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, 2012 and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards.

Deloitte s.e.n.c.r.l. 1 (signed)

February 25, 2013Brossard, Québec

1 CPA auditor, CA, public accountancy permit No. A113142

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, 2012, 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.

mAnAgEmEnt’S rESponSibiLity for thE finAnciAL StAtEmEntSManagement 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 rESponSibiLityOur 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.

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Actuary’s Certifcate

I have evaluated the policy liabilities on the balance sheet of La Mutuelle des municipalités du Québec as at December 31, 2012 and their variation on the statements of earnings for the year then ended in accordance with recognized actuarial practice in Canada, notably by proceeding 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 corporation’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.

Jean­Pierre Paquet, FICA, FSA (signed)Avalon Actuaires Inc.

February 18, 2013

Saint-Antoine-de-l’Isle-aux-Grues (Montmagny RCM)

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2012 ($) 2011 ($)

Surplus at beginning 17,747,317 12,447,737

Withdrawal of mutual members during the year (Note 13) 200 100

Net income and comprehensive income 2,678,338 5,299,480

Surplus at end 20,425,855 17,747,317

Mutual members’ shares at beginning 96,800 95,500

Contributions from mutual members during the year (Note 13) 1,600 1,400

Withdrawal of mutual members during the year (Note 13) (200) (100)

Mutual members’ shares at end 98,200 96,800

Total mutual members’ equity 20,524,055 17,844,117

2012 ($) 2011 ($)

rEVEnuES

Written premiums

Gross premiums 31,744,825 30,438,595

Ceded premiums (5,938,226) (5,547,193)

Net premiums 25,806,599 24,891,402

Net change in unearned premiums (671,902) (696,276)

Net earned premiums 25,134,697 24,195,126

Investment income (Note 11) 1,024,013 1,034,714

Total revenues 26,158,710 25,229,840

poLicy bEnEfitS And ExpEnSES

Policyholder benefits and claims expenses (Note 6) 16,952,948 10,768,319

Benefits and ceded claims expenses (Note 6) (3,583,957) (660,998)

Policyholder benefits and claims expenses – net 13,368,991 10,107,321

Commissions 4,660,938 5,264,648

Loss prevention (Schedule A) 903,103 873,230

Operating expenses (Schedule B) 2,553,471 2,184,914

Total policy benefits and expenses 21,486,503 18,430,113

Income for the year before experience refunds to mutual members 4,672,207 6,799,727

Experience refunds to mutual members (Note 12) 2,000,000 1,500,247

Experience refunds to withdrawn mutual members (Note 12) (6,131) –

1,993,869 1,500,247

Net income and comprehensive income attributable to mutual members 2,678,338 5,299,480

Statement of Comprehensive Incomefor the year ended december 31, 2012

Statement of Surplus and of Mutual Members’ Sharesfor the year ended december 31, 2012

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

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

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2012 ($) 2011 ($)

ASSEtS

Cash 324,698 1,634,319

Investments (Note 5) 45,353,071 38,450,888

Premiums receivable 9,834,605 9,301,907

Accounts receivable 859,634 605,333

Reinsurers’ share in claims and settlement expenses paid 464,720 403,924

Reinsurers’ share in the provision for unpaid claims and settlement expenses (Note 6) 6,717,313 6,333,000

Prepaid expenses 58,635 3,076

Deferred commission costs (Note 7) 2,396,601 2,295,815

Fixed assets (Note 8) 156,945 174,973

Intangible assets (Note 9) 1,091,794 1,076,249

67,258,016 60,279,484

LiAbiLitiES

Provision for unpaid claims and settlement expenses (Note 6) 27,349,000 24,719,000

Unearned premiums (Note 10) 15,980,344 15,308,442

Premiums owed to reinsurers 513,839 298,884

Accounts payable and accrued liabilities 890,778 608,891

Experience refunds payable to mutual members (Note 12) 2,000,000 1,500,150

46,733,961 42,435,367

mutuAL mEmbErS’ EQuity

Surplus 20,425,855 17,747,317

Mutual members’ shares (Note 13) 98,200 96,800

20,524,055 17,844,117

67,258,016 60,279,484

Statement of Financial positionas at december 31, 2012

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

On behalf of the Board,

Michel Gilbert, Director

Rémi Moreau, Director

15

2012 ($) 2011 ($)

cASh fLowS from opErAting ActiVitiES

Net income 2,678,338 5,299,480

Items not affecting cash: Depreciation of fixed assets 64,440 52,452 Loss on disposal of fixed assets 1,673 –

2,744,451 5,351,932

Reinsurers’ share in the provision for unpaid claims and settlement expenses (384,313) 2,823,657

Deferred commission costs (100,786) 699,076

Unearned premiums 671,902 696,276

Provision for unpaid claims and settlement expenses 2,630,000 (2,963,193)

Interest income (1,004,090) (981,747)

Change in non­cash operating working capital items (Note 14) 238,116 (1,651,057)

4,795,280 3,974,944

cASh fLowS from inVESting ActiVitiES

Acquisition of investments (34,452,223) (20,503,781)

Proceeds from the disposal of investments 27,478,000 17,822,000

Interest received 931,352 938,947

Acquisition of fixed assets (48,850) (20,130)

Acquisition of intangible assets (15,545) (1,076,249)

Proceeds from the disposal of fixed assets 765 –

(6,106,501) (2,839,213)

cASh fLowS from finAncing ActiVitiES

Contributions from mutual members 1,600 1,400

Net (decrease) increase in cash and cash equivalents (1,309,621) 1,137,131

Cash and cash equivalents at beginning 1,634,319 497,188

Cash and cash equivalents at end 324,698 1,634,319

Statement of Cash Flowsfor the year ended december 31, 2012

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

16

La Mutuelle des municipalités du Québec was incorporated on November 17, 2003 under the Cities and Towns Act as well as 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 Jean­Talon Street East, Suite 210, Montréal, Québec, H1M 3S3, Canada.

Under the Income Tax Act (Canada) and the Taxation Act (Québec), 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, 2013.

The appointed actuary is appointed by the Board of Directors of La Mutuelle des municipalités du Québec. The appointed 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 appointed 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.

Policy liabilities are made up of two components: the claims liability and the premium liability. The claims liability includes provisions for indemnifications, provisions for non­settlement­related expenses and settlement expenses, provisions for claims incurred but not reported 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 appointed 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.

notes to the

Financial Statementsdecember 31, 2012

1dEScription of thE buSinESS

2roLE of thE AppointEd ActuAry And thE indEpEndEnt Auditor

17

Cash Loans and receivables

Investments – Term deposits Loans and receivables

Investments – Bonds Held to maturity

Premiums receivable Loans and receivables

Accounts receivable Loans and receivables

Reinsurers’ share in claims andsettlement expenses

Loans and receivables

Premiums owed to reinsurers Other liabilities

Accounts payable and accrued liabilities Other liabilities

Experience refunds to mutual members payable

Other liabilities

Statement of complianceThe financial statements have been prepared in accordance with the International Financial Reporting Standards (IFRS) published by the International Accounting Standards Board (IASB) 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, 2012 and December 31, 2011, cash and cash equivalents consisted solely of cash.

financial instrumentsFinancial assets and financial liabilities are initially recognized at fair value and their subsequent measurement depends on their classifica­tion, as described below. Their classification depends on the 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.

3SignificAnt Accounting poLiciES

Loans and receivablesLoans and receivables are non­derivative financial assets with fixed or determinable payments that are not quoted in an active market and not designated into another category, recognized at amortized cost using the effective interest method.

Held to maturityFinancial assets held to maturity are non­derivative 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.

Other liabilitiesOther liabilities are recorded at amortized cost using the effective interest method and include all financial liabilities other than derivative instruments.

Transaction costsTransaction costs related to financial assets held to maturity, other liabilities, and loans and receivables are added to the carrying value of the asset or netted against the carrying value of the liability and are then recorded in net income over the expected life of the instrument using the effective interest method.

Effective interest methodThe 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 assetsFinancial 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.

18

Sainte-Agathe-des-Monts (Laurentides RCM)

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.

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.

Regular-way purchases or sales of financial assets Regular­way purchases or sales of held­to­maturity 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 liabilitiesFinancial 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 valueThe fair values of cash, premiums receivable, accounts receivable, 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 short­term maturities.

fixed assetsFixed assets are held for administrative purposes. They are recognized at cost less their residual value. Depreciation is calculated based on their estimated useful lives using the straight­line method over the following terms:

Layout Term of lease (5 years)

Furniture 10 years

Data processing equipment 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.

Derecognition of fixed assetsA 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.

19

intangible assetsIntangible 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 straight­line basis over their estimated useful lives, which is 10 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 assetsAn 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 profit or loss when the asset is derecognized.

impairment of fixed assets and intangible assetsAt the end of each reporting period, La Mutuelle des municipalités 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 cash­generating 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 cash­generating 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 pre­tax 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 cash­generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash­generating unit) is reduced to its recoverable amount. An impairment loss is recognized immediately in profit or loss.

When an impairment loss subsequently reverses, the carrying amount of the asset (or a cash­generating 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 cash­generating unit) in prior years. A reversal of an impairment loss is recognized immediately in profit or loss.

balances related to premiumsa) 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.

Unearned premiums represent the portion of written premiums related to the remaining coverage period up to fiscal year­end.

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.

20

balances related to lossesa) Provision for unpaid claims and settlement expenses The provision for unpaid claims and settlement expenses is the

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.

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 Bornhuetter­Ferguson method. This method uses the historical development of incurred and reported claims, based on reserves on a case­by­case 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 1.99% as at December 31, 2012 (2.43% in 2011).

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, 2012 vary from 5% (5% in 2011) for short­term risks, such as for property and auto­mobiles, and 12.5% (12.5% in 2011) for long­term 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, 2012, this ratio varies from 19% to 70% (10% to 75% in 2011) on a net basis.

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, 2012 (1% in 2011).

investment incomeInterest 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 membersExperience refunds are presented on 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.

Les Escoumins (La Haute-Côte-Nord RCM)

21

use of estimatesThe 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:

• the provision for unpaid claims and settlement expenses as well as the reinsurers’ share;

• assumptions used for fixed asset and intangible asset impairment tests;

• 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 assetsLa 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 assetsAt 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 assetsManagement 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.

Chesterville (Arthabaska RCM)

22

4chAngES in Accounting poLiciES

Application of new accounting standards On January 1, 2012, La Mutuelle des municipalités du Québec applied the amendment to IFRS 7, Financial instruments: Disclosures, relating to transfers of financial assets. The additional information provided allows financial statement users to understand the relationship between transferred financial assets that are not fully derecognized and liabilities associated with them. This additional information enables users to assess the nature of links maintained with derecognized financial assets and risks associated with them. This amendment had no impact on La Mutuelle des municipalités du Québec’s disclosures.

future accounting changesOn December 16, 2011, the IASB issued an amendment to IFRS 7, Financial instruments: Disclosures concerning the presentation of additional disclosures on offsetting arrangements. These changes will enable financial statement users to understand the impact of such arrangements on La Mutuelle des municipalités du Québec’s financial position. The provisions set out in this amendment will be applied to financial statements for periods beginning on or after January 1, 2013. The amendments must be applied retrospectively. La Mutuelle des municipalités du Québec is currently assessing the impact of these amendments on its financial statements.

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. IFRS 9 was to be applied to financial statements for periods beginning on or after January 1, 2013. On December 16, 2011, the IASB issued an amendment to IFRS 9 to defer the mandatory effective date to annual periods beginning on or after January 1, 2015. This amendment also states that entities will not have to restate comparative figures. However, additional disclosure on the impact at transition will be required. La Mutuelle des municipalités du Québec is currently assessing the impact of this new standard on its financial statements.

In May 2011, the IASB published IFRS 13, Fair Value Measurement. This standard brings further clarification on fair value measurement and specifies disclosures related to fair value measurement when another IFRS requires or permits fair value measurement. IFRS 13 will apply to financial statements for periods beginning on or after January 1, 2013. 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 set­off, 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. La Mutuelle des municipalités du Québec is currently assessing the impact of these amendments on its financial statements.

23

5inVEStmEntS

Nominal Fair Carrying value value value ($) ($) ($)

December 31, 2012Term 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

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

December 31, 2011

Term deposits, $13,600,000 redeemable at all times, bearing interest at 1.00% to 2.00%, maturing from March 2012 to December 2014 18,350,000 18,350,000 18,350,000

Municipal bonds, stipulated interest rates of 2.70% to 5.40%, effective interest rates of 1.65% to 5.31%, maturing from May 2012 to January 2021 19,916,000 20,767,450 20,100,888

38,266,000 39,117,450 38,450,888

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. The fair value of term deposits approximates their carrying amount due to the weak interest rate fluctuations and their relatively short maturities.

Mont-Saint-Hilaire (La Vallée-du-Richelieu RCM)

24

Gross Ceded Net ($) ($) ($)

December 31, 2012Provision 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 16,066,186 3,074,320 12,991,886– during previous years 886,762 509,637 377,125

16,952,948 3,583,957 13,368,991

Amounts paid for claims incurred:

– during the current year 5,552,898 944,759 4,608,139– during previous years 8,770,050 2,254,885 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

December 31, 2011

Provision for unpaid claims and settlement expenses at beginning 27,682,193 9,156,657 18,525,536

Increase (decrease) in estimated losses and expenses related to claims incurred

– during the current year 12,248,382 1,213,860 11,034,522

– during previous years (1,480,063) (552,862) (927,201)

10,768,319 660,998 10,107,321

Amounts paid for claims incurred:

– during the current year 3,537,846 – 3,537,846

– during previous years 10,193,666 3,484,655 6,709,011

13,731,512 3,484,655 10,246,857

Provision for unpaid claims and settlement expenses at end 24,719,000 6,333,000 18,386,000

6cLAimS 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 on the statement 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:

Loss ratio sensitivity analysisGiven 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 $341,000 as at December 31, 2012 ($292,000 as at December 31, 2011).

25

Estimated ultimate claims: (in thousands of dollars)

At end of year of occurrence 2004 2005 2006 2007 2008 2009 2010 2011 2012

– one year later 4,389 6,972 5,665 7,382 8,992 9,689 12,680 11,034 12,992

– two years later 3,723 6,689 5,446 7,883 9,642 11,920 11,998 10,656

– three years later 3,692 6,664 5,367 8,170 11,626 11,624 11,855

– four years later 3,793 6,670 5,902 9,424 11,879 11,590

– five years later 3,741 6,824 6,278 9,200 11,651

– six years later 3,870 7,025 6,318 9,167

– seven years later 3,991 6,993 7,587

– eight years later 4,004 6,891

– nine years later 4,029

Current estimate of cumulative claims 4,029 6,891 7,587 9,167 11,651 11,590 11,855 10,656 12,992 86,418

Less: cumulative payments 3,994 6,789 5,977 8,240 10,332 9,579 9,324 6,943 4,608 65,786

Provision for unpaid claims and settlement expenses – net 35 102 1,610 927 1,319 2,011 2,531 3,713 8,384 20,632

Reinsurers’ share in the provision for unpaid claims and settlement expenses 6,717

Provision for unpaid claims and settlement expenses – gross 27,349

2012 ($) 2011 ($)

Balance at beginning 2,295,815 2,994,891

Commission costs deferred during the year 4,761,724 4,565,572

Amortization of deferred commission costs during the year (4,660,938) (5,264,648)

100,786 (699,076)

Balance at end 2,396,601 2,295,815

7dEfErrEd commiSSion coStS

26

8fixEd ASSEtS

As at December 31, 2012, intangible assets had not yet begun to be amortized since the software was not ready for use. No impairment has been recognized to date.

9 intAngibLE ASSEtS

2012 ($) 2011 ($)

Carrying values

Layout 60,042 99,176

Furniture 50,299 52,483

Data processing equipment 46,604 23,314

156,945 174,973

Cost Data processing Layout Furniture equipment Total ($) ($) ($) ($)

Balance as at January 1, 2011 140,232 55,797 14,126 210,155

Acquisitions – 2,804 17,326 20,130

Balance as at December 31, 2011 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 140,232 62,736 73,411 276,379

Accumulated depreciation

Balance as at January 1, 2011 (1,921) (398) (541) (2,860)

Depreciation expense (39,135) (5,720) (7,597) (52,452)

Balance as at December 31, 2011 (41,056) (6,118) (8,138) (55,312)

Depreciation expense (39,134) (6,637) (18,669) (64,440)

Elimination related to disposal – 318 – 318

Balance as at December 31, 2012 (80,190) (12,437) (26,807) (119,434)

2012 ($) 2011 ($)

Carrying values

Acquired separately

Software being adapted 1,091,794 1,076,249

Cost Software ($)

Balance as at January 1, 2011 –

Acquisitions 1,076,249

Balance as at December 31, 2011 1,076,249

Acquisitions 15,545

Balance as at December 31, 2012 1,091,794

27

10unEArnEd prEmiumS

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 appointed 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 December 11, 2012, the Board of Directors approved experience refunds of $2,000,000 for the year ended December 31, 2012 ($1,500,000 for the year ended December 31, 2011).

To be eligible for experience refunds for the year ended December 31, 2012, a mutual member must:• Be the holder of an insurance policy that took effect between December 31, 2007 and

December 30, 2008, inclusively.

• Keep its insurance policy in effect between December 31, 2012 and December 30, 2013.

The formula used for calculating each eligible mutual member’s share is a two­step process:• The first portion of $1,000,000 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, 2010.

• The second portion of $1,000,000 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.

11inVEStmEnt incomE

12ExpEriEncE rEfundS to mutuAL mEmbErS

2012 ($) 2011 ($)

Balance at beginning 15,308,442 14,612,166

Net written premiums during the year 25,806,599 24,891,402

Net earned premiums during the year (25,134,697) (24,195,126)

671,902 696,276

Balance at end 15,980,344 15,308,442

2012 ($) 2011 ($)

Interest 1,004,090 981,747

Experience refunds on interest received 19,923 52,967

1,024,013 1,034,714

28

13mutuAL mEmbErS’ ShArES

membership and initial contributionTo 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 sections 465.1 and thereafter of the Cities and Towns Act and sections 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.

The initial contribution is non­refundable.

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 contributionThe 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. Suspension or expulsionThe Board of Directors may order the suspension or expulsion of a mutual member according to the terms and conditions set out in By­law 1.1 of La Mutuelle des municipalités du Québec.

14AdditionAL cASh fLow informAtion

withdrawalAccording 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.

In addition, a mutual member may not withdraw from La Mutuelle des municipalités du Québec without providing twelve­month prior notice to general management.

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.

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.

2012 2011

Number of mutual members 982 968

Contributions from mutual members ($) 98,200 96,800

During the year ended December 31, 2012, sixteen mutual members (fourteen mutual members in 2011) joined La Mutuelle des municipa­lités du Québec and two mutual members (one mutual member in 2011) withdrew.

2012 ($) 2011 ($)

Change in non-cash operating working capital items

Premiums receivable (532,698) (945,581)

Accounts receivable (109,523) (7,905)

Reinsurers’ share in claims and settlement expenses (60,796) 88,058

Prepaid expenses (55,559) 25,262

Premiums owed to reinsurers 214,955 (304,276)

Accounts payable and accrued liabilities 281,887 (503,438)

Experience refunds payable to mutual members 499,850 (3,177)

238,116 (1,651,057)

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15commitmEntS

La Mutuelle des municipalités du Québec has concluded a distribution agreement for its insurance products upon payment of a 15% commis sion on gross written premiums. The agreement expires on December 31, 2026.

La Mutuelle des municipalités du Québec has concluded an agreement for the outsourcing of its IT and accounting services in exchange for 1.5% of gross written premiums. The agreement expires on December 31, 2013.

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 up to $75,000 annually, mainly for professional development activities. This agreement expires in 2015. It has also made a commitment to the Fédération québécoise des municipalités to pay up to $100,000 annually for the preservation of the liaison committee and related visibility. This agreement expires in 2014.

La Mutuelle des municipalités du Québec has concluded an agreement to acquire a data management operating permit and program for pro c essing damage insurance activities. The contract also includes software adaptation, data migration and maintenance and expires in December 2015. Future payments will amount to $366,037 and will be allocated as follows:

2013 ($) 2014 ($) 2015 ($)

118,424 121,977 125,636

La Mutuelle des municipalités du Québec has agreed to pay a total of $304,350 under service agreements expiring on various dates until 2015. Payments due in the forthcoming years are as follows: 2013 ($) 2014 ($) 2015 ($)

185,121 84,162 35,067

La Mutuelle des municipalités du Québec leases automotive equipment and premises under operating leases that expire on various dates until December 2015. Future rental payments will total $188,200 and include the following payments over the forthcoming years:

2013 ($) 2014 ($) 2015 ($)

171,526 14,292 2,382

The recognized costs relating to these operating leases recognized totalled $162,630 in 2012 ($160,623 in 2011). These costs are presented as administrative expenses and as policyholder benefits and settlement expenses.

In the ordinary 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.

16contingEnciES

30

17cApitAL mAnAgEmEnt

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. A­32) 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 150%, as filed with the Autorité des marchés financiers.

As at December 31, 2012, the MCT stood at 347% (321% as at December 31, 2011).

2012 ($) 2011 ($)

(in thousands of dollars)

Total available capital 20,524 17,844

Total capital required 5,922 5,553

Capital surplus 14,602 12,291

Percentage of MCT 347% 321%

As at December 31, 2012, La Mutuelle des municipalités du Québec met the MCT requirements.

Sainte-Rose-du-Nord (Fjord-du-Saguenay RCM)

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18riSk mAnAgEmEnt rELAtEd to finAnciAL inStrumEntS And inSurAncE riSk

risk management policies and objectivesIn the ordinary course of its activities, 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. In December 2012, La Mutuelle des municipalités du Québec adopted a new investment policy. The impact of this policy is described under Credit Risk.

The risk exposure, objectives, procedures and risk management processes have not changed significantly during the year, with the exception of the above­mentioned item.

financial risksa) 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.

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.

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.

Cash All cash is held by Desjardins, a reputable financial institution

in Québec having 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.

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 Québec municipalities. Municipal bond issuers have no credit rating on the market, making it impossible to measure their credit risk.

As at December 31, 2012, its entire bond portfolio was made up of bonds from Québec municipalities. As at December 31, 2012, three municipalities account for 34% of the bond portfolio (three municipalities accounted for 39% in 2011). Since adopting the new Investment Policy in December 2012, La Mutuelle des municipalités du Québec has set quantitative limits on the concen­tration of any one security compared to the overall 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 90% 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.

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, 2012 and December 31, 2011, no premiums receivable were outstanding.

32

Maximum credit risk The maximum credit risk exposure associated with financial

instruments is equivalent to the carrying amount of the financial assets presented on the statement of financial position.

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 time frame 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 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.

The liquidity risk relates mainly 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.

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 face value received upon maturity of the bond.

Information on the maturity of interest­bearing investments is presented in the Liquidity risk section in this note.

As at December 31, 2012 (in thousands of dollars) Less than 12 months 1 to 2 years 3 to 4 years More than 5 years

Provision for unpaid claims and settlement expenses, net of the reinsurers’ share (undiscounted amount) 11,017 4,494 4,396 1,276

Term deposits 22,600 – – –Bonds 4,997 7,662 5,420 4,408

Total 27,597 7,662 5,420 4,408

As at December 31, 2011 (in thousands of dollars)

Provision for unpaid claims and settlement expenses, net of the reinsurers’ share (undiscounted amount) 8,85 4,262 4,491 1,471

Term deposit 18,350 – – –

Bonds 878 12,181 4,555 2,302

Total 19,228 12,181 4,555 2,302

33

e) Interest rate sensitivity When the time value of money is taken into consideration in order

to establish provisions for unpaid claims and settlement expenses, an increase or a decrease in the capitalization rate may result in a decrease or increase in the burden of losses and the settlement expenses. A 1% change in the discount rate would have a $249,000 impact on the provision for unpaid claims and settlement expenses as at December 31, 2012 ($290,000 as at December 31, 2011).

Management estimates that an immediate hypothetical 1.0% parallel increase in interest rates would decrease the fair value of bonds by approximately $526,000 as at December 31, 2012 ($569,000 as at December 31, 2011). Conversely, a 1.0% decrease in interest rates would increase the fair value of bonds by approx­imately $526,000 as at December 31, 2012 ($569,000 as at December 31, 2011).

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.

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 operations: product design and pricing risk, underwriting risk and claims settlement risk.

Product design and pricing riskProduct 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 them 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 riskUnderwriting 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 Québec. This specialization provides greater stability and predictability, thereby reducing the anti­selection 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.

The insurance program is available to local municipalities with a population of less than 30,000, regional county municipalities and inter­municipal boards. Most local municipalities insured with La Mutuelle des municipalités du Québec have fewer than 5,000 inhabitants and there is no urban concentration.

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 five­year period, La Mutuelle des municipalités du Québec issues twelve­month insurance contracts that are reviewed annually upon their renewal. Following the initial five­year period, if a mutual member wishes to withdraw, a twelve­month 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 in­depth knowledge of each municipality being insured. Given its very high rate

34

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 department manager and supervisor, the indemnification department manager, the risk management and compliance department manager, the underwriters, 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 personnel as well as external members, proposes changes to the underwriting guide to the Board of Directors, among other things.

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 riskThe 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 the 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 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 Québec, automobile risk is limited to vehicle damage. Bodily injuries are covered by government insurance.

Theft and embezzlement – Given the nature of mutual members’ activities, theft is not a major concern for La Mutuelle des municipalités du Québec.

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. Its many training activities are held annually in meeting rooms in most regions on an annual basis and via web conference so as to reach as many mutual members as possible.

La Pocatière (Kamouraska RCM)

35

Causes of uncertainty in estimating future claims paymentsIn 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 follow­up, each file is reviewed annually by the department manager. Although 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.

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.

reinsuranceThe 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.

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 $10 million. It also has a catastrophe treaty for property and auto­mobile insurance with a limit of $30 million in excess of $10 million. Moreover, for buildings valued at more than $5 million, La Mutuelle des municipalités du Québec has a facultative­obligatory excess of loss treaty with a $28 million limit.

The insurance limits per claim authorized by reinsurers are as follows:

Compensation of key management personnel, i.e., the directors and executive committee members, are detailed below:19

compEnSAtion of kEy mAnAgEmEnt pErSonnEL

Civil liability – excluding automobile $3,000,000

Civil liability – automobile $5,000,000

Misappropriation $1,000,000

Buildings and content $5,000,000

Other $1,000,000

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 when 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 ceded 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 non­traditional ceded reinsurance treaties such as obligations in the event of a disaster.

2012 ($) 2011 ($)

Short-term benefits

Executive committee 885,511 671,633

Directors’ fees 52,369 49,660

36

notES to thE finAnciAL StAtEmEntS

december 31, 2012

2012 ($) 2011 ($)

SchEduLE A – LoSS prEVEntion

Prevention advisors 453,773 365,771

Prevention events 151,450 135,972

Travel expenses 98,253 85,754

Relations with mutual members 75,521 88,346

Professional fees 66,144 143,410

Inspections 57,962 53,977

903,103 873,230

SchEduLE b – opErAting ExpEnSES

Salaries and corporate benefits 1,180,525 1,032,697

Outsourcing of accounting and IT services 499,981 479,408

Professional fees 140,737 44,855

Administrative outlays 101,344 103,870

Creative writing 83,793 76,312

Advertising 80,155 83,905

IT system hosting expenses 75,328 –

Depreciation of fixed assets 64,440 52,452

Committee expenses 59,250 53,250

Dues and subscriptions 53,238 45,191

Conferences 49,362 34,545

Travel expenses 43,309 35,772

Insurance 42,074 44,970

Business partnerships 29,628 35,836

Entertainment expenses 26,703 28,815

Stationery and printing 15,882 28,044

Website 8,537 14,128

Loss on the disposal of fixed assets 1,673 –

Bank charges 727 910

Assigned risk­sharing plan (3,215) (10,046)

2,553,471 2,184,914

The schedules are an integral part of the notes to the financial statements.

37

* Non­administrator

1 Former MMQ administrator2 Mayor of Weedon

3 President, DLR services conseils4 General Director, of Les Îles­de­la­Madeleine

Board of Directors

jacques BolducTreasurer Consulting Actuary

Gérard MarinovichChairman and Chief Executive Officer Mayor of Eastman

Richard Lehoux Vice­Chairman Mayor of Saint­Elzéar and Warden of the La Nouvelle­Beauce RCM

Linda Daoust*Secretary Executive Director and Head of Operations

Committees’ MembersAdvisory committees

Insurance Rémi Moreau (Chairman)Michel Giroux1

Danielle Henri AllardRichard LehouxPierre Mireault1

Jean­Noël Ouellet1

Mutual Members’ Loss PreventionMichel Gilbert (Chairman)Guy DiamondJean­Claude Dumas2

Michel Fernet 3

Gérard MarinovichHubert Poirier 4

Jacques Riopel

Rémi MoreauAdministrator Editor in Chief, Insurance and Risk Management, HEC Montréal

Danielle Henri AllardAdministrator Warden of the Montcalm RCM

jacques RiopelAdministratorMayor of Saint­Marc­de­Figuery and Warden of the Abitibi RCM

Guy DiamondAdministrator Mayor of Charette

Michel GilbertAdministrator Mayor of Mont­Saint­Hilaire

Raymond MedzaAdministrator Retired Executive Director of the Insurance Bureau of Canada

Statutory committees

Ethics and GovernanceRaymond Medza (Chairman)Michel GilbertRichard LehouxGérard MarinovichRémi Moreau

Audit and InvestmentJacques Bolduc (Chairman)Guy DiamondDanielle Henri AllardJacques Riopel

38

EDIToR IN CHIEFLouise Desjardins Director, Communications and Public Relations

EDIToRManon Allaire

CREATIVE DESIGN AND PRoDuCTIoNLajeunesse communication marketing

PRINTINGQuadriscan

the ultima Brokerage Firm network experience Serving MMQ Mutual Members

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.

ISBN 978-2-9811401-4-2Legal Deposit - Bibliothèque et Archives nationales du Québec, 2013Legal Deposit - Library and Archives Canada, 2013

39

A trustworthy insurAnce mutuAl serving Québec’s municipAlities

La Mutuelle des municipalités du Québec7100 Jean-Talon Street East, Suite 210Montréal, Québec H1M 3S3Telephone: 1-866-662-0661 • Fax: 1-800-808-8418

mutuellemmq.cominfo@mutuellemmq.com

your peace of mind may rest easy,

mmQ is standing by.