PACIFIC CATASTROPHE RISK INSURANCE COMPANY SPECIAL PURPOSE FINANCIAL STATEMENTS For the year ended 30 June 2022 Contents Page Certification by management 1 Statement of comprehensive revenue and expenses 2 Statement of changes in equity 3 Statement of financial position 4 Statement of cash flow 5 Notes to the financial statements 6 - 12 Independent auditor's report 13 - 15 PACIFIC CATASTROPHE RISK INSURANCE COMPANY SPECIAL PURPOSE FINANCIAL STATEMENTS CERTIFICATION BY MANAGEMENT For the year ended 30 June 2022 We certify that the attached special purpose financial statements for the Pacific Catastrophe Risk Insurance Company comprising of the Statement of Comprehensive Revenue and Expenses, Statement of Changes in Equity, Statements of Financial Position, Statement of Cash Flows and the notes forming part of the special purpose financial statements for the period from 1 July 2021 to 30 June 2022: a) give a true and fair view of the matters to which the relate; and b) have been properly drawn up in accordance with the accounting policies described in Note 2 to the special purpose financial statements. We are not aware of any circumstances which would render any particulars included in the financial statements to be misleading or inaccurate. We authorise these special purpose financial statements for issue on 30 November 2022 on behalf of the Management of the Pacific Catastrophe Risk Insurance Company. _____________________________ _____________________________ Tine Ponia Sarah-Jane Wild Resident Director Director and Chairperson 1 PACIFIC CATASTROPHE RISK INSURANCE COMPANY SPECIAL PURPOSE FINANCIAL STATEMENTS STATEMENT OF COMPREHENSIVE REVENUE AND EXPENSES For the year ended 30 June 2022 Note Category 1 Category 2 & 3 Total Category 1 Category 2 & 3 Total 2022 2022 2022 2021 2021 2021 US$ US$ US$ US$ US$ US$ Revenue from non-exchange transactions 4 721,027 - 721,027 540,684 2,000,000 2,540,684 Plus / (less) movement in revenue received in advance 84,338 - 84,338 301,636 - 301,636 Revenue from non-underwriting sources 4 805,365 - 805,365 842,320 2,000,000 2,842,320 CEO remuneration (162,679) - (162,679) (132,430) - (132,430) Product Development Hazard (152,457) - (152,457) (81,600) - (81,600) Communications Manager (107,973) - (107,973) (17,400) - (17,400) Calculation agent fee (60,000) - (60,000) (26,950) - (26,950) Directors' fees (54,995) - (54,995) (77,086) - (77,086) M&E Specialist Fee (42,750) - (42,750) (94,500) - (94,500) Finance & Planning Manager (40,329) - (40,329) - - - Management fee expense (37,500) - (37,500) (80,000) - (80,000) Regional TA Coordinator (35,811) - (35,811) - - - Secretariat Advisor (23,285) - (23,285) (63,225) - (63,225) Travel & related expenses (17,656) - (17,656) - - - Website Development (16,011) - (16,011) (8,989) - (8,989) Investment Advisor (12,556) - (12,556) (5,814) - (5,814) Recruitment agency fee (13,498) - (13,498) (12,500) - (12,500) Legal fees (10,652) - (10,652) (59,118) - (59,118) Consultants (3,250) - (3,250) (81,750) - (81,750) FX Gain/Loss (1,044) - (1,044) - - - Office Costs (802) - (802) - - - Auditor's remuneration 5 (10,000) - (10,000) (100,000) - (100,000) Other expenses (2,117) - (2,117) (958) - (958) Total expenses (805,365) - (805,365) (842,320) - (842,320) SURPLUS FOR THE PERIOD - - - - 2,000,000 2,000,000 TOTAL COMPREHENSIVE REVENUE AND EXPENSES - - - - 2,000,000 2,000,000 These financial statements are special purpose financial statements that have been prepared in accordance with the Special Purpose Financial Reporting Framework described under the basis of preparation in Notes 1 and 2 of these special purpose financial statements and are to be read in conjunction with the notes accompanying these special purpose financial statements. 2 PACIFIC CATASTROPHE RISK INSURANCE COMPANY SPECIAL PURPOSE FINANCIAL STATEMENTS STATEMENT OF CHANGES IN EQUITY For the year ended 30 June 2022 Retained Earnings Long Term Reserves Unrestricted Restricted Reserves Reserves Accessed Total NOTE $US $US $US $US $US Balance as at 30 June 2020 - - 18,000,000 (1,119,690) 16,880,310 Comprehensive revenue and expenses Surplus for the year - 2,000,000 - - 2,000,000 Other comprehensive revenue and expenses for the year - - - - - Total comprehensive revenue and expenses - 2,000,000 - - 2,000,000 Transfers Transfer (to) / from Long Term Reserves - - - 192,152 192,152 Transfer to Long Term Reserves Accessed 8 - (2,000,000) 2,000,000 - - Total transfers - (2,000,000) 2,000,000 192,152 192,152 Balance as at 30 June 2021 - - 20,000,000 (927,538) 19,072,462 Comprehensive revenue and expenses Surplus for the year - - - - - Other comprehensive revenue and expenses for the year - - - - Total comprehensive revenue and expenses - - - - - Transfers Transfer (to) / from Long Term Reserves - - - 52,963 52,963 Transfer to Long Term Reserves Accessed 8 - - - - - Total transfers - - - 52,963 52,963 Balance as at 30 June 2022 - - 20,000,000 (874,575) 19,125,425 These financial statements are special purpose financial statements that have been prepared in accordance with the Special Purpose Financial Reporting Framework described under the basis of preparation in Notes 1 and 2 of these special purpose financial statements and are to be read in conjunction with the notes accompanying these special purpose financial statements. 3 PACIFIC CATASTROPHE RISK INSURANCE COMPANY SPECIAL PURPOSE FINANCIAL STATEMENTS STATEMENT OF FINANCIAL POSITION As at 30 June 2022 Category 1 Category 2 & 3 TOTAL Category 1 Category 2 & 3 TOTAL NOTE 2022 2022 2022 2021 2021 2021 US$ US$ US$ US$ US$ US$ EQUITY Long Term Reserves - 20,000,000 20,000,000 - 20,000,000 20,000,000 Long Term Reserves Accessed - (874,575) (874,575) - (927,538) (927,538) TOTAL EQUITY - 19,125,425 19,125,425 - 19,072,462 19,072,462 Represented By: CURRENT ASSETS Cash and cash equivalents 6 159,769 - 159,769 253,170 192,152 445,322 Investments - 19,125,425 19,125,425 - 18,880,300 18,880,300 Other receivable 1,035 - 1,035 - - - TOTAL CURRENT ASSETS 160,804 19,125,425 19,286,229 253,170 19,072,452 19,325,622 TOTAL ASSETS 160,804 19,125,425 19,286,229 253,170 19,072,452 19,325,622 CURRENT LIABILITIES Payables 213,682 - 213,682 221,700 - 221,700 Grant income received in advance 4 (52,878) - (52,878) 31,460 - 31,460 TOTAL CURRENT LIABILITIES 160,804 - 160,804 253,160 - 253,160 TOTAL LIABILITIES 160,804 - 160,804 253,160 - 253,160 NET ASSETS - 19,125,425 19,125,425 10 19,072,452 19,072,462 Signed on behalf of the Management of the Pacific Catastrophe Risk Insurance Company, 30 November 2022. _____________________________ _____________________________ Tine Ponia Sarah-Jane Wild Resident Director Director and Chairperson These financial statements are special purpose financial statements that have been prepared in accordance with the Special Purpose Financial Reporting Framework described under the basis of preparation in Notes 1 and 2 of these special purpose financial statements and are to be read in conjunction with the notes accompanying these special purpose financial statements. 4 PACIFIC CATASTROPHE RISK INSURANCE COMPANY SPECIAL PURPOSE FINANCIAL STATEMENTS STATEMENT OF CASH FLOWS For the year ended 30 June 2022 Note Category 1 Category 2 & 3 Total Category 1 Category 2 & 3 Total 2022 2022 2022 2021 2021 2021 US$ US$ US$ US$ US$ US$ CASH FLOWS FROM OPERATING ACTIVITIES Cash was disbursed to: Payments to suppliers and consultants (814,428) - (814,428) (705,565) - (705,565) NET CASH (OUTFLOWS) / INFLOWS FROM OPERATING ACTIVITIES 7 (814,428) - (814,428) (705,565) - (705,565) CASH FLOWS FROM INVESTING ACTIVITIES - (245,125) (245,125) - (18,880,300) (18,880,300) NET CASH (OUTFLOWS) / INFLOWS FROM INVESTING ACTIVITIES - (245,125) (245,125) - (18,880,300) (18,880,300) CASH FLOWS FROM FINANCING ACTIVITIES Cash was provided from: Reserves Accessed Replenishment - 52,963 52,963 - 192,152 192,152 Receipt of grant funding from the World Bank on behalf of the Donors under the MTDF Grant No TF A4171 for Part 1: Category 1 Operational Expense Grant 721,027 - 721,027 540,684 - 540,684 Receipt of grant funding from the World Bank on behalf of the Donors under the MTDF Grant No TF A4171 for 'Part 2: Category 2 & 3 - Capitalization Phase 1 & 2 - - - - 2,000,000 2,000,000 Receipts from the Company resulting from reinsurance claim receipts - - - - NET CASH INFLOW FROM FINANCING ACTIVITIES 721,027 52,963 773,990 540,684 2,192,152 2,732,836 NET (DECREASE) / INCREASE IN CASH HELD (93,401) (192,162) (285,563) (164,881) (16,688,148) (16,853,028) Cash and cash equivalents at the beginning of the period 253,170 192,162 445,332 418,051 16,880,310 17,298,361 CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD 159,769 0 159,769 253,170 192,162 445,332 Represented by: Total cash and cash equivalents 6 159,769 - 159,769 253,170 192,162 445,332 These financial statements are special purpose financial statements that have been prepared in accordance with the Special Purpose Financial Reporting Framework described under the basis of preparation in Notes 1 and 2 of these special purpose financial statements and are to be read in conjunction with the notes accompanying these special purpose financial statements. 5 PACIFIC CATASTROPHE RISK INSURANCE COMPANY SPECIAL PURPOSE FINANCIAL STATEMENTS NOTES TO THE SPECIAL PURPOSE FINANCIAL STATEMENTS For the year ended 30 June 2022 1 INTRODUCTION Pacific Catastrophe Risk Insurance Company ('PCRIC' / 'the Company') is a company limited by shares, incorporated in the Cook Islands registered under Cook Islands Companies Act and is constituted under the Cook Islands Pacific Catastrophe Risk Insurance Facility Act 2016. The Pacific Catastrophe Risk Insurance Foundation ('the Foundation') is the sole shareholder of PCRIC. The Company receives grant funding under the Multi- Donor Trust Fund Agreements (MDTF) entered into with International Bank for Reconstruction and Development, and the International Development Association. These special purpose financial statements (hereinafter referred to as the ‘the special purpose financial statements’) are prepared by the Company pursuant to the Pacific Catastrophe Risk Assessment and Financing Initiative Multi-Donor Trust Fund Grant Agreement Number TF A4171 dated 16 February 2017 (‘Grant Agreement') between the Company and the International Bank for Reconstruction and Development and the International Development Association, which require the Company to prepare financial statements to reflect the operations, resources and expenditures related to the Project, and to have its financial statements for the respective parts of the Project audited, 'the Project' being as described in the Grant Agreement. The Grant Agreement, was established pursuant to the Administration Arrangements (‘PCRAFI MDTF Administration Arrangements’) concerning the Pacific Catastrophe Risk Assessment and Financing Initiative Multi-Donor Trust Fund Number TFO72622 (‘PCRAFI MDTF’) between the International Bank for Reconstruction and Development and the International Development Association (‘the World Bank’) as ‘the Administrator’ of the PCRAFI MDTF, and the current contributing donor countries (collectively ‘the Donors’). The current contributing donors to the PCRAFI MDTF are: the German Federal Ministry for Economic Cooperation and Development (BMZ); the Ministry of Finance of the Government of Japan; the United Kingdom Department for International Development of the Government of the United Kingdom of Great Britain and Northern Ireland, and the United States Department of the Treasury. The World Bank is ‘the Administrator’ of the PCRAFI MDTF. The Company is a Public Benefit Entity ('PBE') for the purpose of preparing these special purpose financial statements. The objective of the Project is to improve access to post-disaster rapid response finance for Pacific Island Countries. These special purpose financial statements have been prepared for: – Directors of the Pacific Catastrophe Risk Insurance Company to assist the Company in complying with the financial reporting provisions of the MTDF Grant No TF A4171; and – the World Bank and the Donors Partners . These special purpose financial statements are for the year ended 30 June 2022 and were authorised for issue by the Board on 30 November 2022. The following are the significant accounting policies adopted by the Company in the preparation and presentation of these special purpose financial statements. The accounting policies have been consistently applied, unless otherwise stated. 2 BASIS OF PREPARATION AND SIGNFICANT ACCOUNTING POLICIES Statement of Compliance The Company's special purpose financial statements are prepared and presented in accordance with New Zealand Generally Accepted Accounting Practice (‘NZ GAAP’) issued by the New Zealand External Reporting Board (‘XRB’) as required in the Cook Islands Captive Insurance Regulations and the presentation and classification requirements of the Grant Agreement Schedule 2 Section II A, which requires its financial statements reported for the Respective Parts of the Project, (together ‘the Special Purpose Financial Reporting Framework’). In terms of the requirements of NZ GAAP, the Company has elected to report in accordance with Tier 1 PBE Accounting Requirements Accounting Requirements (New Zealand Equivalents to International Public Sector Accounting Standards ('PBE IPSASs')). In terms of the requirements of Grant Agreement Schedule 2 Section II A, the Company undertakes its monitoring, reporting and evaluation by categories 1 to 3 defined in Grant Agreement Schedule 2 Section IV A. - Part 1: Category 1 - Establishment and Operationalization - Part 2: Category 2 - Capitalization Phase 1 (First instalment of project funds for capitalization) - Part 2: Category 3 - Capitalization Phase 2 (Second instalment of project funds for capitalisation) Historical Cost Convention The special purpose financial statements have been prepared on a realisation basis due to the "Closing Date"of the Project being December 31, 2022, the Company has not requested, nor received, an extension of the Project from the World Bank as at June 30, 2022 or as at the date of the signing of these financial statements. The basis of preparation has changed due the Company and World Bank no longer seeking to continue on with the Project, as the objective of the Project to improve access to post-disaster rapid response finance for Pacific Island Countries has been achieved. (2021: The special purpose financial statements had been prepared under the historical cost convention, as modified by revaluations to fair value for certain classes of assets and liabilities as described in the accounting policies. The basis of preparation had changed from that of June 30, 2020 due to the "Closing Date" of the Project being extended to December 31, 2022 from June 30, 2021). Reporting Period The period covered by the financial information presented in these special purpose financial statements is from 1 July 2021 to 30 June 2022. The period covered by the comparative financial information presented in these special purpose financial statements is from the 1 July 2020 to 30 June 2021. The "Closing Date" of the Project (as defined in Note 1) is December 31, 2022, and as such, these special purpose financial statements have been prepared on a realisation basis, which does not contemplate the continuity of normal business activities or the realisation of assets and the settlement of liabilities in the ordinary course of business, refer to the ' "Closing date" of the Project ' section below for further information. (2021: The financial statements had been prepared on a going concern basis, which contemplated continuity of normal business activities and the realisation of assets and the settlement of liabilities in the ordinary course of business. The Directors had considered it appropriate for these financial statements to be prepared on a going concern basis.) 6 2 BASIS OF PREPARATION AND SIGNFICANT ACCOUNTING POLICIES (continued) 2.1 Basis of preparation (continued) Compliance with the Grant Agreement Under the Grant Agreement, the Company has to ensure that the Respective Parts of the Project are carried out in accordance with the provisions of Schedule 2 of the Grant Agreement, as stipulated by Article II of the Grant Agreement. In the event the Company fails to perform any obligation under the Grant Agreement, the World Bank could either: suspend the Company's right to make withdrawals from the Grant Account; or cancel / terminate the right of the Company to make withdrawals with respect to an unwithdrawn amount of the Grant under the Grant Agreement. In addition, under clause 4.05(a) of the World Bank Policy "Standard Conditions for Grants Made by the World Bank Out of Various Funds", the World Bank has the ability to seek a refund if the Company is deemed to be non-compliant with the Grant Agreement and the Terms and Conditions attaching. To date there have been minor instances of non-compliance regarding process matters, and whilst known to the World Bank, these breaches have not been formally waived by them. Management's immediate plans are to closely monitor the performance of its obligations under the Grant Agreement and if the Company anticipates non-compliance of any such obligations, Management would notify the World Bank and seek approval from duly authorised World Bank staff member (or representative) prior to any actions which may be considered as non-compliant. As at 30 June 2022 and the date of the signing of these financial statements, the unwithdrawn amount of grant under the Grant Agreement was $1.9m. As at the date of the signing of these financial statements (30 November 2022), the Company has cash and cash equivalents of $2.5m and investments available of $25.3m, which provides sufficient operating cashflows for the Company's cashflows requirements for 12 months from the date of the signing of these financial statements, should the World Bank suspend the Company's right to make withdrawals from the Grant Account or cancel / terminate the right of the Company to make withdrawals with respect to an unwithdrawn amount of the grant under the Grant Agreement. The Council of Members have given the Company approval to use the capitalization funds in supporting the Company’s operational expenses commencing 1 January 2022. Should the World Bank suspend the Company's right to make withdrawals from the Grant Account or cancel / terminate the right of the Company to make withdrawals with respect to an unwithdrawn amount of the grant under the Grant Agreement, this would give rise to a material uncertainty in relation to the Company's ability to continue as a going concern. If the Company was unable to continue in operational existence for the foreseeable future, adjustments may have to be made to reflect the situation that assets may need to be realised other than the amounts at which they are currently recorded in the Statement of Financial Position. In addition, the Company may have to provide for further liabilities that might arise, and to reclassify non-current liabilities as current liabilities in the Statement of Financial Position. "Closing date" of the Project The Grant Agreement stipulates the "Closing Date" of the Grant Agreement is December 31, 2022. The World Bank Policy ‘Standard Conditions for Grants Made by the World Bank Out of Various Funds' (the 'Standard Conditions') set forth certain terms and conditions generally applicable to grants made by the World Bank and they apply to the extent specified in the Grant Agreement. The definitions of the Standard Conditions define the “Closing Date" as the date specified in the Grant Agreement (or such later date as the World Bank shall establish by notice to the Company) after which the World Bank may, by notice to the Company, terminate the right of the Recipient to withdraw from the Grant Account. Section 4.03 (e) Cancellation by the World Bank of the Standard Conditions - Closing Date, stipulate that 'the World Bank may, by notice to the Company, terminate the right of the Company to make withdrawals with respect to an unwithdrawn amount of the Grant, and cancel such amount, if, after the Closing Date, there remains an unwithdrawn amount of the Grant. As at the date of the signing of these financial statements, the World Bank has indicated to the Company that they would close the Project / Grant on the "Closing Date" was stipulated in the Grant Agreement of December 31, 2022. Accordingly, these special purpose financial statements have been prepared on a realisation basis. From December 31, 2022, the Company will no longer be able to withdraw any undrawn amounts from the Grant Account, all amounts withdrawn from the Grant Account since the inception of the Grant Agreement and up to the "Closing Date" of December 31, 2022, would be become the Company’s funds, unencumbered, and no longer be able to be, recalled by, returned / refunded to, the World Bank. Functional and presentation currency The special purpose financial statements are presented in United States dollars ('USD') which is the Company's functional and presentation currency. Standards issued and not yet effective and not early adopted PBE IPSAS 41 Financial Instruments replaces the existing guidance in PBE IPSAS 29 Financial Instruments: Recognition and Measurement. PBE IPSAS 41 includes revised guidance on the classification and measurement of financial instruments, a new expected credit loss model for calculating impairment on financial assets, and new general hedge accounting requirements. PBE IPSAS 41 is effective for annual reporting periods beginning on or after 1 January 2022, with early adoption permitted. Based on management's initial impact assessment of this Standard, this Standard is not expected to have a material impact on the Company's financial statements. PBE FRS 48 Service Performance Reporting is effective for annual reporting periods beginning on or after 1 January 2022, with early adoption permitted. Based on management's initial impact assessment of this Standard, this Standard is not expected to have a material impact on the Company however its financial statements would need to include Service Performance Reporting, which the Company intends to disclosure upon adoption. - Other standards and amendments adopted There are a number of other standards and amendments issued but not yet effective and not early adopted. Based on Management's initial impact assessment of these standards, they are not expected to have a material impact on the special purpose financial statements. Income Tax The Company is exempt from income tax in the Cook Islands in accordance with the Pacific Catastrophe Risk Insurance Facility Act 2016. Accordingly, no provision has been made for income tax. Tax advice may be sought to ensure that any operation by the Company in other jurisdictions does not jeopardise the entity's position to maintain the tax exempt status. Critical Accounting Estimates and Assumptions The preparation of special purpose financial statements in conformity with PBE IPSAS requires Management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, and revenues and expenditures. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates. The estimates and underlying assumptions are also reviewed on an ongoing basis and any changes to the estimates are recognised in the period in which they are revised. For the periods presented there are no critical accounting estimates or assumptions. 7 2 BASIS OF PREPARATION AND SIGNFICANT ACCOUNTING POLICIES (continued) 2.2 Significant accounting policies The following are the significant accounting policies adopted by the Company in the preparation and presentation of these special purpose financial statements. The accounting policies have been consistently applied, unless otherwise stated. a Revenue recognition Revenue from non-exchange transactions Non-exchange transactions are those where the Company receives value from another entity (e.g. case or other assets) without giving approximately equal value in exchange. Inflows of resources from non-exchange transactions, other than services in-kind, that meet the definition of an asset are recognised as an asset only when: - It is probable that the Company will receive an inflow of economic benefits or service potential; and - The fair value of can be measured reliably. Inflows of resources from non-exchange transactions that are recognised as assets are recognised as non-exchange revenue, to the extent that a liability is not recognised in respect to the same inflow. Liabilities are recognised in relation to inflows of resources from non-exchange transaction when there is a resulting presents obligation as a result of thee non-exchange transactions, where both: - It is probable that an outflow of resources embodying future economic benefit or service potential will be required to settle the obligation, and - The amount of the obligation can be estimated reliably. The following are the specific recognition criteria in relation to the Company's non-exchange transactions. (i) Grants The recognition of non-exchange revenue from grants depends on whether the grant comes with any stipulations imposed on the used of a transferred asset. Stipulations that are 'conditions' specifically require the Company to return the inflow of resources received if they are not used in the way stipulated, and therefore do not result in the recognition of a non-exchange revenue until the 'conditions' are satisfied. Stipulations that are 'restrictions' do not specifically require the Company to return the inflow of resources received if they are not utilised in the way stipulated, and therefore do not result in the recognition of a non-exchange liability, which results in the immediate recognition of non-exchange revenue on receipt. As described in Note 1 (above), the Company receives grant funding from the Donors through the World Bank under the Pacific Catastrophe Risk Assessment and Financing Initiative Multi-Donor Trust Fund Grant Agreement Number TF A4171 dated 16 February 2017 (‘Grant Agreement'). The objective of the grant funding is to improve access to post-disaster rapid response finance for Pacific Island Countries. Depending on stipulations of the grant funding the Company may or may not have to return unspent funds. If there are conditions attached, revenue in relation to the particular grant is not recognised when it is received by the Project. Under the Grant Agreement, the Project consists of the following parts: - Part 1. Establishment and Operationalization of the PCRIC and the Foundation - Part 2. Capitalization of the PCRIC - Part 3. Institutional Capacity Building on Disaster Risk Financing and Insurance - Part 4. Development of Disaster Risk Insurance Products - Part 5. Monitoring and Evaluation Grant funding received from the date of the establishment of the Company to reporting date have been for Parts 1 and 2 and are designated as follows: The Designated Bank Account and Term Deposit Accounts have been created to hold the restricted funds. Restricted Funds are those funds received from the Grant Agreement. Part 1: Category 1 - Establishment and Operationalization - Funds for goods, consulting services, non-consulting services, training and operating costs for: - Establishment and operationalisation of the PCRIC; - Development of disaster and climate related risk financing products; - Monitoring and evaluation of the insurance pay-out process; Part 1: Category 1 grant funding is recognised as revenue in the fiscal period in which an eligible expenditure is occurred. Part 2: Category 2 & 3 - Capitalization Phase 1 & 2 (first and second instalment of project funds for capitalization) - Funds to enable PCRIC to: (i) earn income on the Capitalization Funds to finance its operations; (ii) make insurance pay-outs rapidly and be partially reimbursed by the reinsurers; and (iii) retain and manage a portion of the risks while the rest is passed to the reinsurance markets. Part 2: Category 2 & 3 grant funding is recognised in the period in which the funds are received. Funds received from the Grant Agreement as Category 1 are held within the Designated Bank Account. Funds received as Category 2 and 3 are held within the term Deposit Accounts. 8 2 BASIS OF PREPARATION AND SIGNFICANT ACCOUNTING POLICIES (continued) 2.2 Significant accounting policies (continued) b Expenses Expenses are recognised as incurred in profit or loss on an accrual basis. c Cash and cash equivalents Cash and cash equivalents comprise cash on hand and cash at bank and deposits on call, with an original maturity of three months or less, which are readily convertible to cash and are subject to insignificant risk of changes in value. d Financial instruments The Company initially recognises financial instruments when the Company becomes a party to the contractual provisions of the instrument. Financial instruments are initially measured at fair value, plus for those financial instruments not subsequently measured at fair value through surplus or deficit, directly attributable transaction costs. Subsequent measurement is dependent on the classification of the financial instrument, and is specifically detailed in the accounting policies below. Loans and receivables are subsequently measured at amortised cost using the effective interest method, less any impairment losses. Loans and receivables comprise other receivables. Loans and receivables are assessed at each reporting date to determine whether there is objective evidence that it is impaired. Loans and receivables are impaired if there is objective evidence of impairment after the initial recognition of the asset, and that a loss event(s) have an impact on the estimated future cash flows of the loans or receivables that can be estimated reliably. Investments are subsequently measured at fair value through surplus or deficit. Assets in this category are classified as current assets if expected to be settled or sold within 12 months, otherwise they are classified as non-current. Regular purchases and sales of financial assets are recognised on the trade-date, being the date on which the Company commits to purchase or sell the asset. Gains or losses arising from changes in the fair value of the ‘financial assets at fair value through surplus or deficit’ category are presented in the statement of comprehensive income in the period in which they arise. The fair value of financial instruments traded in active markets is based on quoted market prices at the balance date. The quoted market price used for financial assets held by the Company is the current bid price. Financial liabilities classified as amortised cost are subsequently measured at amortised cost using the effective interest method. Financial liabilities classified as amortised cost comprise other payables. (c) Equity Equity is the as measured by total assets less total liabilities. Equity for the Company is comprised of retained earnings. Retained earnings are disaggregated and classified into a number of sub-reserves to enable clearer identification of the specified uses that the Company makes of its retained earnings. The components of retained earnings are: • Retained Earnings • Long Term Reserve Reserves represent a particular use to which various parts of equity have been assigned. Retained earnings sub-reserves may be: • Created, by the Company and may be altered without reference to any party, transfers to and from these reserves are at the discretion of Company; or • Legally restricted, under specific conditions accepted as binding by the Company, transfers from these reserves may be made only for specified purposes or when certain conditions are met. The retained earnings sub-reserve 'Long Term Reserve' has been created by the Company for the purpose of: • identifying and segregating from Retained Earnings the restricted Grant Agreement funds which can only be used for: • facilitating a quick claim payment whilst waiting on reinsurance to be recovered. • making a claim payment where there is insufficient Retained Earnings to cover the full cost of the claim. 9 PACIFIC CATASTROPHE RISK INSURANCE COMPANY SPECIAL PURPOSE FINANCIAL STATEMENTS NOTES TO THE SPECIAL PURPOSE FINANCIAL STATEMENTS For the year ended 30 June 2022 3. CAPITAL, INSURANCE AND FINANCIAL RISK MANAGEMENT Categories of Financial Instruments Financial assets: 2022 2021 Assets measured at amortised cost US$ US$ - Cash and cash equivalents 159,769 445,322 - Investments 19,125,425 18,880,300 - Other receivable 1,035 - Total financial assets 19,286,229 19,325,622 Financial liabilities Other financial liabilities - Payables 213,682 221,700 - Grant income received in advance (52,878) 31,460 Total financial liabilities 160,804 253,160 (a) Capital Risk Management The Company's capital includes retained earnings and reserves. The Company's policy is to maintain a strong reserve base. (b) Insurance Risk The Company's insurance operations, which do not relate to the operations, resources and expenditures of the Project described in the Grant Agreement and hence do not form part of these special purpose financial statements, expose it primarily to insurance risk. The insurance risk related information described and disclosed below have been included in these special purpose financial statements to provide the users of these special purpose financial statements with additional information about the Company's insurance operations and exposures. The Company was issued with a licence under the Cook Islands Captive Insurance Act 2013 on 10 June 2016. The financial condition and operation of the Company is affected by a number of key risks including insurance risk, market risk, compliance risk and operational risk. The Company's policies and procedures in respect of managing insurance risk are set out in this note. Objectives in managing risks arising from insurance contracts and policies for mitigating those risks The Company has an objective to control insurance risk thus minimising substantial unexpected losses that would expose the Company to an adverse financial capital loss. Key aspects of the processes established to mitigate risks include: - The maintenance and use of management information systems, which provide up to date, reliable data on the risks to which the business is exposed at any point in time. - Models, using information from the management information systems, are used to calculate premiums and monitor claims patterns. Past experience is used as part of the process. - The management of assets and liabilities is closely monitored to attempt to match the maturity dates of assets with the expected pattern of claims. - The Company does not currently have an investment strategy. All funds surplus to operating requirements are held in term deposits maintained in the Cook Islands until an Board approved investment strategy is adopted. - The diversification over separate geographical areas seeks to reduce variability in loss experience. Insurance Risk The Company can be indirectly impacted by the exposure taken on by the Company. In the event a claim occurs which exceeds the Retained Earnings of the Company, the Restricted Reserves can be accessed in accordance with the Grant Agreement. Insurance exposures are managed by the Company through: - The ability to review insurance contracts in place and in particular adjust future premium rates. - Concentration risk is mitigated as a result of geographical spread of Pacific Island countries. These counties include Cook Islands, Republic of Marshall Islands, Samoa, Tonga and Vanuatu. The gross exposure of the Company as at 30 June 2022 is US$ 20,634,269 (2021: US$ 20,326,983). This is limited through the purchase of reinsurance. Net exposure of the Company as at 30 June 2022 is US$ 8,884,269 (2021: US$ 8,576,983). Exposure for each of the member countries is: 2022 2021 Coverage Coverage Member Peril Insured Event Insured Limit Peril Insured Event Insured Limit Cook Islands Tropical 1 in 150 Year 2,881,982 Tropical 1 in 150 Year 2,881,982 Cyclone Cyclone Samoa Earthquake & 1 in 50 Year 10,695,750 Earthquake & 1 in 50 Year 10,510,162 Tropical Tropical Cyclone Cyclone Tonga Earthquake & 1 in 30 Year 7,056,537 Earthquake & 1 in 30 Year 6,934,839 Tropical Tropical Cyclone Cyclone Total 20,634,269 20,326,983 10 PACIFIC CATASTROPHE RISK INSURANCE COMPANY SPECIAL PURPOSE FINANCIAL STATEMENTS NOTES TO THE SPECIAL PURPOSE FINANCIAL STATEMENTS For the year ended 30 June 2022 3. CAPITAL, INSURANCE AND FINANCIAL RISK MANAGEMENT (CONTINUED) (c) Market Risk (i) Foreign exchange risk Foreign currency risk is the risk that the value of the Company's assets and liabilities or revenues and expenditure will fluctuate due to changes in foreign exchange rates. Reinsurance is purchased in United States dollars, irrespective of where the reinsurer is domiciled, and is effective from the same date and time as the Company writes the policy for its premiums and accepts the insurance risk. The Company is not exposed to currency risk as its investments are denominated in United States dollars. (ii) Price risk The Company is exposed to equity securities price risk because of investments held by the Company and classified in the statement of financial position as at fair value through surplus or deficit. The Company is not exposed to commodity price risk. To manage its price risk arising from investments in equity securities, the Company diversifies its portfolio. Diversification of the portfolio is done in accordance with the limits set by the Company's SIPO. (d) Credit Risk Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. The Company’s exposure to credit risk, or the risk of counterparties defaulting arises mainly from term deposits with banks. The Company maintains these deposits for the Company with counterparty registered banks having a credit rating of AA- from Standard & Poor's, and does not anticipate a default from the counterparty registered banks. The carrying amount of financial assets recorded in the special purpose financial statements represents the Company's maximum exposure to credit (e) Liquidity Risk Liquidity risk is the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities. The Company has liquidity risk with respect to its repayment obligations of financial liabilities. The Company manages liquidity risk by maintaining adequate reserves, by continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities. The following tables detail the Company's remaining contractual maturity for its financial instruments. The tables have been drawn up based on the undiscounted cash flows of financial instruments based on the earliest date on which the Company can be required to pay/receive. The table includes both interest and principal cash flows. < 6 months < 1 years > 1 year Total US$ US$ US$ US$ 2021 Financial Assets - Cash and cash equivalents 445,322 - - 445,322 - Investments 18,880,300 - - 18,880,300 19,325,622 - - 19,325,622 Financial Liabilities - Payables (221,700) - - (221,700) - Grant income received in advance - (31,460) - (31,460) (221,700) (31,460) - (253,160) 2022 Financial Assets - Cash and cash equivalents 159,769 - 159,769 - Investments 19,125,425 19,125,425 - Other receivable 1,035 1,035 19,286,229 - - 19,286,229 Financial Liabilities - Payables (213,682) - - (213,682) - Grant income received in advance - 52,878 - 52,878 (213,682) 52,878 - (160,804) (e) Fair value risk The Company considers that the carrying amount of the financial assets and liabilities approximates their fair value. 4. REVENUE FROM NON-EXCHANGE TRANSACTIONS Category 1 Category 2 & 3 TOTAL Category 1 Category 2 & 3 TOTAL 2022 2022 2022 2021 2021 2021 US$ US$ US$ US$ US$ US$ Grant Agreement Part 1: Category 1 Operational Expense Grant 721,027 721,027 540,684 540,684 Part 2: Category 2 & 3 - Capitalization Phase 1 & 2 - - - 2,000,000 - 2,000,000 Grant income received in advance 52,878 - 52,878 (31,460) - (31,460) Opening balance of grant income received in 31,460 - 31,460 333,095 - 333,095 Revenue from non-exchange transactions 805,365 - 805,365 2,842,320 - 2,842,320 11 PACIFIC CATASTROPHE RISK INSURANCE COMPANY SPECIAL PURPOSE FINANCIAL STATEMENTS NOTES TO THE SPECIAL PURPOSE FINANCIAL STATEMENTS For the year ended 30 June 2022 5. AUDITOR'S REMUNERATION 2022 2021 US$ US$ KPMG Auckland - Audit of the Company's general purpose financial statements - (35,228) Total - 35,228 Baker Tilly Staples Rodway Auckland - Audit of the Company's general purpose financial statements 35,000 - Total 35,000 - Baker Tilly Staples Rodway Auckland - Audit of the Company's special purpose financial statements * 20,000 100,000 Prior year over-accrual (10,000) - Total 10,000 100,000 * Baker Tilly Staples Rodway Auckland were engaged as auditors for the Company's general purpose financial statements and special purpose financial statements, and the fees for their remuneration has been recognised in the Company's general purpose financial statements and special purpose financial statements for the year ended 30 June 2022. 6. CASH AND CASH EQUIVALENTS Category 1 Category 2 & 3 TOTAL Category 1 Category 2 & 3 TOTAL 2022 2022 2022 2021 2021 2021 US$ US$ US$ US$ US$ US$ Restricted funds Designated Bank Account/s 159,769 - 159,769 249,198 - 249,198 Premium Account - - - 3,972 192,152 196,124 Total cash and cash equivalents 159,769 - 159,769 253,170 192,152 445,322 7. NET CASH GENERATED BY OPERATING ACTIVITIES Reconciliation of surplus for the period to net cash generated by operating activities: Category 1 Category 2 & 3 TOTAL Category 1 Category 2 & 3 TOTAL 2022 2022 2022 2021 2021 2021 US$ US$ US$ US$ US$ US$ Profit for the year - - - - 2,000,000 2,000,000 Less revenue from non-exchange transactions - - - - (2,000,000) (2,000,000) Changes in net assets and liabilities: Payables (814,428) - (814,428) (705,565) - (705,565) Net cash generated by operating activities (814,428) - (814,428) (705,565) - (705,565) 8. RELATED PARTY TRANSACTIONS AND BALANCES The parent of the Company is Pacific Catastrophe Risk Insurance Foundation, which is also the sole shareholder, and therefore is a related party. During the year, the Company did not incur insurance pay-outs (2021: Nil). The Company did not receive grant funding for the period ended 30 June 2022 (2021: $2,000,000). There were no balances owing to / from related parties as at 30 June 2022 (2021: Nil). During the year, the Company incurred directors fees of $55,040 (2021: $77,086). During the year, the Company incurred travel fees for directors of $17,656 (2021:$Nil). 9. COMMITMENTS AND CONTINGENT LIABILITIES There were no material commitments or contingent liabilities at reporting date (2021: Nil). 10. EVENTS OCCURRING AFTER BALANCE DATE There has been no matter or circumstance, which has arisen since 30 June 2022 that has significantly affected or may significantly affect the operations in financial years subsequent to 30 June 2022 of the Company. 12