PACIFIC CATASTROPHE RISK INSURANCE COMPANY SPECIAL PURPOSE FINANCIAL STATEMENTS For the year ended 30 June 2021 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 - 14 Independent auditor's report 15 - 17 PACIFIC CATASTROPHE RISK INSURANCE COMPANY SPECIAL PURPOSE FINANCIAL STATEMENTS CERTIFICATION BY MANAGEMENT For the year ended 30 June 2021 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 2020 to 30 June 2021: 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 07 December 2021 on behalf of the Management of the Pacific Catastrophe Risk Insurance Company. _____________________________ _____________________________ Tine Ponia Sarah-Jane Wild Resident Director Director and Chairperson Page 1 PACIFIC CATASTROPHE RISK INSURANCE COMPANY SPECIAL PURPOSE FINANCIAL STATEMENTS STATEMENT OF COMPREHENSIVE REVENUE AND EXPENSES For the year ended 30 June 2021 Note Category 1 Category 2 & 3 Total Category 1 Category 2 & 3 Total 2021 2021 2021 2020 2020 2020 US$ US$ US$ US$ US$ US$ Revenue from non-exchange transactions 4 540,684 2,000,000 2,540,684 214,440 - 214,440 Plus / (less) movement in revenue received in advance 301,636 - 301,636 (23,864) - (23,864) Revenue from non-underwriting sources 842,320 2,000,000 2,842,320 190,576 - 190,576 Auditor's remuneration 5 (100,000) - (100,000) - - - CEO remuneration (132,430) - (132,430) - - - Calculation agent fee (26,950) - (26,950) - - - Management fee expense (80,000) - (80,000) (80,000) - (80,000) Recruitment agency fee (12,500) - (12,500) (15,000) - (15,000) Website Development (8,989) - (8,989) - - - Directors' fees (77,086) - (77,086) (22,056) - (22,056) Legal fees (59,118) - (59,118) - - - Financial Strength Rating - - - 54,014 - 54,014 M&E Specialist Fee (94,500) - (94,500) - - - Investment Advisor (5,814) - (5,814) (20,700) - (20,700) Product Development Hazard (81,600) - (81,600) - - - Consultants (81,750) (81,750) (105,000) (105,000) Communications Manager (17,400) (17,400) Secretariat Advisor (63,225) (63,225) Other expenses (958) - (958) (1,834) - (1,834) Total expenses (842,320) - (842,320) (190,576) - (190,576) 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. Page 2 PACIFIC CATASTROPHE RISK INSURANCE COMPANY SPECIAL PURPOSE FINANCIAL STATEMENTS STATEMENT OF CHANGES IN EQUITY For the year ended 30 June 2021 Retained Earnings Long Term Reserves Reserves Unrestricted Restricted Reserves Accessed Total NOTE $US $US $US $US $US Balance as at 30 June 2019 - - 18,000,000 (878,480) 17,121,520 Comprehensive revenue and expenses Surplus for the year - - - - - Other comprehensive revenue and expenses for the year - - - - Total comprehensive revenue and expenses - - - - - Transfers Transfer (to) / from Long Term Reserves - - - (241,210) (241,210) Transfer to Long Term Reserves Accessed 8 - - - - - Total transfers - - - (241,210) (241,210) Balance as at 30 June 2020 - - 18,000,000 (1,119,690) 16,880,310 Comprehensive revenue and expenses Surplus for the year - 2,000,000 - - 2,000,000 Other comprehensive revenue and expenses for the year - - - - Total comprehensive revenue and expenses - 2,000,000 - - 2,000,000 Transfers Transfer (to) / from Long Term Reserves - - - 192,152 192,152 Transfer to Long Term Reserves Accessed 8 - (2,000,000) 2,000,000 - - Total transfers - (2,000,000) 2,000,000 192,152 192,152 Balance as at 30 June 2021 - - 20,000,000 (927,538) 19,072,462 These financial statements are special purpose financial statements that have been prepared in accordance with the Special Purpose Financial Reporting Framework described under the basis of preparation in Notes 1 and 2 of these special purpose financial statements and are to be read in conjunction with the notes accompanying these special purpose financial statements. Page 3 PACIFIC CATASTROPHE RISK INSURANCE COMPANY SPECIAL PURPOSE FINANCIAL STATEMENTS STATEMENT OF FINANCIAL POSITION As at 30 June 2021 Category 1 Category 2 & 3 TOTAL Category 1 Category 2 & 3 TOTAL NOTE 2021 2021 2021 2020 2020 2020 US$ US$ US$ US$ US$ US$ EQUITY Long Term Reserves - 20,000,000 20,000,000 - 18,000,000 18,000,000 Long Term Reserves Accessed - (927,538) (927,538) - (1,119,690) (1,119,690) TOTAL EQUITY - 19,072,462 19,072,462 - 16,880,310 16,880,310 Represented By: CURRENT ASSETS Cash and cash equivalents 6 253,170 192,152 445,322 418,051 16,880,310 17,298,361 Investments - 18,880,300 18,880,300 - - - Deferred licence fee - - - - - - TOTAL CURRENT ASSETS 253,170 19,072,452 19,325,622 418,051 16,880,310 17,298,361 TOTAL ASSETS 253,170 19,072,452 19,325,622 418,051 16,880,310 17,298,361 CURRENT LIABILITIES Payables 221,700 - 221,700 84,956 - 84,956 Grant income received in advance 4 31,460 - 31,460 333,095 - 333,095 TOTAL CURRENT LIABILITIES 253,160 - 253,160 418,051 - 418,051 NET ASSETS 10 19,072,452 19,072,462 - 16,880,310 16,880,310 Signed on behalf of the Management of the Pacific Catastrophe Risk Insurance Company, 07 December 2021. _____________________________ _____________________________ 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. Page 4 PACIFIC CATASTROPHE RISK INSURANCE COMPANY SPECIAL PURPOSE FINANCIAL STATEMENTS STATEMENT OF CASH FLOWS For the year ended 30 June 2021 Note Category 1 Category 2 & 3 Total Category 1 Category 2 & 3 Total 2021 2021 2021 2020 2020 2020 US$ US$ US$ US$ US$ US$ CASH FLOWS FROM OPERATING ACTIVITIES Cash was disbursed to: Payments to suppliers and consultants (705,565) - (705,565) (199,521) - (199,521) NET CASH (OUTFLOWS) / INFLOWS FROM OPERATING ACTIVITIES 7 (705,565) - (705,565) (199,521) - (199,521) CASH FLOWS FROM INVESTING ACTIVITIES - (18,880,300) (18,880,300) - - - NET CASH (OUTFLOWS) / INFLOWS FROM INVESTING ACTIVITIES - (18,880,300) (18,880,300) - - - CASH FLOWS FROM FINANCING ACTIVITIES Cash was provided from: Reserves Accessed Replenishment - 192,152 192,152 (241,210) (241,210) 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 540,684 - 540,684 214,440 - 214,440 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 - - - Cash was disbursed to: NET CASH INFLOW FROM FINANCING ACTIVITIES 540,684 2,192,152 2,732,837 214,440 (241,210) (26,770) NET (DECREASE) / INCREASE IN CASH HELD (164,881) (16,688,148) (16,853,028) 14,919 (241,210) (226,291) Cash and cash equivalents at the beginning of the period 418,051 16,880,310 17,298,361 403,132 17,121,520 17,524,652 CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD 253,170 192,162 445,332 418,051 16,880,310 17,298,361 Represented by: Total cash and cash equivalents 6 253,170 192,162 445,332 418,051 16,880,310 17,298,361 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. Page 5 PACIFIC CATASTROPHE RISK INSURANCE COMPANY SPECIAL PURPOSE FINANCIAL STATEMENTS NOTES TO THE SPECIAL PURPOSE FINANCIAL STATEMENTS For the year ended 30 June 2021 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 2021 and were authorised for issue by the Board on 07 December 2021. 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 2.1 Basis of preparation (continued) 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 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 has changed due to the the "Closing Date" of the Project being extended to December 31, 2022. Refer to further guidance on "Closing Date" of the Project below. (2020: The special purpose financial statements were prepared on a realisation basis due to the "Closing Date"of the Project being June 30, 2021, as the Company had not requested, nor received, an extension of the Project from the World Bank as at June 30, 2021). Page 6 2 BASIS OF PREPARATION AND SIGNFICANT ACCOUNTING POLICIES (continued) 2.1 Basis of preparation (continued) Going Concern Reporting Period The period covered by the financial information presented in these special purpose financial statements is from 1 July 2020 to 30 June 2021. The period covered by the comparative financial information presented in these special purpose financial statements is from the 1 July 2019 to 30 June 2020. The financial statements have been prepared on a going concern basis, which contemplates continuity of normal business activities and the realisation of assets and the settlement of liabilities in the ordinary course of business. The Directors consider it appropriate for these financial statements to be prepared on a going concern basis. (2020: The "Closing Date" of the Project (as defined in Note 1) was June 30, 2021, 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.) 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 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. 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 was June 30, 2021. The "Closing Date" was subsequently extended to December 31, 2022, by way of letter dated July 1, 2021 from the World Bank. 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 Company has not received any indication from the World Bank on whether they intend to give notice to the Company that they would terminate the right of the Company to withdraw from the Grant Account. Since no decision has been made, as described above, these special purpose financial statements have been prepared on a going concern basis. Nonetheless, if these special purpose financial statements were to be prepared on a realisation basis, Management have determined that there would be no adjustments required to be made to the recorded values of the Company's assets and liabilities which have presented as current and their realisation values would remain unchanged. 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. Page 7 2 BASIS OF PREPARATION AND SIGNFICANT ACCOUNTING POLICIES (continued) 2.1 Basis of preparation (continued) 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. - 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. 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. Page 8 2 BASIS OF PREPARATION AND SIGNFICANT ACCOUNTING POLICIES (continued) 2.2 Significant accounting policies (continued) a Revenue recognition (continued) 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. Page 9 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 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. Page 10 PACIFIC CATASTROPHE RISK INSURANCE COMPANY SPECIAL PURPOSE FINANCIAL STATEMENTS NOTES TO THE SPECIAL PURPOSE FINANCIAL STATEMENTS For the year ended 30 June 2021 3. CAPITAL, INSURANCE AND FINANCIAL RISK MANAGEMENT Categories of Financial Instruments Financial assets: 2021 2020 Assets measured at amortised cost US$ US$ - Cash and cash equivalents 445,322 17,298,361 - Investments 18,880,300 Total financial assets 19,325,622 17,298,361 Financial liabilities Other financial liabilities - Payables 221,700 84,956 - Grant income received in advance 31,460 333,095 Total financial liabilities 253,160 418,051 (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 diversification over separate geographical areas seeks to reduce variability in loss experience. - The investment strategy is to invest in assets as stipulated in the Company's Statement of Investment Policy Objectives (SIPO). 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 2021 is US$ 20,326,983 (2020: US$ 20,875,244). This is limited through the purchase of reinsurance. Net exposure of the Company as at 30 June 2021 is US$ 8,576,983 (2020: US$ 9,125,244). Page 11 PACIFIC CATASTROPHE RISK INSURANCE COMPANY SPECIAL PURPOSE FINANCIAL STATEMENTS NOTES TO THE SPECIAL PURPOSE FINANCIAL STATEMENTS For the year ended 30 June 2021 3. CAPITAL, INSURANCE AND FINANCIAL RISK MANAGEMENT (CONTINUED) (b) Insurance Risk (continued) Exposure for each of the member countries is: Event2021 Coverage 2020 Coverage Member Peril Insured Insured Limit Peril Insured Event Insured Limit Cook Islands Tropical 1 in 150 Year 2,881,982 Tropical 1 in 150 Year 3,004,647 Cyclone Cyclone Samoa Earthquake & 1 in 50 Year 10,510,162 Earthquake & 1 in 50 Year 10,716,366 Tropical Tropical Cyclone Cyclone Tonga Earthquake & 1 in 30 Year 6,934,839 Earthquake & 1 in 30 Year 7,154,231 Tropical Tropical Cyclone Cyclone Total 20,326,983 20,875,244 (c) Market Risk (i) Interest rate risk The Company's interest rate risk arises from investments in bonds and cash funds. To manage its exposure to interest rate risk the Company diversifies its investment portfolio. Diversification of the investment portfolio is done in accordance with the limits set by the Company's SIPO. (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 investments in cash funds and funds held with banks. Credit risk is monitored by the Company's Adviser who is responsible for warning the Board of changes to the credit ratings of investment funds and registered banks. The Company does not anticipate a default from the relevant counterparties. The carrying amount of financial assets recorded in the special purpose financial statements represents the Company's maximum exposure to credit risk. (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. Page 12 PACIFIC CATASTROPHE RISK INSURANCE COMPANY SPECIAL PURPOSE FINANCIAL STATEMENTS NOTES TO THE SPECIAL PURPOSE FINANCIAL STATEMENTS For the year ended 30 June 2021 3. CAPITAL, INSURANCE AND FINANCIAL RISK MANAGEMENT (CONTINUED) (e) Liquidity Risk (continued) 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 < 6 months < 1 years > 1 year Total US$ US$ US$ US$ 2020 Financial Assets - Cash and cash equivalents 17,298,361 - 17,298,361 17,298,361 - - 17,298,361 Financial Liabilities - Payables (84,956) - - (84,956) - Grant income received in advance - (333,095) - (333,095) (84,956) (333,095) - (418,051) 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) (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 2 & Category 1 3 TOTAL Category 1 Category 2 & 3 TOTAL 2021 2021 2021 2020 2020 2020 US$ US$ US$ US$ US$ US$ Grant Agreement Part 1: Category 1 Operational Expense Grant 540,684 540,684 214,440 214,440 Part 2: Category 2 & 3 - Capitalization Phase 1 & 2 2,000,000 - 2,000,000 - - - Grant income received in advance (31,460) - (31,460) (333,095) - (333,095) Opening balance of grant income received in advance 333,095 - 333,095 309,231 - 309,231 Revenue from non-exchange transactions 2,842,320 - 2,842,320 190,576 - 190,576 2021 2020 5. AUDITOR'S REMUNERATION US$ US$ KPMG Auckland - Audit of the Company's general purpose financial statements (35,228) 32,442 - Agreed upon procedures engagement on the Company's utilisation of grants - - Total 35,228 32,442 Baker Tilly Staples Rodway Auckland - Audit of the Company's special purpose financial statements * 100,000 20,000 Total 100,000 20,000 * Baker Tilly Staples Rodway Auckland were engaged as auditors for the Company's special purpose financial statements subsequent to reporting date in April 2020, and fees for their remuneration have been recognised in the Company's special purpose financial statements for the year ended 30 June 2021. Page 13 PACIFIC CATASTROPHE RISK INSURANCE COMPANY SPECIAL PURPOSE FINANCIAL STATEMENTS NOTES TO THE SPECIAL PURPOSE FINANCIAL STATEMENTS For the year ended 30 June 2021 6. CASH AND CASH EQUIVALENTS Category 2 & Category 1 3 TOTAL Category 1 Category 2 & 3 TOTAL 2021 2021 2021 2020 2020 2020 US$ US$ US$ US$ US$ US$ Restricted funds Designated Bank Account/s 249,198 - 249,198 384,000 16,880,310 17,264,310 Premium Account 3,972 192,152 196,124 34,051 - 34,051 Total cash and cash equivalents 253,170 192,152 445,322 418,051 16,880,310 17,298,361 7. NET CASH GENERATED BY OPERATING ACTIVITIES Reconciliation of surplus for the period to net cash generated by operating activities: Category 2 & Category 1 3 TOTAL Category 1 Category 2 & 3 TOTAL 2021 2021 2021 2020 2020 2020 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) - - - Less interest received on Term Deposit - - Changes in net assets and liabilities: Payables (705,575) - (705,575) (199,521) - (199,521) Net cash generated by operating activities (705,575) - (705,575) (199,521) - (199,521) 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 (2020: $ 1,250,000). The Company received grant funding for the period ended 30 June 2021 of $2,000,000 (2020: Nil). There were no balances owing to / from related parties as at 30 June 2021 (2020: Nil). During the year, the Company incurred directors fees of $77,086 (2020: $22,056). During the year, there were no travel expenses incurred on behalf of the Company (2020: the Company reimbursed directors for travel expenses incurred on behalf of the Company for $1,355). 9. COMMITMENTS AND CONTINGENT LIABILITIES There were no material commitments or contingent liabilities at reporting date (2020: Nil). 10. EVENTS OCCURRING AFTER BALANCE DATE There are no subsequent events which occurred after the balance date Page 14 Level 9, 45 Queen Street, Auckland 1010 T: +64 9 309 0463 PO Box 3899, Auckland 1140 E: auckland@bakertillysr.nz New Zealand W: www.bakertillysr.nz INDEPENDENT AUDITOR’S REPORT To the Directors of Pacific Catastrophe Risk Insurance Company Report on the Audit of the Special Purpose Financial Statements Opinion We have audited the special purpose financial statements of Pacific Catastrophe Risk Insurance Company ('the Company') on pages 2 to 14, which comprise the special purpose statement of financial position as at 30 June 2021, and the special purpose statement of comprehensive income, special purpose statement of changes in equity and special purpose statement of cash flows for the year then ended, and notes to the special purpose financial statements, including significant accounting policies. In our opinion, the accompanying special purpose financial statements present fairly, in all material respects, the financial position of the Company as at 30 June 2021, and its financial performance and its cash flows for the year then ended in accordance with the basis of preparation described in Notes 1 and 2.1. Our report is made solely to the Directors of the Company. Our audit work has been undertaken so that we might state to the Directors of the Company those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Directors of the Company as a body, for our audit work, for our report or for the opinions we have formed. Basis for Opinion We conducted our audit in accordance with International Standards on Auditing (New Zealand) ('ISAs (NZ)'). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Company in accordance with Professional and Ethical Standard 1 (Revised) International Code of Ethics for Assurance Practitioners (including International Independence Standards) (New Zealand) issued by the New Zealand Auditing and Assurance Standards Board and the International Ethics Standards Board for Accountants’ International Code of Ethics for Professional Accountants (including International Independence Standards) (‘IESBA Code’), and we have fulfilled our other ethical responsibilities in accordance with these requirements and the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Other than in our capacity as auditor we have no relationship with, or interests in, Pacific Catastrophe Risk Insurance Company. Material Uncertainty Related to Going Concern We draw attention to Note 2.1 in the special purpose financial statements, which describes that 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 the Grant Agreement. As stated in Note 2.1, these events or conditions, along with other matters as set forth in Note 2.1, indicate that a material uncertainty exists 15 that may cast significant doubt on the Company’s ability to continue as a going concern. Our opinion is not modified in respect of this matter. Emphasis of Matter - Basis of Accounting and Restriction on Distribution and Use We draw attention to Notes 1 and 2.1 of the special purpose financial statements, which describes the basis of accounting. The special purpose financial statements are prepared at the request of the Directors of the Pacific Catastrophe Risk Insurance Company to assist the Pacific Catastrophe Risk Insurance Company in complying with the financial reporting provisions of the Pacific Catastrophe Risk Assessment and Financing Initiative Multi-Donor Trust Fund Grant Agreement Number TF A4171 dated 16 February 2017 (‘the Grant Agreement’). As a result, the special purpose financial statements may not be suitable for another purpose. Our report is intended solely for the Directors of the Pacific Catastrophe Risk Insurance Company and should not be distributed to or used by parties other than the Shareholder of the Pacific Catastrophe Risk Insurance Company, and the following parties defined in the Pacific Catastrophe Risk Assessment and Financing Initiative Multi-Donor Trust Fund Number TFO72622; the World Bank and the Donors Partners (as described in Note 1). Our opinion is not modified in respect of this matter. Emphasis of Matter – Composition of the Company’s operations, resources and expenditures We draw attention to Note 1 of the special purpose financial statements, which describes 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'), 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. These special purpose financial statements reflect only the operations, resources and expenditures related to the Project described in the Grant Agreement. These special purpose financial statements do not reflect any of the operations, resources and expenditures related to the Project (the Pacific Catastrophe Risk Assessment and Financing Initiative Project Code: 205266) described in the Memorandum of Understanding dated 9th September 2017 between the Company and the Government of the United Kingdom of Great Britain and Northern Ireland through the United Kingdom’s Department for International Development. Our opinion is not modified in respect of this matter. Responsibilities of the Directors of the Pacific Catastrophe Risk Insurance Company for the Special Purpose Financial Statements The Directors of the Pacific Catastrophe Risk Insurance Company are responsible on behalf of the Company for the preparation and fair presentation of the special purpose financial statements in accordance with the basis of preparation described in Notes 1 and 2.1, and for such internal control as the Directors determine is necessary to enable the preparation of the special purpose financial statements that are free from material misstatement, whether due to fraud or error. In preparing the special purpose financial statements, the Directors are responsible on behalf of the Company for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so. 16 Auditor’s Responsibilities for the Audit of the Special Purpose Financial Statements Our objectives are to obtain reasonable assurance about whether the special purpose financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (NZ) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these special purpose financial statements. As part of an audit in accordance with ISAs (NZ), we exercise professional judgement and maintain professional scepticism throughout the audit. We also:  Identify and assess the risks of material misstatement of the special purpose financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.  Obtain an understanding of internal control relevant to the audit 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 Company’s internal control.  Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.  Conclude on the appropriateness of the use of the going concern basis of accounting by the Directors and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the special purpose financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern.  Evaluate the overall presentation, structure and content of the special purpose financial statements, including the disclosures, and whether the special purpose financial statements represent fairly the underlying transactions and events in a manner that achieves fair presentation. We communicate with the Directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. BAKER TILLY STAPLES RODWAY AUCKLAND Auckland, New Zealand 7 December 2021 17