Annual Report #3

Tradition Mutual Insurance Company

2008 ANNUAL REPORT

President’s Message The past year has been one of challenges and opportunities.

Tradition Mutual Insurance has been going through a conversion of a new computer system. This has put added pressure on the staff and presented some challenges to our policyholders in the process.

We believe as a board, the new system will provide many benefits in years to come.

Our business has continued to grow at a moderate pace, unfortunately, so have claims.The board has made a recent decision to try and improve the claims side by adding a full time Loss Prevention Officer. Our board has continued to be diligent on our strategic plan and will continue to monitor and implement it in the following year.

I would like to recognize John Hudson for his 25 years of service as a director and adjuster. His dedication and loyalty to the mutual insurance industry will be missed, but at the same time the board and I wish John all the best in his retirement. Job well done John.

At last year’s annual meeting Don Brubacher retired from the board. Don was replaced by John Nyenhuis, a hog farmer who lives just North of our Sebringville office. It takes some time to learn the ropes as new director but John has met the challenge and has been a great contributor in his first year.

Finally, I would like to thank the policyholders for their support and patience throughout the computer changeover. I would also like to convey thanks and appreciation to the staff from the board, for the extra effort and patience during this implementation process. Last but not least to our manager, Alec Harmer for his efforts and enthusiasm during a challenging year.

Your board is here for you to work on your behalf.

They have been a great board and gave me strong support and guidance as President this past year.

Tradition Mutual Insurance is your company and I encourage you to support and promote it in the future.

Jim Watt President

Message from the Manager Although some of us are happy that 2008 is behind us, it will be remembered as a year of change and challenges. One of the largest challenges for us was a conversion to a new computer system. I owe the entire staff my gratitude for the job they have done to make this transition occur as smoothly as it did. A computer conversion that involves over 9,000 policies, hundreds of claims, and the accounting that ties all of it together, is a monumental task. We thank our loyal policyholders for their patience during this year, especially those that we gave extra challenges to. Now we have our system up and running more smoothly, our team is working on the efficiencies it can provide for the company and ultimately our policyholders.

We helped a lot of people last year with just over 1,000 claims reported. Tradition also made donations to the Sebringville community center for new lights around their baseball diamond, Mitchell Public Library for new office furniture, five scholarship awards at our local high schools and to many other worthwhile events and organizations. We are more than an insurance company, we are part of the community.

For those of you who read our financial report, it doesn’t look good. I mentioned before, we helped a lot of policyholders with claims. Added to that, was the downturn in the investments that everyone felt in 2008. We are confident our quality investments will rebound in future years as the negativity fades and a new positive attitude returns to the economy.

Tradition Mutual is over 100 years old and has weathered the storms of previous economic downturns. We are a financially strong company backed by 44 other mutual insurers across Ontario.

Wherever you see the “ontario mutuals” logo below, you know it’s another great farm mutual company in our organization.

2008 was the first year I could honestly say being a snowbird looked very appealing. It was cold and the snow came early and in large volumes.Throw in some short mild spells with rain and what you end up with is heavy snow piling up on buildings. Tradition was one of the first companies to add snowload to all the buildings that qualified for wind coverage.This year, it paid off for many of our policyholders as we were able to cover these losses, some that would have been devastating had there not been insurance. Not everyone in our communities was fortunate to have a company, like Tradition, that had the foresight to add this coverage to all buildings. These types of decisions are made because we have a policyholder based board of directors and agents who want to protect their policyholders, even if it means being a little higher in premium than the competition. Insurance cannot pay for everything, but the more we can say “yes that’s covered”, the better we like it.

I hope you have a safe and prosperous 2009.

Alec Harmer, CIP (Chartered Insurance Professional)

Manager

1

Tradition Mutual Insurance Company

NOTICE OF THE 6TH ANNUAL MEETING

The 6th Annual Meeting of the policyholders of Tradition Mutual Insurance Company will be held at the St. Pauls Community Centre in St. Pauls, Ontario on Wednesday, March 4, 2009 at 1:00 pm. The meeting is called to; receive and dispose of the annual report for the year ending December 31, 2008, the auditors report, to appoint auditors and authorize the directors to set the auditors’ remuneration, to set the remuneration of the directors, and to transact any other business that may properly come before the meeting.

Retiring directors are Doug Ahrens, Robert Kittmer & John Hudson. All directors are eligible for re-election to the board. John Hudson has indicated he will not be running for re-election to the board. A new director must be elected to fill his position.

Be advised that any eligible policyholder, wishing to run for director, must state his or her intentions in writing to the Corporate Secretary at least five(5) days prior to the annual meeting. Election forms are available at the office during regular business hours.

President Jim Watt

Corporate Secretary Irene Van De Walle

Notice of Change to By-laws The following by-law sections will be amended with the approval of the policyholders: 1. Section 3.17 Executive Committee will be amended as follows: Where the number of directors on the board is greater than six (6), the President, the Vice-President and one (1) other director designated by the Board from time to time shall constitute the Executive Committee of the Board of Directors, and shall meet at the call of the President to advise and assist the Manager in dealing with emergency business during the intervals between meetings of the Board of Directors, or to dispose of routine business in accordance with the instructions of the directors. During the absence or inability to act of a member of the Executive Committee, another director shall be invited by the Board to act on the Executive Committee in substitution. A majority of the members of the Executive Committee shall constitute a quorum for the transaction of business by the Executive Committee. [Corporations Act, s. 70] The Board shall constitute such other Committees of the Board as may be required from time to time by the Act. Subject to the Act, the terms of reference of such other Committees shall be as determined from time to time by the Board and such Committees shall meet at the call of the President of the Corporation or the Chair of the Committees.

2. A new section 2.06 Officer Designations is added as follows: For the purposes of this Bylaw, references herein to “Manager” shall be deemed to refer to “President” and references herein to “President” and “Vice-President” shall be deemed to refer to “Chair” and “Vice-Chair” respectively.

Explanatory Notes: In order to comply with certain provisions of Bill 151 (Budget Measures Act), a new section 2.06 was added and section 3.17 is amended to provide: 1. In section 2.06 – that the Manager will now be called the President of the Corporation and the President and Vice-President will now be called the Chair and Vice-Chair of the Corporation to meet common practice regarding corporate officer titles.

2. In section 3.17, a second paragraph was added to show the board is specifically empowered to create committees of the board with specific terms of reference to meet new corporate governance regulations.

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Tradition Mutual Insurance Company

AUDITORS’ REPORT

To the Policyholders of Tradition Mutual Insurance Company Sebringville, Ontario We have audited the balance sheet of Tradition Mutual Insurance Company as at December 31, 2008 and the statements of income, comprehensive income, members’ surplus, accumulated other comprehensive income and cash flows for the year then ended. These financial statements are the responsibility of the company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.

In our opinion, these financial statements present fairly, in all material respects, the financial position of the company as at December 31, 2008 and the results of its operations and cash flows for the year then ended in accordance with Canadian generally accepted accounting principles.

Stratford, Ontario February 2, 2009

Famme & Co. LLP Chartered Accountants Licensed Public Accountants

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Tradition Mutual Insurance Company

BALANCE SHEET as at December 31, 2008

Assets Cash Investments - (Note 1, 2 and 5) Accrued interest receivable Mortgage receivable, 6%, $983 monthly, including principal and interest, due April 30, 2008 Outstanding premiums receivable Due from reinsurer - ceded claims - other Other receivables Income taxes receivable Deferred policy acquisition expenses Capital assets - net of amortization Investment in subsidiary - (Note 6) Future income taxes Customer lists

2008

2007

$ 2,336,167 16,306,481 54,958

$ 1,955,867 18,015,566 54,283

--3,276,745 19,137,683 58,596 369,615 --563,600 898,578 104,701 698,478 106,250

90,935 2,785,696 17,568,772 223,912 403,161 48,998 535,018 961,111 130,943 212,622 ---

$ 43,911,852

$ 42,986,884

27,674,599 4,982,725 710,245 23,842

25,252,201 4,708,375 592,092 ---

$ 33,391,411

$ 30,552,668

12,135,530

12,330,079

Liabilities Provision for unpaid claims Unearned premiums Accounts payable and accrued liabilities Income taxes payable

Members’ Surplus Accumulated Other Comprehensive Income

(1,615,089) $ 43,911,852

4

104,137 $ 42,986,884

Tradition Mutual Insurance Company

STATEMENT OF MEMBERS’ SURPLUS for the year ended December 31, 2008

Members’ Surplus

2008

2007

Balance – beginning of year Net income (loss) for the year per statement of income

$ 12,330,079

$ 11,318,656

Balance – end of year

$ 12,135,530

Tradition Mutual Insurance Company

(194,549)

1,011,423 $12,330,079

STATEMENT OF ACCUMULATED OTHER COMPREHENSIVE INCOME for the year ended December 31, 2008

Accumulated Other Comprehensive Income

2008

Balance – beginning of year Unrealized (losses) gains on available for sale financial assets per statement of comprehensive income

$

104,137

Balance – end of year

$ (1,615,089)

2007 $

(1,719,226)

5

0 104,137

$

104,137

Tradition Mutual Insurance Company

STATEMENT OF INCOME for the year ended December 31, 2008

Income

2008

2007

Gross Premiums Written Less: Increase (decrease) in reserve for unearned premiums Reinsurance premiums Reinsurance assumed

$ 10,708,351

$ 10,043,991

2,160,530

1,699,076

Net premium income

$ 8,547,821

$ 8,344,915

Gross claims incurred Reinsurance plan recoveries

8,522,053 2,072,158

10,478,434 5,060,247

Net claims incurred Commissions Salaries and directors’ fees Benefits and education Audit and legal fees Travel, convention and meetings Corporation premium tax Printing supplies Office and general MVA’s and claim reports Telephone and mailing Insurance Association fees Office premises Data processing Bank charges Advertising and promotion Loss prevention

6,449,895 1,389,160 615,641 312,915 22,176 99,253 22,897 52,140 39,290 31,566 47,060 36,547 89,474 117,707 150,143 10,892 97,304 54,323

5,418,187 1,200,753 564,111 310,180 17,521 90,201 21,963 46,326 45,647 30,690 34,973 31,554 88,764 125,612 264,142 9,622 84,672 53,467

9,638,383

8,438,384

270,237 1,931,180 (40,887)

35,717 1,709,278 (45,919)

Claims and Expenses

(1,090,562) Premium deficiency

(93,469)

(5,508)

Underwriting gain (loss)

35,268

(1,085,054)

(128,737)

Other Revenue Refund from reinsurer Investment income Other income

Equity in Net Income (loss) of Subsidiary Income (loss) before income taxes Provision for (recovery of ) income taxes

- current - future

Net income (loss) for the year

$

6

--424,478 6,414

11,955 1,081,410 4,396

430,892

1,097,761

(654,162)

969,024

(26,242)

(3,037)

(680,404) --(485,855)

965,987 --(45,436)

(485,855)

(45,436)

(194,549)

$

1,011,423

Tradition Mutual Insurance Company

STATEMENT OF COMPREHENSIVE INCOME for the year ended December 31, 2008

2008 Net income (loss) for the year (per statement of income)

$

(194,549)

2007 $

1,011,423

Other Comprehensive Income Reclassification adjustment for gains (losses) included in income Unrealized gains (losses) on available for sale financial assets, net of income tax

(372,602)

Comprehensive income (loss) for the year

Tradition Mutual Insurance Company

95,341

(1,346,624)

8,796

(1,719,226)

104,137

$ (1,913,775)

$

1,115,560

STATEMENT OF CASH FLOWS for the year ended December 31, 2008

Cash Provided By (Used In):

2008

Operating Activities Net income (loss) for the year per statement of income Adjustments to convert income to cash basis: Increase (decrease) in unearned premiums Increase (decrease) in unpaid claims and adjustment expense Increase (decrease) in payables Increase (decrease) in income taxes payable Amortization of capital assets Amortization of discounts on bonds and debentures (Gain) loss on sale of investments Decrease (increase) in receivables Decrease (increase) in deferred policy acquisition expenses Decrease (increase) in investment income due and accrued Decrease (increase) in income tax receivable Decrease (increase) in future income taxes

$

(194,549)

2007 $

274,350

$ Investing Activities Proceeds from sale of investments Purchase of investments Decrease in investment in subsidiary Purchase of capital assets Purchase of customer lists Repayment of mortgage receivable

Excess of cash provided over cash applied (cash applied over cash provided) Cash — beginning of year Cash — end of year

34,977

2,422,398 118,153 23,842 83,684

4,647,991 (17,301) --85,800

19,818 405,984 (1,861,098)

422 (95,341) (4,192,927)

(28,582)

(90,520)

(675) 48,998 (485,856)

(1,655) 134,393 (45,436)

826,467

$

1,471,826

2,333,853 (2,769,796) 26,242 (21,151) (106,250) 90,935

1,659,318 (2,965,964) 3,037 (127,356) --6,206

(446,167)

(1,424,759)

380,300 1,955,867

47,067 1,908,800

$ 2,336,167

$ 1,955,867

Interest paid during the year amounted to $10,892 (2007 - $8,855).

Income taxes paid (recovered) during the year amounted to ($45,436) (2007 - ($112,179)).

7

1,011,423

Tradition Mutual Insurance Company

NOTES TO THE FINANCIAL STATEMENTS for the year ended December 31, 2008

1.

Accounting Policies The accounting policies of the company conform with those generally accepted in Canada and comply with the requirements for filing with the Financial Services Commission of Ontario. a)

Investments The company classifies its investments as available for sale financial assets. The classification depends on the purpose for which the investments were acquired. Management determines the classification of its investments at initial recognition and re evaluates this designation at each reporting date.

Available for sale financial assets, comprising principally of marketable equity securities, are investments that are quoted in an active market but are not actively being traded. All mutual funds and Farm Mutual Pooled funds are classified as available for sale because Management does not intend to trade these investments for short term profit making. Any increase or decrease in the market value is shown in the current year on the Statement of Comprehensive Income as Unrealized gains (losses) on available for sale financial assets. The quoted market price was used to determine the fair value of these investments. Certain of these investments are not publicly traded in an active market and as a result, are shown at cost.

b)

Investment in Subsidiary The investment in the wholly owned subsidiary is accounted for on the equity basis. The company includes in income the earnings and losses of the subsidiary.

c)

Premiums Earned and Deferred Policy Acquisition Expense Insurance premiums are included in income on a daily prorata basis over the life of the policies. Acquisition expenses related to unearned premiums, which expenses comprise commissions and premium taxes, are deferred and amortized to income over the periods in which the premiums are earned. The method followed in determining the deferred acquisition expenses limits the amount of the deferral to its realizable value by giving consideration to claims and expenses expected to be incurred as the premiums are earned.

d)

Capital Assets Capital assets are shown at acquisition cost net of accumulated amortization to date as provided for using the declining balance method of amortization at the following rates: Buildings 5% Furniture and office equipment 10% Parade cart 30% Amortization of computer equipment is calculated using the straight-line method at an annual rate of 33.33% Normal maintenance and repair expenditures are expensed as incurred.

e)

Customer Lists Customer lists purchased are shown at acquisition cost net of accumulated amortization to date as provided for using the straight line method over a three year period.

f)

Provision for Unpaid Claims The provision for unpaid claims represents an estimate for the full amount of all costs and the projected final settlements of claims incurred prior to the balance sheet date. These estimates of future loss activity are necessarily subject to uncertainty. These provisions are adjusted up or down as additional information affecting the estimated amounts become known during the course of claims settlement. All changes in estimates are recorded as incurred claims in the current period.

The company is a mutual insurance corporation and a member of the Fire Mutuals Guarantee Fund. Therefore, under provisions of the Ontario Insurance Act, it is exempt from the requirement to use actuarial reports.

g)

Income Taxes The company uses the liability method of accounting for income taxes. Under this method, current income taxes are recognized for the estimated income taxes payable for the current year. Future income tax assets and liabilities are recognized for temporary differences between the tax and accounting bases of assets and liabilities as well as for the benefit of losses available to be carried forward to future years for tax purposes that are likely to be realized.

h)

Revenue Recognition Revenue is recognized when the requirements for the sale of the goods or services are met and ultimate collection is reasonably assured.

i)

Use of Estimates Preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that could affect amounts reported as assets, liabilities, revenues, and expenses. Due to measurement uncertainty, results could differ from those estimates.

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2.

Change in Accounting Policy On January 1, 2008, the company adopted three new CICA Handbook Sections: Section 1535, Capital Disclosures; Section 3862, Financial Instruments Disclosures; and Section 3863, Financial Instruments Presentation. Prior year financial statements have not been restated.

Section 1535 requires disclosure of the company’s objectives and policies, and processes for managing capital; information about what the company regards as capital; whether the company has complied with any external capital requirements; and the consequences of not complying with these capital requirements.

Sections 3862 and 3863 replace Handbook Section 3861, Financial Instruments Disclosure and Presentation. Section 3863 carries forward unchanged the presentation requirements of Section 3861 while Section 3862 requires enhanced financial instrument disclosures focusing on disclosures related to the nature and extent of risks arising from financial instruments and how the company manages those risks.

Since the purpose of these new standards is to enhance disclosure requirements, they do not have a financial impact on the company

3.

Future Accounting Change The Accounting Standards Board has confirmed that all publicly accountable enterprises will have to comply with International Financial Reporting Standards (IFRS) for fiscal years beginning on or after January 1, 2011. Management understands there to be differences between current Canadian GAAP and IFRS, and have undertaken a project to understand the possible future effects on the financial statements.

4.

Capital Assets

as at December 31, 2008

Capital assets are stated at cost and consist of the following:

Land Buildings Furniture and fixtures Computer equipment Parade cart

Cost $ 89,390 1,089,036 328,101 207,308 12,469

Accumulated Amortization $ -458,477 212,831 150,991 5,427

2008 Net Book Value $ 89,390 630,559 115,270 56,317 7,042

2007 Net Book Value $ 89,390 656,894 125,293 79,192 10,342

$ 1,726,304

$

$

$

9

827,726

898,578

961,111

5.

Investments The company has reported its investments as described in note 1 as follows:

2007

2008 Available for sale, shown at fair value

$ 16,306,481

$ 18,015,566

The company carries investments as summarized below:

Term Deposits Bonds and Debentures Provincial Municipal Corporate

Cost 679,367

Market Value $ 679,335

2,459,882 203,880 2,133,152

1,970,475 294,739 2,367,380

1,979,165 304,651 2,354,354

4,811,741

$ 4,796,914

$ 4,632,594

$ 4,638,170

2,304,696 1,472,976 8,873,589 30,607

1,809,151 1,233,300 8,026,509 31,149

2,543,500 1,500,047 8,515,295 29,620

2,679,654 1,454,588 8,534,199 29,268

$ 17,903,609

$ 16,307,023

$ 17,900,423

$ 18,015,214

1 to 3 Years 180,000

3 to 5 Years 90,000

$

$ Common Shares Mutual Funds Farm Mutual Pooled Funds Fire Mutuals Guarantee Fund

Cost 410,000

Market Value $ 410,000

2,375,239 194,592 2,241,910

These investments mature over the following time periods: Within 1 Year Term Deposits $ 140,000 Bonds and Debentures Provincial 225,942 Municipal --Corporate $

Percent of Total

$

$

$

$

Over 5 Years ---

358,168 ---

339,721 49,977

1,451,408 144,615

101,376

595,870

815,066

729,598

467,318

$ 1,134,038

$ 1,294,764

$ 2,325,621

9%

22%

25%

44%

Common shares, mutual funds, pooled funds and the Fire Mutuals Guarantee Fund have no specific maturities.

6.

Investment in Subsidiary Tradition Mutual Insurance Company owns 100 common shares of Tradition Financial Services Ltd., a wholly owned subsidiary. The income earned (loss incurred) by Tradition Financial Services Ltd. is reflected on the financial statements of Tradition Mutual Insurance Company as an increase (decrease) in income on the statement of income and an increase (decrease) in the investment in subsidiary on the balance sheet.

2008 Investments in subsidiary consists of: 100 common shares Advance to subsidiary Cumulative income earned (loss incurred) by the subsidiary

$

100 599,900

2007 $

(495,299) $

10

104,701

100 599,900 (469,057)

$

130,943

7.

Provision for Unpaid Claims The provision for unpaid claims and amounts recoverable from the company’s reinsurer are categorized as follows:

2007

2008 Type of Unpaid Claims Property Liability Automobile Greenhouse Facility Association and risk sharing pool

8.

Gross $ 2,838,455 5,943,578 18,486,581 4,965 401,020

Ceded $ 1,694,259 4,071,033 13,367,426 4,965 ---

$ 27,674,599

$ 19,137,683

$

Gross 755,400 5,489,297 18,630,812 4,988 371,704

$ 25,252,201

$

Ceded 563,413 2,941,441 14,058,930 4,988 ---

$ 17,568,772

Income Taxes Under subsections 149(1)(t) and 149(4.2) of the Canadian Income Tax Act, the company is exempt from income taxes if it received at least 90% of its gross premium income in respect of insurance of farm property or the residences of farmers. If more than 20% of its gross premium income is from non farm sources, then the non farm percentage of the company’s net income is subject to income tax. If less than 20% of its gross premium income is from farm sources, then all of its net income is subject to income tax.

9.

Related Party Transaction During the year, the company entered into transactions with related parties as follows: The company has advanced an interest free loan to Tradition Financial Services Ltd. (a wholly owned subsidiary) with no specific terms of repayment. At December 31, 2008, the balance of this loan was $599,900 (2007 - $599,900.)

10.

Reinsurance Ceded The company follows the policy of underwriting and reinsuring contracts of insurance which, in the main, limit the liability of the company to a maximum amount of one claim of $230,000 (2007 - $230,000) in the event of a property claim, $180,000 (2007 - $180,000) in the event of a liability claim, $205,000 (2007 - $200,000) in the event of an automobile claim and $20,000 (2007 - $20,000) in the event of a farmer’s accident claim. In addition, the company has obtained reinsurance regarding stop loss coverage.

11.

Income Taxes For income tax purposes, the company has losses carried forward from prior years which can be used to reduce future years’ taxable income. These losses expire as follows: 2009 359,624 2014 64,879 2026 233,935 2027 124,305 2028 2,809,824 $ 3,592,567 The potential benefits relating to the available losses have been recorded on the balance sheet as part of future income taxes of $212,622 (2006 - $167,186).

12.

Investment in Farm Mutual Financial Services During the year, Farm Mutual Financial Services Inc. (FMFS) made a voluntary assignment in bankruptcy and was appointed a Trustee in bankruptcy. A lawsuit has been commenced against FMFS. As such, the company has adjusted the common share value of FMFS and the result is shown as a realized loss on investments on the financial statements.

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13.

Financial Instruments Purchases and sales of financial assets are accounted for at settlement date. Transaction costs are recognized immediately in income.

LIABILITIES

ASSETS Held for trading

14.

Available for sale

Cash Accounts receivable Investments Accounts payable Net other

$

2,336,167 ---------

$

----16,306,481 -----

Total

$

2,336,167

$ 16,306,481

Loans and receivables $

--22,897,597 -------

$ 22,897,597

Other financial liabilities $

TOTAL

Other (assets) and liabilities

------28,408,686 ---

$

--------2,611,118

$

2,336,167 22,897,597 16,306,481 (28,408,686) (2,611,118)

$ 28,408,686

$

2,611,118

$ 10,520,441

Pension Plan The company makes contributions to the Ontario Mutual Insurance Association Pension Plan, which is a multi employer plan, on behalf of 27 members of its staff. The plan is a money purchase plan for all employees with a defined benefit option at retirement for salaried employees, which specifies the amount of the retirement benefit to be received by the employees based on length of service and rates of pay. The amount contributed to the plan for 2008 was $71,240 for current service. These payments are included in expenses in the statement of income.

15.

Credit Risk Credit risk is the risk of financial loss to the company if a debtor fails to make payments of interest and principal when due. The company is exposed to this risk related to its debt holdings in its investment portfolio and the reliance on reinsurers to make payment when certain loss conditions are met.

The company’s investment policy limits bonds, debentures and certificates to those issued by federal, provincial or municipal governments (or guaranteed by federal or provincial governments), trust companies and chartered banks. All fixed income portfolios are regularly measured for performance and monitored by management on a quarterly basis. Bonds and debentures issued by Ontario municipalities, municipalities of other provinces and chartered banks are each limited to 10% of surplus. The maximum for a guaranteed investment certificate is the Canada Deposit Insurance Corporation insurance limit (currently $100,000).

Reinsurance is placed with FMRP, a Canadian registered reinsurer. Management monitors the creditworthiness of FMRP by reviewing their annual financial statements and through ongoing communications. Reinsurance treaties are reviewed annually by management prior to renewal of the reinsurance contract.

Accounts receivable are short term in nature and are not subject to material credit risk.

The maximum exposure to credit risk and concentration of this risk is outlined in Note 5.

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

16.

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

The company’s investment policy operates within the guidelines of the Insurance Act. An investment policy is in place and its application is monitored by the Board of Directors. Diversification techniques are utilized to minimize risk. The Policy limits the investment in equities to a maximum of 25% of the company’s total assets, and a 10% limit in any one company. a) Currency risk Currency risk relates to the company operating in different currencies and converting non Canadian earnings at different points in time at different foreign exchange levels when adverse changes in foreign currency exchange rates occur.

The company’s foreign exchange risk is related to its stock and mutual fund holdings. Foreign currency changes are monitored by management. A 1% change in the value of the United States dollar would affect the fair value of stocks by approximately $1,500 which would be reflected in net income or Other Comprehensive Income.

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

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b) Interest rate risk Interest rate risk is the potential for financial loss caused by fluctuations in fair value or future cash flows of financial instruments because of changes in market interest rates. The company is exposed to this risk through its interest bearing investments.

Historical data and current information is used to profile the ultimate claims settlement pattern by class of insurance, which is then used in a broad sense to develop an investment policy and strategy. However, because a significant portion of the company’s assets relate to its capital rather than liabilities, the value of its interest rate based assets exceeds its interest rate based liabilities.

As a result, generally, the company’s investment income will move with interest rates over the medium to long term, with short term interest rate fluctuations creating unrealized gains or losses in Other Comprehensive Income. There are no occurrences where interest would be charged on liabilities, therefore little protection is needed to ensure the fair market value of assets will be offset by a similar change in liabilities due to an interest rate change.

The objective and policies and procedures for managing interest rate risk is to manage the bond portfolio in such a way that the bonds are a portfolio laddered over a period of years. One fifteenth of the bond portfolio would come due each year and be reinvested. This protects the company from fluctuations in the interest rates.

At December 31, 2008, a 1% move in interest rates, with all other variables held constant, could impact the market value of bonds by $600,000. For bonds that the company did not sell during the year, the change during the year and changes prior to the year would be recognized as Other Comprehensive Income during the period.

There have been no significant changes from the previous period in the exposure to risk or policies, procedures and methods used to measure the risk. c) Equity risk Equity risk is the uncertainty associated with the valuation of assets arising from change in equity markets. The company is exposed to this risk through its equity holdings within its investment portfolio.

The company’s portfolio includes Canadian stocks with fair values that move with the Toronto Stock Exchange Composite Index, United States stocks with fair values that move with the S&P 500 Index and international stocks that move with stock exchanges in Europe, Australia and the Far East. A 10% movement in the stock markets with all other variables held constant would have an estimated affect on the fair value of the company’s equity holdings of $843,000. For stocks that the company did not sell during the period, the change would be recognized in the asset value and Other Comprehensive Income. For stocks that the company did sell during the period, the change during the period and changes prior to the period would be recognized as net realized gains in income during the period.

In accordance with its investment policy, the company limits its holdings in equities to 25% of total assets and a 10% limit in any one company. Up to 7% of the investment portfolio may be invested in other investments, known as the “basket clause”.

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

17.

Liquidity Risk Liquidity risk is the risk that the company will not be able to meet all cash outflow obligations as they come due. The company mitigates this risk by monitoring cash activities and expected outflows. Current liabilities arise as claims are made. There are no material liabilities that can be called unexpectedly at the demand of a lender or client. There are no material commitments for capital expenditures and there is no need for such expenditures in the normal course of business. Claim payments are funded by current operating cash flow including investment income.

There have been no significant changes from the previous period in the exposure to risk or policies, procedures and methods used to measure the risk, other than the following : The administrator of the Farm Mutual Pooled Funds held by the company entered bankruptcy protection during the year. Due to the uncertainty surrounding the bankruptcy, the custodian of these funds has frozen any contributions or withdrawals by the unit holders.

The funds continue to be managed according to the investment mandate, but no purchase or sale of the units will be allowed until the uncertainty is resolved.

18.

Capital Management The company’s objectives with respect to capital management are to maintain a capital base that is structured to exceed regulatory requirements and to best utilize capital allocations. Reinsurance is utilized to protect capital from catastrophic losses as the frequency and severity of these losses are inherently unpredictable. To limit their potential impact, stop loss coverage limits the company’s exposure to 92% of the earned property premium. This limits the company’s exposure to approximately $900,000 which represents 8.6% of the company’s surplus. For the purpose of capital management, the company has defined capital as policyholders’ equity excluding accumulated other comprehensive income.

The company measures the financial strength of the company by comparing the gross written premium to the company’s capital. A guideline ratio of 1.2:1 (premium to surplus) has been adopted by the board. At December 31, 2008 the company’s ratio is at 88:1.

19.

Subsequent Event At the close of business on December 31, 2008, the wholly owned subsidiary, Tradition Financial Services Ltd. was wound up into the parent company, Tradition Mutual Insurance Company.

13

DIRECTORS Joan Schmidt . . . . . . . . . . . . . . . .519-625-8168 Glenn Coulthard . . . . . . . . . . . . .519-393-6653 John Nyenhuis . . . . . . . . . . . . . .519-393-6539 Larry Barker . . . . . . . . . . . . . . . .519-348-0084 Douglas Ahrens . . . . . . . . . . . . .519-393-6813 John Hudson . . . . . . . . . . . . . . . .519-461-1668 Robert Kittmer . . . . . . . . . . . . . .519-349-2416 Jim Watt . . . . . . . . . . . . . . . . . . . .519-284-0066 Jim McCutcheon . . . . . . . . . . . . .519-284-1913

AGENTS Chris Dietz . . . . . . . . . . . . . . . . . .519-656-2585 Bruce Hanly . . . . . . . . . . . . . . . . .519-229-6560 Kathryn Mallon . . . . . . . . . . . . .519-271-9018 Ian Morrison . . . . . . . . . . . . . . . .519-349-2592 Keith Patterson . . . . . . . . . . . . . .519-348-8391 Laurel Poirier . . . . . . . . . . . . . . .519-348-0482 Robert Ready . . . . . . . . . . . . . . . .519-393-6965 Steve Riehl Sr. . . . . . . . . . . . . . . .519-393-6708 Patricia Riehl . . . . . . . . . . . . . . . .519-393-6708 Steve Riehl Jr. . . . . . . . . . . . . . . .519-393-5990 Jim Stacey . . . . . . . . . . . . . . . . . .519-284-3326 Lloyd Walkom . . . . . . . . . . . . . . .519-348-8050 Patrick McHugh . . . . . . . . . . . . .519-284-1291

BROKERS F.A. Campbell & Son Ins. Brokers Ltd. – Mitchell . . . . . . . . . . . . . . . . . .519-348-8425 St. Marys Insurance Group – St. Marys . . . . . . . . . . . . . . . . .519-284-3321

OFFICERS Alec Harmer . . . . . . . . . . . . . . . . . . . .Manager Irene Van De Walle . . . . . .Secretary-Treasurer

LOCATIONS Head Office 264 Huron Road, P.O. Box 10 Sebringville, Ontario N0K 1X0 Tel: 519-393-6402 Toll Free: 1-800-263-1961 Fax: 519-393-5185

www.TraditionMutual.com

Service Office 293 Queen Street West St. Marys, Ontario Tel: 519-284-3084