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CAPRICORN MUTUAL LIMITED

ABN 24 104 601 194

Annual Financial Report for the year ended 30 June 2013

CAPRICORN MUTUAL LIMITED

Contents Page

Page

Corporate particulars 1

Corporate governance statement 2

Directors‟ report 7

Auditor‟s independence declaration 12

Statement of comprehensive income 13

Statement of financial position 14

Statement of changes in equity 15

Statement of cash flows 16

Notes to the financial statements 17

Directors‟ declaration 54

Independent auditor‟s report 55

CAPRICORN MUTUAL LIMITED Corporate Particulars

1

Directors

Michael McLeod

Wayne Negus

Russell Green

Vincent O‟Neill

Colin Heavyside

Company Secretary Andrew Griffiths

Registered Office

The registered office of Capricorn Mutual Limited (“CML” or “the Company”) is at –

34 Welshpool Road Welshpool Western Australia 6106 The registered office of CML NZ Limited (“CMLNZ”) is at – C/- Puhoi River Motors Ltd 1 Ahuroa Road Auckland 0951 New Zealand The registered office of Capricorn (Isle of Man) Ltd (“CIOM”) is at - Fort Anne Douglas Isle of Man IM1 5PD Presentation Currency The financial report is presented in Australian Dollars. Solicitors Bankers Swaab Attorney Australia and New Zealand Banking Group Limited Lvl 1, 20 Hunter St. 77 St Georges Terrace Sydney Perth NSW 2000 WA 6000 Auditors Actuary Ernst & Young AM Actuaries 11 Mounts Bay Road, Suite 8.05, Equitable House Perth, WA 6000 343 Little Collins St Melbourne, VIC 3000

CAPRICORN MUTUAL LIMITED Corporate Governance Statement

2

This statement outlines key Corporate Governance practices that were in place throughout the financial year ended 30 June 2013. Board of Directors The Board of Directors (the “Board”) is responsible for protecting the rights and interests of the Members of Capricorn Mutual Limited (“the Company” or “CML”) and is accountable for the overall management of the consolidated entity. The Company‟s Constitution requires a majority of the Directors of the Board to be directors of Capricorn Society Limited (“CSL”) and up to eight (8) Directors may be nominated by the Board of Directors of CSL. Each Director nominated by CSL must remain, whilst holding office as a Director of the Company, a Director of CSL. The Directors may appoint to the Board up to three (3) Independent Directors for a maximum term of three (3) years. All Directors, except the Independent Chairman, who held office during the financial year ended 30 June 2013 were Directors appointed by CSL. One third of Directors must retire by rotation at each Annual General Meeting of the Company. A retiring Director is eligible for re-election. Composition of the Board The Company‟s Constitution stipulates that the Board shall consist of a minimum of three Directors and a maximum of eleven Directors. The current Board comprises the following Directors: Michael McLeod Wayne Negus Russell Green Vincent O‟Neill Colin Heavyside

Chairman – Independent Non-Executive Director Vice Chairman - Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director

Role of the Board The Board‟s primary role is to protect the rights and interests of the Company‟s Members in accordance with the terms of the Company‟s Constitution and at law. The Board is accountable to the Company‟s Members for the overall management of the Company although operational management of the Company is outsourced to mutual management service provider Capricorn Mutual Management Pty Ltd (the “Managers” or “CMM” as the context requires), an ultimate wholly owned subsidiary of CSL. The Board is responsible for:-

(a) the overall corporate governance of the Company and its controlled entities (the “Consolidated Entity”); (b) setting strategic direction; (c) establishing goals for the Company‟s Managers and monitoring the achievement of those goals; (d) ensuring regulatory compliance; and (e) monitoring service delivery to the Company‟s Members.

Governance philosophy and approach The Board governs the Company with an emphasis on:-

(a) a future focus rather than a preoccupation with the present or past; (b) strategic issues rather than administrative detail; (c) pro-activity rather than reactivity; (d) encouraging a diversity of opinions and views; (e) the development and expression of a collective responsibility for all aspects of the Board’s performance; (f) continuing improvement in Board and individual Board member effectiveness; and (g) the interests of the Company as a whole.


3

Board process An Audit, Risk and Compliance Committee and a Claims Committee have been established to assist the Board with the execution of its responsibilities. Each Committee has its own terms of reference and objectives which are reviewed annually. The Board has also established a framework for the management of the Consolidated Entity including a system of internal control and the establishment of appropriate ethical standards. The Board usually holds six scheduled meetings each year, plus a minimum of one strategy meeting and any other one-off meetings as may be required to address specific matters that may arise. The Board met on eight (8) occasions during the year. The attendance details of the Board are as per the Directors‟ Report on page 10. To assist the Board with its understanding of the business of the Company, regular presentations and workshops are arranged during the year including, where required, presentations by external professional consultants. Audit, Risk and Compliance Committee The Audit, Risk and Compliance Committee has been established by the Board under terms of reference. The terms of reference set out the Audit, Risk and Compliance Committee‟s role, responsibilities, composition, structure and membership requirements. The Committee provides the Board with an efficient mechanism to focus on particular issues relevant to verifying and safeguarding the integrity of the Company‟s financial reporting and compliance with various statutory obligations. The key responsibilities of the Audit, Risk and Compliance Committee are:-

- reviewing periodical financial reports and annual financial statements;

- reviewing the Company‟s compliance with Australian Financial Services Licence issued by the Australian Securities and Investments Commission;

- liaising with the external auditors and reviewing external audit reports to ensure that, where major

deficiencies or breakdown in controls or procedures have been identified, appropriate and prompt remedial actions are taken by the Managers;

- overseeing review of the Product Disclosure Statement and Rules; - reviewing the Company‟s corporate insurance program; - reviewing risk management and making recommendations to the Board regarding changes to policies

regarding operational risk and compliance; - monitoring the internal control frameworks and making recommendations to the Board regarding

enhancements; - overseeing review of the Company‟s actuarial performance; and - overseeing processes for compliance with laws, standards, and best practice guidelines.

All members of the committee must be Directors of the Board. The Audit, Risk and Compliance Committee met on six (6) occasions during the year. The attendance details of the committee are as per the Directors‟ Report on page 10. The members of the Audit, Risk and Compliance Committee during the year were:- Vincent O‟Neill Chairman – Non-Executive Director Michael McLeod Independent Non-Executive Director Russell Green Non-Executive Director Wayne Negus Non-Executive Director Colin Heavyside Non-Executive Director


4

Claims Committee The Claims Committee is established by the Board under terms of reference. Its role is to assist the Board in exercising its discretion and to promote the highest level of claims administration service whilst ensuring prudent and equitable claims governance at all times. The Committee is governed by a statement of general claims administration principles contained in its terms of reference. The Committee supports the Managers in making a positive difference to the protection holders particularly during times of catastrophe or disaster. The key responsibilities of the Claims Committee are:-

- to administer claims by assisting with the payment and settlement approvals; - to review current claims paid and make recommendations to the Board with respect to the Board exercising

its discretion in connection with discretionary claims; - to provide input to the Managers on the underwriting of special risks;

- to oversee the standards of service in claim assessment, benefit delivery and post benefit delivery;

- to support the Managers to minimise fraudulent claims activity; and

- to review the Company‟s policies and procedures regarding independent valuation and audit.

All members must be Directors of the Board. The Claims Committee met on five (5) occasions during the year. The attendance details of the committee are as per the Directors‟ Report on page 10. The members of the Claims Committee during the year were:- Wayne Negus Michael McLeod Russell Green Vincent O‟Neill Colin Heavyside

Chairman – Non-Executive Director Independent Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director

Conflicts of interest Directors must keep the Board advised of any interest that could potentially conflict with those of the Company. Under the Company‟s Constitution, Directors are prohibited from attending and voting at any meeting of the Directors in respect of any claim made pursuant to the Company‟s Rules by the Member with whom the sa id Director is associated. Details of Director related entity transactions with the Company and the Consolidated Entity are set out in Note 26.


5

Directors’ Code of Conduct The Board is committed to ethical conduct in all areas of its responsibilities and authority. Directors shall:-

- act honestly, for proper purposes and in good faith at all times in the best interests of the Company‟s Members as a whole;

- declare all interests that could result in a conflict between personal and the Company‟s priorities;

- exercise diligence and care in fulfilling the functions of office;

- attend Board meetings and devote sufficient time for preparation of Board meetings to allow for full and appropriate participation in the Board‟s decision making;

- put the interests of the Company ahead of any personal interests;

- ensure scrupulous avoidance of deception, unethical practices or any other behaviour that is, or might be construed as, less than honourable in the pursuit of the Company‟s business;

- respect the need for confidentiality in all matters relating to the governance of the Company and not disclose to any other person or organisation confidential information other than as agreed by the Board or required under law;

- act in accordance with their fiduciary duties, complying with the spirit as well as the letter of the law, recognising both the legal and moral duties of the role;

- abide by Board decisions once reached notwithstanding a Board member‟s right to pursue a review or reversal of a Board decision;

- not to make, comment, issue, authorise, offer or endorse any public criticism or statement having or designed to have an effect prejudicial to the best interests of the automotive industry generally, or the Company;

- respect the law and customs at all times and in all places including foreign countries;

- treat all persons with respect, dignity and proper regard for their rights and obligations; and

- not misuse funds or property of the Company.

The Board shall:-

- ensure that there is an appropriate separation of duties and responsibilities between itself and its Managers;

- make every reasonable effort to ensure that the Company does not raise community, supplier or stakeholder expectations that cannot be fulfilled;

- regularly review its own performance as the basis for its own development and quality assurance; and

- carry out its meetings in such a manner as to ensure fair and full participation of all Board members.

Risk Management Risk is inherent in all corporate activities undertaken by the Company. Sound business practice and corporate governance standards demand that formal and systematic approaches to the risk management are incorporated into business activities. The overarching objective of minimising risk is achieved through:-

- building conservative claims provisioning throughout the year in the Company‟s management accounts to avoid unwelcome year-end surprises through actuarial year-end claims provisioning adjustments;

- pro-active management of compliance with Australian Financial Service Licence and other legislative requirements through, where appropriate, external professional advice and building sufficient financial resources to meet the capital requirement under the licence;

- Voluntarily adopting application of accounting standard of achieving 75% probability of sufficiency of net outstanding claims liability valuation; and

- Using an external agency in buying discretionary protection to avoid having to absorb large losses suffered by the protection holders.


6

Internal Control Framework The Board is responsible for the overall internal control framework, but recognises that no cost effective internal control system will preclude all errors or irregularities. The following are some of the Board oversight internal control framework processes and procedures in addition to the other internal controls that are in place:-

- budgeting and variance analysis;

- financial forecasting;

- claims analysis on attritional and large loss basis; - exceptional reporting on matters requiring the Board‟s attention; and - expenditure management.

Actuarial Review Although, the Company is not an insurance Company licensed by the Australian Prudential Regulation Authority (“APRA”), the Company has voluntarily adopted the application of the Accounting Standard of achieving 75% probability of sufficiency of net outstanding claims liability valuation. This is achieved through the assessment of the Company‟s claims liability by an independent external Actuary. The recommendation made by the Actuary is considered by the Audit, Risk and Compliance Committee and the Committee makes a recommendation to the Board for resolution. The gross and net claims liability provision in the Financial Statement is based on the Actuary‟s report.

CAPRICORN MUTUAL LIMITED Directors’ Report

7

The Directors present their report on the Company and its controlled entities for the year ended 30 June 2013. Directors The names and details of Directors in office at any time during or since the year ended 30 June 2013 are as follows.

Michael McLeod

Chairman FAICD

Mike joined the Board of the Company and the Boards of CMLNZ and CIOM on 1 July 2010 as a Non-Executive Director who is not a Member of the Company or CSL. Mike has over 30 years‟ experience in the insurance industry and was previously Chief Executive Officer of Australian Health Management Group Limited, Australia‟s 7th largest health insurance company. Mike has headed other companies including Australasian Medical Insurance Limited, Australia‟s largest medical indemnity insurer. Prior to joining Australasian Medical Insurance Limited, Mike was CEO of Willis Coroon / Richard Oliver, the Australian subsidiary of the world‟s 4th largest insurance broking and risk consulting group.

Wayne Negus Vice Chairman FAICD, SFCDA

Wayne joined the Board in 2003 and was inaugural Chairman between 2003 and 2010. Wayne stood down as Chairman to become Vice-Chairman of the Board on 1 July 2010. He is a director of CSL and CMLNZ and the Motor Trade Association of Western Australia, is a past National Chairman of the Motor Trade Association of Australia Service Station and Convenience Store Division. Wayne resigned from CIOM in April 2012. Wayne is a Fellow of the Australian Institute of Company Directors (Diploma). Wayne has been a Member of the CSL Board since 1987 where he was Chairman from 1995 to 2003, and has been a Rotarian since 1975.

Russell Green

Non-Executive Director FAICD

Russell joined the Board in 2003. Russell was Chairman of CSL since 2005 until October 2010 and is a director of CMLNZ and CIOM. Russell has extensive experience in the motor trade industry and presently owns a mechanical repair business in Puhoi, New Zealand. He has been actively involved with the Motor Trade Association of New Zealand, from serving time on the local branch committee right up to being president of its largest branch, Auckland.

Vincent O‟Neill


Vincent was elected to the CML Board in January 2007 and is Chairman of the Audit, Risk and Compliance Committee. Vincent is a director of CSL and CMLNZ. Vincent resigned from CIOM in April 2012. Vincent has been actively involved in the motor trades industry for many years and owns a mechanical repair workshop he established in 1979. He is a member of the Victorian Automobile Chamber of Commerce. Vincent has served on the CSL board since September 2005.

Colin Heavyside


Colin joined as a director of the Board of the Company and the Boards of CMLNZ and CIOM on 30 November 2009. Colin resigned from CIOM in April 2012. Colin is Chairman of CSL since October 2010. Colin has extensive retail automotive experience having worked for 30 years in the industry and has in the past served the industry in many capacities, including national chairman of the Australian Service Station Association (ASSA), Board member of the Federal Industrial Council for the retail automotive industry, President of the Motor Trades Association of South Australia, Board member for the Motor Trades Association Group Training Scheme and director of the MTAA Superannuation Fund, which at the time had 240,000 members and assets of $2 billion.


8

We, the Board of Capricorn Mutual Limited are pleased to present this year‟s annual statement for the review of the 2012-2013 financial year, which has been an extraordinarily successful year for CML highlighted by:

- The largest receipt of contributions from members in our history; - A surplus being achieved for the third time in our history; - The successful implementation of our correction strategy; - Improved member service; - The benefit of benign weather to assist in lower than expected claims costs; and - A high demonstration of loyalty and confidence of our membership demonstrating the strong loyalty to

Capricorn Mutual and Capricorn Society. Short Term Objectives of the Company The Company has been promoted, set-up and supported financially and operationally by CSL. The objective for the establishment of the Company is to provide discretionary risk products at a competitive price to members of CSL as an alternative to traditional insurance products. For the financial year of these accounts we witnessed the further development of the new correction strategy to align core risk, reduce portfolio volatility, improve operational efficiency, recruit related industry experts and become more self-reliant proving effective in the second year of turning around the Company‟s performance. The result for the year of a surplus was only the third year this has been achieved, and the Company also sustained significant cost increases related to reinsurance policies. The strategies that are continuing to be implemented to achieve the short term objectives of CML, including new risk transfer arrangements, contribution levels and loss control programs, are designed to place the portfolio in a more sustainable position to ensure the ongoing benefit to Members of a fully resourced and independent insurance alternative product, specialised to the motor trade industry. Long Term Objectives of the Company As the Company was set-up only in 2003, it is still expanding its penetration into the membership base of CSL. Due to the high entry barrier of the segment and the inherent industry structure in which the Company operates this resulted in the Company incurring initial losses to establish a critical mass for the portfolio size and scale to support a member focused Company. The Board has continued its journey of undertaking a comprehensive review in re-building the Company‟s statement of financial position to become self-sustainable in producing long term effective capability for the benefit of protection holders and to position itself as a provider of choice in risk transfer for the automotive industry segment aligned to CSL. The company remains a not-for-profit mutual to solely serve the protection needs of our membership. Strategy for achieving the Objectives The Company draws its protection holder base from the membership and authorised purchase account holders of CSL. Contact is being made to the existing members of CSL for buying one of the discretionary risk products on offer by the Company and of course we encourage existing members to continue to renew their protections through the Company. The Company is evaluating the implementation of industry preferred comprehensive risk assessment technology on an integrated basis. The new technology aims to give the Company access to data, information and analytical capacity at par with the industry players. Risk selection to create a more homogenous risk profile across the portfolio is occurring. This may mean some protection holders fall outside the ideal profile and those protection holders risks are transferred from the Company to the traditional risk transfer and insurance market through an in-house referral program to Capricorn Insurance Services which intends to maintain and service the core clientele of the Company while balancing the risk and reward for the Company for mutual member benefit. Principal Activity The principal activity of the Consolidated Entity during the year was to offer discretionary risk products to subscribing members of CSL to protect the liabilities and assets of those members to enable them to successfully operate their businesses. Currently, the Company can offer the discretionary risk products to the members and holders of authorised purchaser account numbers of CSL, including CSL and its subsidiaries. The Consolidated Entity also pays claims incurred by the protection holder on a discretionary basis in accordance with the Company‟s Constitution and Rules.


9

Linking activities in achieving the Company’s objectives Year after year, the Company has been able to increase the number of CML members. The Company has been able to demonstrate the growth in protection holder penetration in a highly competitive market through focused concentration to the particular segment. More growth in the protection holders means more members of CSL are opting for the Company's protections and are able to save on their risk transfer related cost which is an added advantage of membership. Although the Company has been able to increase the penetration of CSL membership by offering the choice of an alternative to insurance product to the members this has incurred significant financial losses since inception. These losses are considered the cost of not capitalising the risk portfolio from the commencement and the strategy is to now effect capital build up to repay the loans and supporting financial instruments to a level where the Company is self-reliant. As noted earlier on previous page in the „long term objectives‟ section, the Board has continued its journey of comprehensive review in re-building the Company‟s statement of financial position to become self-sustainable in producing long term capability improvements for the protection holders and position itself as a provider of choice for the automotive industry segment. This year‟s surplus is evidence of the effective implementation of the portfolio correction strategy and its success provides the Company the ability to remain a standalone entity owned by the Members and able to prove the ability to pay its debts when due, and build reserves to target levels consistent with our five year strategy. Proposed Scheme of Arrangement The Company entered an agreement with CSL (ACN 008 347 313) on 8 September 2011 (Scheme Implementation Agreement). The SIA was reported on in the Directors Report of financial year 2010/11. Details of the SIA have been included in notes 2 and 30 to the financial statements. The scheme of arrangement was terminated by mutual agreement in 2013 as the underlying circumstances changed and it is no longer the preferred option of either party. Performance measurement The board has set a number of key performance measurement indicators. Penetration of CSL membership, renewal rates, claims loss ratio, cost of servicing members and sustainability of the Company via targeted reserve levels are some of the key indicators. Since the Company started in 2003, the Company has been able to keep increasing the protection holder base, CSL penetration level and thereby the gross written protections on a year to year basis. These achievements have been possible by demonstrating the capacity to offer an alternative product at a competitive price. The sound and conservative resource management by balancing the cost of risk retention and the capacity availed to mitigate eventual losses has assisted the Company in demonstrating how offering a discretionary risk product can make a difference from the traditional risk service provider while maintaining the expectations of its protection holders. The increased issuance of protections and member penetration the Company has achieved since inception in 2003 along with a capacity to settle the claims from a series of catastrophic events is proof of the effectiveness of delivering to protection holders and their satisfaction with the Company‟s deliverables.

Membership and Additional Contribution The Company has only one type of membership. In the event of winding up of the Company, the members would have to contribute 5% of the contribution paid by the member for the protection in the relevant financial year only if a call was issued by the Board. Such an additional contribution call would contribute $1,862,868 (2012: $1,707,478) to the Company based on the contribution paid by the members for the period under review.


10

Directors’ Meetings The number of meetings of Directors held during the year and the number of meetings attended by each Director was as follows: Directors Board of

Directors Audit, Risk & Compliance

Committee Claims

Committee Held Attended Held Attended Held Attended Michael McLeod 8 8 6 6 5 5 Wayne Negus 8 8 6 6 5 5 Russell Green 8 8 6 6 5 5 Vincent O‟Neill 8 8 6 6 5 5 Colin Heavyside 8 7 6 5 5 5 Directors attended all meetings they were eligible to attend. There were 8 Board meetings, 6 Audit, Risk & Compliance Committee meetings and 5 Claims Committee meetings. All other business was conducted by circular resolution. The meeting dates were as follows: Board: 28 August, 10 October, 26 October, 5 December, 25 January, 12 March, 16 April and 13 June. Audit, Risk & Compliance Committee: 28 August, 10 October, 26 October, 5 December, 16 April and 13 June. Claims Committee: 28 August, 26 October, 5 December, 16 April and 13 June. Indemnification of Directors or Officers The Company has paid insurance premiums in respect of its Directors, Officers and the Company Secretary as well as those of its controlled entities. The insurance premium relates to:-

- costs and expenses incurred by the relevant director or officer in defending proceedings; and - other liabilities that may arise from their position, with the exception of conduct involving a willful breach of

duty or improper use of information or position to gain a personal advantage.

The contract prohibits disclosure of the nature of the liabilities and the amount of the premium. Proceedings No person has applied for leave of court to bring proceedings on behalf of the Company or its controlled entities or intervene in any proceedings to which the Company and its controlled entity is a party for the purpose of taking responsibility on behalf of the Company for all or any part of those proceedings.

Auditor

Ernst & Young, Chartered Accountants, continues in office in accordance with section 327B of the Corporations Act 2001.

Independence Declaration The Auditors‟ Independence Declaration on page 12 forms part of the Directors‟ Report for the year ended 30 June 2013.

ASIC Relief regarding disclosure of separate information on the Company

This financial report includes the financial statement of the Consolidated Entity and the Company. The Company is the kind of company referred to in the class order 10/654 issued by ASIC. As a result, the summarised financial position of the Company has not been presented.


11

Signed in accordance with a resolution of the Directors:

_____________________

_____________________

Michael McLeod Wayne Negus Chairman Vice Chairman Dated: 18 October 2013 Dated: 18 October 2013 Sydney Perth

CAPRICORN MUTUAL LIMITED Statement of comprehensive income

For the year ended 30 June 2013

This statement of comprehensive income is to be read in conjunction with the accompanying notes to the financial statements

12

CAPRICORN MUTUAL LIMITED Statement of comprehensive income


This statement of comprehensive income is to be read in conjunction with the accompanying notes to the financial statements

13

Consolidated Entity The Company

Notes

2013 2012 2013 2012

$ $ $ $

Protection revenue 6 35,580,764 32,803,761 35,580,764 32,803,761

Outward discretionary protection fees

(4,601,972) (3,890,102) (4,601,972) (3,890,102)

Net protection revenue

30,978,792 28,913,659 30,978,792 28,913,659

Claims expense (including claims handling costs) 7 (16,435,599) (20,817,996) (16,435,599) (20,817,996)

Discretionary protection and other recoveries 7 2,220,804 3,350,856 2,220,804 3,350,856

Net claims incurred

(14,214,795) (17,467,140) (14,214,795) (17,467,140)

Acquisition costs 15 (4,265,280) (3,814,137) (4,265,280) (3,814,137)

Net underwriting result

12,498,717 7,632,382 12,498,717 7,632,382

Interest revenue 6 120,078 115,139 116,414 102,339

Non-recourse funding received under the terms of the SIA 6 - 400,000 - 400,000 Net foreign exchange gain/(loss)

231,467 (27,817) 248,428 (34,750)

Borrowing costs

(533,281) (563,519) (526,645) (563,519)

Other operating expenses 8 (8,709,325) (7,406,528) (8,694,641) (7,391,742)

Profit from continuing operations before income tax

3,607,656 149,657 3,642,273 144,710

Income tax expense 9 (4,550) (143,608) (6,871) (144,446)

Profit for the period 3,603,106 6,049 3,635,402 264 Other comprehensive income: Other comprehensive profit for the period net of tax - - - -

Total comprehensive profit for the period

3,603,106 6,049 3,635,402 264

CAPRICORN MUTUAL LIMITED Statement of financial position

As at 30 June 2013

This statement of financial position is to be read in conjunction with the accompanying notes to the financial statements 14


Notes

2013 2012 2013 2012

$ $ $ $

Current assets Cash and cash equivalents 10 9,119,628 7,824,331 8,945,328 7,178,552

Trade and other receivables 11 18,518,157 16,746,734 18,517,929 16,746,734

Discretionary protection related and other recoveries 13 2,843,982 3,251,000 2,843,982 3,251,000

Prepaid expenses 14 2,140,025 1,926,999 2,140,025 1,926,999

Deferred acquisition costs 15 2,348,908 1,960,349 2,348,908 1,960,349

Total current assets 34,970,700 31,709,413 34,796,172 31,063,634

Non-current assets

Deferred tax asset 9 845

1,140 845

1,140

Investments in controlled entities 12 - - 91 91

Discretionary protection related and other recoveries 13

447,018 510,584 447,018 510,584

Total non-current assets 447,863 511,724 447,954 511,815

Total assets 35,418,563 32,221,137 35,244,126 31,575,449

Current liabilities

Current tax liabilities 12,271 130,179

12,271

129,179

Trade and other payables 16 1,709,229 1,981,597 1,633,848 1,468,261

Accrued expenses 17 1,973,293 2,844,796 1,973,293 2,844,796

Outstanding claims liability 18 10,345,552 9,985,777 10,345,552 9,985,777

Unearned protection revenue 19 18,804,716 16,959,140 18,804,716 16,959,140

Provisions 21 - 871,358 - 871,358

Total current liabilities

32,845,061 32,772,847 32,769,680 32,258,511

Non-current liabilities

Outstanding claims liability 18

1,784,448 2,262,342

1,784,448 2,262,342

Interest bearing liabilities 20 4,903,401

4,903,401 4,903,401

4,903,401

Total non-current liabilities

6,687,849 7,165,743 6,687,849 7,165,743

Total liabilities 39,532,910 39,938,590 39,457,529 39,424,254

Net liabilities

(4,114,348)

(7,717,454)

(4,213,404)

(7,848,806)

Equity

Accumulated losses

(4,114,348)

(7,717,454)

(4,213,404)

(7,848,806)

CAPRICORN MUTUAL LIMITED Statement of changes in equity


This statement of changes in equity is to be read in conjunction with the accompanying notes to the financial statements 15

Consolidated

Entity The Company

$ $

Accumulated losses at 1 July 2011

(7,723,503)

(7,849,070)

Net profit for the year

6,049 264

Total comprehensive profit for the year

6,049 264

Accumulated losses at 30 June 2012

(7,717,454)

(7,848,806)

Accumulated losses at 1 July 2012

(7,717,454)

(7,848,806)

Net profit for the year

3,603,106

3,635,402

Total comprehensive profit for the year

3,603,106

3,635,402

Accumulated losses at 30 June 2013

(4,114,348)

(4,213,404)

CAPRICORN MUTUAL LIMITED Statement of cash flows


This statement of cash flows is to be read in conjunction with the accompanying notes to the financial statements 16

Notes Consolidated Entity The Company

2013 2012 2013 2012

$ $ $ $

Cash flows from operating activities

Contributions from members

39,247,250 35,651,126 39,247,250 35,651,126

Discretionary protection and other recoveries

2,195,646

3,498,357

2,491,765

3,498,357

Non-recourse funding received under the terms of the SIA

-

400,000 -

400,000

Claims paid

(17,375,186) (24,708,820) (17,375,186) (24,708,820)

Payment of discretionary protection and related on costs

(4,516,106)

(3,833,224)

(4,516,106)

(3,833,224)

Payments to suppliers

(16,241,788) (7,149,033) (16,055,538) (7,545,753)

Net GST paid

(1,529,385) (1,045,429) (1,523,692) (1,050,873)

Interest received

99,944 113,766 96,560 102,135

Interest paid

(651,384) (315,911) (658,020) (315,911)

Net Income tax paid

(107,743) (4,698) (109,064) (4,698)

Net cash from operating activities 10(b) 1,121,248 2,606,134 1,597,969 2,192,339

Cash flows from investing activities - - - -

Net cash flows used in investing activities

- - - -

Cash flows from financing activities

Net cash flows from financing activities

- - - -

Net cash flows used in financing activities

- - - -

Net increase in cash held

1,121,248

2,606,134

1,597,969

2,192,339

Cash and cash equivalents at beginning of the financial year

7,824,331

5,174,212

7,178,552

4,943,363

Net foreign exchange differences

174,049 43,985 168,807 42,850

Cash and cash equivalents at end of the financial year 10(a) 9,119,628 7,824,331 8,945,328 7,178,552

CAPRICORN MUTUAL LIMITED Notes to the Financial Statements

for the year ended 30 June 2013

17

1 Corporate Information This financial report of Capricorn Mutual Limited for the year ended 30 June 2013 was authorised for issue in accordance with a resolution of the directors on 18 October 2013. The financial report covers Capricorn Mutual Limited (“CML” or “the Company”) and its controlled entities (“Consolidated Entity”), CML NZ Limited (“CMLNZ”), formerly Capricorn Insurance New Zealand Limited and Capricorn (Isle of Man) Limited (“CIOM”). The Company together with CMLNZ and CIOM in this report refers to “the Consolidated Entity”. CML is a public company limited by guarantee, incorporated in Australia on 2 May 2003 and domiciled in Australia. CMLNZ is a company limited by shares, incorporated in Wellington, New Zealand on 6 May 2003 and domiciled in New Zealand. CMLNZ changed its name from Capricorn Insurance New Zealand Limited on 14 February 2012. CIOM is a company limited by shares, incorporated in Isle of Man on 12 November 2008 and domiciled in Isle of Man. The Company is not a registered authorised insurer and therefore is not subject to general insurance prudential standards and guidance established by the Australian Prudential Regulation Authority (“APRA”). The Company has been granted an Australian Financial Services Licence (“AFSL”) which is regulated by the Australian Securities and Investments Commission (“ASIC”). The nature of the operations and principal activities of the Consolidated entity are described in the Directors‟ Report.

2 Summary of significant accounting policies (a) Basis of Preparation

The principal accounting policies adopted in the preparation of the financial statements are set out below. These policies have been consistently applied to all periods presented, unless otherwise stated. The financial report is a general purpose financial report, which covers CML and its controlled entities as a Consolidated Entity and has been prepared in accordance with Australian Accounting Standards and other authoritative pronouncements of the Australian Accounting Standards Board and the Corporations Act 2001. The financial report has also been prepared on a historical cost basis except for assets and liabilities which are actuarially assessed which are valued at fair value. The financial report is presented in Australian dollars. Going concern

The financial report has been prepared on a going concern basis, which contemplates the continuity of normal business activity and the realization of assets and settlement of liabilities in the normal course of business.

During the year ended 30 June 2013, the consolidated entity achieved net gains of $3,603,106 (2012: $6,049), and a net cash inflow from operating activities of $1,121,248 (2012: $2,606,134). The cash position of the Consolidated Entity at 30 June 2013 was $9,119,628 (2012: $7,824,331).



18

2 Summary of significant accounting policies (continued)

(a) Basis of Preparation (continued)

The improved financial performance of CML together with other changes to the underlying circumstances at the time of entering the Scheme Implementation Agreement (SIA) have meant that the SIA was no longer the preferred option for either party. It was decided that the SIA be terminated by mutual agreement between CSL and CML effective 5 September 2013. The result being that the proposed Scheme of Arrangement would no longer proceed. The Financial Support Agreement between the parties dated 21 March 2012 (as amended) is unaffected.

The directors have reviewed the Consolidated Entity‟s financial position and are of the opinion that the use of the going concern basis of accounting is appropriate. The financial report does not contain any adjustments relating to the recoverability or classification of recorded assets or to the amounts or classifications of recorded assets or liabilities that might be necessary should the Consolidated Entity not be able to continue as a going concern.

(b) Compliance with International Financial Reporting Standard

The financial report also complies with International Financial Reporting Standard (“IFRS”) as issued by the International Accounting Standards Board. (c) New accounting standards and interpretations

(i) The following standards and interpretations would have been applied for the first time for the year

ended 30 June 2013 (unless early adopted). These standards and interpretations did not have a material impact on the Consolidated Entity.

AASB 2010-8 Amendments to Australian Accounting Standards – Deferred Tax: Recovery of Underlying Assets [AASB 112]

AASB 2011-9 Amendments to Australian Accounting Standards – Presentation of Other Comprehensive Income

AASB 2013-2 Amendments to AASB 1038 – Regulatory Capital

(ii) The following standards and interpretations have been issued by the AASB but are not yet effective for the period ended 30 June 2013:

AASB 10 Consolidated Financial Statements

AASB 12 Disclosure of Interests in Other Entities

AASB 13 Fair Value Measurement

AASB 2011-4 Amendments to Australian Accounting Standards to Remove Individual Key Management Personnel Disclosure Requirements [AASB 124]

AASB 1053 Application of Tiers of Australian Accounting Standards

AASB 2012-2 Amendments to Australian Accounting Standards – Disclosures – Offsetting Financial Assets and Financial Liabilities

AASB 2012-4 Amendments to Australian Accounting Standards – Government Loans

AASB 2012-5 Amendments to Australian Accounting Standards arising from Annual Improvements 2009–2011 Cycle

AASB 2012-9 Amendments to AASB 1048 arising from withdrawal of Australian Interpretation 1039

AASB 2012-3 Amendments to Australian Accounting Standards – Offsetting Financial Assets and Financial Liabilities (application date of 1 January 2014)

Interpretation 21 Levies (application date of 1 January 2014)

AASB 9 Financial Instruments (application date of 1 January 2015)



19


(c) New accounting standards and interpretations (continued)

The Consolidated Entity has not elected to early adopt any new standards or amendments that are issued but not yet effective. The impact from the future adoption of the standards is not expected to be significant.

(d) Basis of consolidation The consolidated financial statements comprise the financial statements of CML and its subsidiaries and as at and for the period ended 30 June each year (the Consolidated Entity).

Subsidiaries are all those entities over which the Consolidated Entity has the power to govern the financial and operating policies so as to obtain benefits from their activities. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether a Consolidated Entity controls another entity.

The financial statements of the subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies. In preparing the consolidated financial statements, all intercompany balances, transactions, unrealised gains and losses resulting from intra-Consolidated Entity transactions and dividends have been eliminated in full.

All controlled entities have a June financial year-end.

Subsidiaries are fully consolidated from the date on which control is obtained by the Consolidated Entity and cease to be consolidated from the date on which control is transferred out of the Consolidated Entity.

Investments in subsidiaries held by CML are accounted for at cost in the separate financial statements of the parent entity less any impairment charges. Dividends received from subsidiaries are recorded as a component of other revenues in the separate statement of comprehensive income of the parent entity, and do not impact the recorded cost of the investment. Upon receipt of dividend payments from subsidiaries, the parent will assess whether any indicators of impairment of the carrying value of the investment in the subsidiary exist. Where such indicators exist, to the extent that the carrying value of the investment exceeds its recoverable amount, an impairment loss is recognised.

The acquisition of subsidiaries is accounted for using the acquisition method of accounting. The acquisition method of accounting involves recognising at acquisition date, separately from goodwill, the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree. The identifiable assets acquired and the liabilities assumed are measured at their acquisition date fair values.

The difference between the above items and the fair value of the consideration (including the fair value of any pre-existing investment in the acquiree) is goodwill or a discount on acquisition.

After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Consolidated Entity‟s cash-generating units that are expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquire are assigned to those units.

Where goodwill forms part of a cash-generating unit and part of the operation within that unit disposal of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed of and the portion of the cash-generating unit retained.

Non-controlling interests are allocated their share of net profit after tax in the statement of comprehensive income and are presented within equity in the consolidated statement of financial position, separately from the equity of the owners of the parent.

Losses are attributed to the non-controlling interest even if that results in a deficit balance. A change in the ownership interest of a subsidiary that does not result in a loss of control is accounted for as an equity transaction.



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(e) Outsourced operations

The Company has entered in to an agreement with Capricorn Mutual Management Pty Ltd (“CMM”) to outsource its claims management, general administration, underwriting & sales operations. The amount of the fee payable to CMM is determined by the Board with CMM from time to time. A new corporate administrative service deed was entered into between the Company, CMM, Regis Mutual Management Limited, CIOM and Cains Fiduciary Limited in relation to the administration of the affairs of CIOM on 1

st October 2012.

(f) Revenue recognition

Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Consolidated Entity and the revenue can be measured reliably. The following specific recognition criteria must also be met before revenue is recognised: (i) Protection revenue Protection revenue comprises amounts charged to members excluding amounts collected on behalf of third parties. Protection revenue, including that on unclosed business, is recognised in the statement of comprehensive income when it has been earned. Protection revenue is recognised in the statement of comprehensive income from the attachment date over the period of contract based on the pattern of risks written. The proportion of contributions not earned in the statement of comprehensive income at the reporting date is recognised in the statement of financial position as unearned protection revenue liability. The Company also charges membership fees to its members which are recognised as income when charged. (ii) Discretionary protection and other recoveries revenue Discretionary protection and other recoveries receivable on paid claims, reported claims not yet paid, claims incurred but not reported (“IBNR”), claims incurred but not enough reported (“IBNER”) and unexpired risk liabilities are recognised as revenue. Amounts recoverable are assessed in a manner similar to the assessment of outstanding claims. Recoveries are measured as the present value of the expected future receipts, calculated on the same basis as the provision for outstanding claims. (iii) Interest revenue Interest revenue is recognised on a time proportion basis using the effective interest method. (g) Discretionary protection expense The contractual obligation towards discretionary protection contracts held by the Consolidated Entity are recorded as an outwards discretionary protection expense and are recognised in the statement of comprehensive income from the attachment date over the period of contract in accordance with the expected pattern of the incidence of risk ceded. Accordingly, a portion of outward discretionary protection payment is treated as a prepayment at the reporting date. (h) Claims The liability for outstanding claims is measured as the central estimate of the present value of expected future payments against claims incurred at the reporting date, with an additional prudential margin to allow for the inherent uncertainty in the central estimate.

The expected future payments include those in relation to claims reported but not yet paid; IBNR, IBNER and anticipated claims handling costs.

Claims handling costs include costs that can be associated directly with individual claims, such as legal and other professional fees, and costs that can be indirectly associated with individual claims, such as claims administration costs.



21

2 Summary of significant accounting policies (continued) (h) Claims (continued) The expected future payments are discounted to present value using a risk free rate. A prudential margin is applied to the outstanding claims liability, net of discretionary protection and other recoveries, to reflect the inherent uncertainty in the central estimate of the outstanding claims liability. This prudential margin increases the probability of the net liability being adequately provided for to a 75% confidence level. (i) Acquisition costs Acquisition costs incurred in obtaining contribution income are deferred and recognised as assets where they can be reliably measured and where it is probable that they will give rise to revenue that will be recognised in the statement of comprehensive income in subsequent reporting periods. (j) Borrowing costs

Borrowing costs are recognised as an expense when incurred. (k) Income and other taxes The income tax expense or benefit for the period is the tax payable on the current period‟s taxable income based on the national income tax rate for each jurisdiction adjusted by changes in deferred tax assets and liabilities attributable to temporary differences between the tax bases of assets and liabilities and their carrying amounts in the financial statements and unused tax losses.

Deferred tax assets and liabilities are recognised for temporary differences at the tax rates expected to apply when the assets are recovered or liabilities are settled, based on those tax rates which are enacted or substantially enacted for each jurisdiction. The relevant tax rates are applied to the cumulative amounts of deductible and taxable temporary differences arising from the initial recognition of an asset or a liability. No deferred tax asset or liability is recognised in relation to these temporary differences if they arose in a transaction, other than a business combination, that at the time of the transaction did not affect either accounting profit or taxable profit or loss.

Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses.

Deferred tax liabilities and assets are not recognised for temporary differences between the carrying amount and tax bases of investments in controlled entity‟s where the Company is able to control the timing of the reversal of the temporary differences and it is probable that the differences will not reverse in the foreseeable future.

Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. Current tax assets and tax liabilities are offset where the entity has a legally enforceable right to offset and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously. Current and deferred tax balances attributable to amounts recognised directly in equity are also recognised directly in equity.

The Company is limited by guarantee and operates for the mutual benefit of the members, accordingly the Company is not liable for income tax on contributions received from members, nor are the related outgoings allowable as an income tax deduction. The Company is however liable for income tax on interest and other income from investments. CMLNZ is limited by share and is liable for income tax in New Zealand. CIOM is not liable for income tax in Isle of Man.



22

2 Summary of significant accounting policies (continued) (k) Income and other taxes (continued) Goods and Services Tax (“GST”)

Revenues, expenses and assets are recognised net of the amount of GST, except where the amount of GST incurred on a purchase of goods or services is not recoverable from the Tax Office. In these circumstances GST is recognised as part of the cost of acquisition of the asset or as part of an item of the expense as applicable and receivables and payables are stated with the amount of GST included.

The net amount of GST recoverable from, or payable to, the Tax Office is included as part of receivables or payables in the statement of financial position. Cash flows are included in the cash flow statement on a gross basis. The GST components of cash flows arising from investing and financing activities which are recoverable from, or payable to, the Tax Office are classified as operating cash flows.

Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the Tax Office.

(l) Cash and cash equivalents Cash and cash equivalents include cash at bank and on hand which are used in cash management function on a day to day basis. (m) Assets backing claims liabilities The company has determined that all contributions receivable from members, discretionary protection related and other recoveries and cash, trade and other receivables are held to back the claims liabilities.

Cash and Cash equivalents

Cash and cash equivalents are carried at face value of the amount deposited. The carrying amounts of cash assets approximate their fair value. For the purposes of the cash flow statement, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts.

Trade and other receivables

Amounts due from members and related parties are initially recognised at fair value being the amounts due. They are subsequently measured at fair value, which is approximated by taking the initially recognised amount and reducing it for an allowance for impairment, as appropriate, when events or circumstances indicate that the carrying amount may not be recoverable. The impairment loss is recognised in the statement of comprehensive income. (n) Discretionary protection and other recoveries receivable Recoveries receivable are assessed in a manner similar to the assessment of outstanding claims. Recoveries are measured as the present value of the expected future receipts, calculated on the same basis as the liability for outstanding claims.

Discretionary protection and other recoveries receivable are tested for impairment on an ongoing basis with any resultant changes being recognised in the income statement. (o) Impairment of assets Assets are tested annually for impairment or more frequently when changes in circumstances indicate that the carrying amount may not be recoverable. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised as the amount by which the assets‟ carrying amount exceeds its recoverable amount.



23

2 Summary of significant accounting policies (continued) (p) Deferred acquisition costs Deferred acquisition costs are amortised systematically in accordance with the expected pattern of the incidence of risk under the schedule of protection to which they relate. This pattern of amortisation corresponds to the earning pattern of the unearned protection revenue. (q) Foreign currency translation

(i) Functional and presentation currency

Items included in the financial statements are measured using the currencies of the economic environments in which the Consolidated Entity operates (“the functional currencies”). The consolidated financial statements are presented in Australian dollars, which is the Company‟s (parent entity‟s) functional and presentation currency.

(ii) Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the statement of comprehensive income. Translation differences on non-monetary items, such as equities held at fair value through profit or loss, are reported as part of the fair value gain or loss.

(iii) Presentation currency

The financial report is presented in Australian dollars. (r) Unexpired risk liability At each reporting date the Consolidated Entity assesses whether the unearned income liability is sufficient to cover all expected future cash flows relating to future claims against current protection contracts. This assessment is referred to as the liability adequacy test and is performed separately for each group of contracts subject to broadly similar risks and managed together as a single portfolio. If the present value of the expected future cash flows relating to future claims plus the additional prudential margin to reflect the inherent uncertainty in the central estimate exceeds the unearned income liability less related intangible assets and related deferred acquisition costs then the unearned income liability is deemed to be deficient. The Consolidated Entity applies a prudential margin to achieve the same probability of sufficiency for future claims as is achieved by the central estimate of the outstanding claims liability, see Note 2 (h). The entire deficiency, gross and net of discretionary protection and other recovery, is recognised immediately in the statement of comprehensive income. The deficiency is recognised first by writing down any related intangible assets and then deferred acquisition costs, with any excess being recorded in the statement of financial position as an unexpired risk liability.

(s) Trade and other payables

These amounts represent liabilities for goods and services provided to the Consolidated Entity prior to the end of the financial year which are unpaid. The amounts are unsecured and are usually paid within 30 days of recognition.



24


(t) Interest-bearing liabilities

All loans and borrowings are initially recognised at the fair value of the consideration received less directly attributable costs.

After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the effective interest rate method.

(u) Derecognition of financial instruments The derecognition of a financial instrument takes place when the Consolidated Entity no longer controls the contractual rights that comprise the financial instrument, which is normally the case when the instrument is sold, or all the cash flows attributable to the instrument are passed through to an independent third party.

3 Critical accounting judgement and estimates

The Consolidated Entity makes estimates and assumptions in respect of certain key assets and liabilities. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The key areas in which critical estimates are applied are described below.

(i) The ultimate liability arising from claims made under protection agreements Provision is made at the year-end for the estimated cost of claims incurred but not settled at the reporting date, including the cost of claims incurred but not yet reported to the Consolidated Entity.

The estimation for the cost of claims includes direct expenses to be incurred in settling claims gross of the expected value of discretionary protection and other recoveries. The Consolidated Entity takes all reasonable steps to ensure that it has appropriate information regarding its claims exposures. However, given the uncertainty in establishing claims provisions; it is likely that the final outcome will prove to be different from the original liability established.

The estimation of IBNR is generally subject to a greater degree of uncertainty than the estimation of the cost of settling claims already notified to the Consolidated Entity, where more information about the claim event is generally available. IBNR claims may often not be apparent to the Consolidated Entity until many years after the events giving rise to the claims. The product liability and professional indemnity classes of business will typically display greater variations between initial estimates and final outcomes because there is a greater degree of difficulty in estimating IBNR reserves. For the property class, claims are typically reported soon after the event, and hence tend to display lower levels of volatility. In calculating the estimated cost of unpaid claims the Consolidated Entity used a variety of estimation techniques, generally based upon statistical analyses of historical experience, which assumed that the development pattern of the current claims will be consistent with past experience.

Allowance is made, however, for changes or uncertainties which may create distortions in the underlying statistics or which might cause the cost of unsettled claims to increase or reduce when compared with the cost of previously settled claims including:

changes in the Consolidated Entity‟s processes which might accelerate or slow down the development and/or recording of paid or incurred claims, compared with the statistics from previous periods;

changes in the legal environment; the effects of inflation; changes in the mix of business; the impact of large losses; movements in industry benchmarks; and medical and technological developments.



25

3 Critical accounting judgement and estimates (continued)

A component of these estimation techniques is usually the estimation of the cost of notified but not paid claims. In estimating the cost of these claims, the Consolidated Entity has regard to the claim circumstance as reported, any information available from loss adjusters and information on the cost of settling claims with similar characteristics in previous periods. Large claims impacting each relevant business class are generally assessed separately, being measured on a case by case basis or projected separately in order to allow for the possible distortive effect of the development and incidence of these large claims.

Where possible, the Consolidated Entity adopts multiple techniques to estimate the required level of provisions. This assists in giving greater understanding of the trends inherent in the data being projected. The projections given by the various methodologies also assist in setting the range of possible outcomes. The most appropriate estimation technique is selected, taking into account the characteristics of the business class and the extent of the development of each accident year. Provisions are calculated gross of any discretionary protection and other recoveries. A separate estimate is made of the amounts that will be recoverable from reinsurers based upon the gross provisions. Details of specific assumptions used in deriving the outstanding claims liability at year end are detailed in Note 4. (ii) Assets arising from discretionary protection agreement Assets arising from the discretionary protection agreement are also computed using the above methods. In addition, the recoverability of these assets is assessed on a periodic basis to ensure that the balance is reflective of the amounts that will ultimately be received, taking into consideration factors such as counterparty and credit risk. Impairment is recognised where it can be reliably concluded based on specific evidence that the Consolidated Entity may not receive amounts due to it and these amounts can be reliably measured, in which case carrying amount is reduced.

4 Actuarial assumptions and methods

The Consolidated Entity wrote five major classes of business, namely Property, Public Liability, Motor, Personal Accident and Professional Indemnity. The process for determining the outstanding claim liabilities are described below and includes the estimation of outstanding claim payments and where appropriate, allowances for inflation, discounting for the time value of money and internal administration expenses to settle outstanding claims. Outstanding payments include case estimates determined by the Consolidated Entity plus an estimate (referred to as future development) for any changes to those case estimates as new information becomes available, IBNR claims and reopened claims. Outstanding payments are calculated as case estimates plus estimated future development. Estimated future development has been calculated using both the paid loss development method (“PLD”) and the incurred cost development method (“ICD”). Discounting is allowed for explicitly having regard for the expected spread of outstanding payments over future years. An allowance is also added for internal expenses.



26

4 Actuarial assumptions and methods (continued)

The following assumptions have been made in determining the outstanding claims liabilities:

Summary of key assumptions Property

Public Liability

Motor Personal Accident

Professional Indemnity

2013

Discount rate 2.50% 2.50% 2.50% 2.50% 2.50%

Claims handling expense 5.00% 5.00% 5.00% 5.00% 5.00%

Inflation rate 2.50% 2.50% 2.50% 2.50% 2.50%

Implied gap - - - - - 2012

Discount rate 2.50% 2.50% 2.50% 2.50% 2.50%

Claims handling expense 5.00% 5.00% 5.00% 5.00% 5.00%

Inflation rate 2.50% 2.50% 2.50% 2.50% 2.50%

Implied gap - - - - - Process used to determine assumptions A description of the processes used to determine these assumptions is provided below: Discount rate Discount rates were derived from the market yields on Treasury Fixed Coupon Bonds as at reporting date. Claims handling expense Claims handling expenses were determined judgementally by reference to industry norms. Inflation rate Inflation rates were derived from forecasts by a range of economists on the wage inflation as measured by Average Weekly Earnings. Implied gap The implied gap has been determined by the difference in the discount and wage inflation rates. Superimposed inflation The methodology used does not require an assumption concerning superimposed inflation due to the short tail nature of the claims portfolio.

Sensitivity analysis – Protection contracts i) Summary The Consolidated Entity conducts sensitivity analyses to quantify the exposure to risk of changes in the key underlying variables. The valuations included in the reported results are calculated using certain assumptions about these variables as disclosed above. The movement in any key variable will impact the performance and equity of the Consolidated Entity. The tables below describe how a change in each assumption will affect the claim liabilities and show an analysis of the sensitivity of the profit/(loss) and equity to changes in these assumptions both gross and net of discretionary protection and other recovery.



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4 Actuarial assumptions and methods (continued)

Variable Impact of movement in variable

Central estimate The central estimate comprises estimated liability on outstanding claims reported as increased by IBNR and IBNER. An increase or decrease in the central estimate would have a direct impact on claims expense.

Claims handling expense

An estimate for the internal costs of handling claims is included in the outstanding claims liability. An increase or decrease in the expense rate assumption would have a corresponding impact on claims expense.

Discount rate The outstanding claims liability is calculated by reference to expected future payments. These payments are discounted to adjust for the time value of money. An increase or decrease in the assumed discount rate will have an opposing impact on total claims expense.

Inflation rates Expected future payments are inflated to take account of inflationary increases. An increase or decrease in the assumed levels of wage inflation would have a corresponding impact on claims expense, with particular reference to longer tail claims.

ii) Impact of changes in key variables on major classes of business

Current Year Previous Year

Consolidated profit after income tax

Consolidated equity

Consolidated profit after income tax

Consolidated equity

$ $ $ $

Recognised amounts per the financial statements

3,603,106 (4,114,346) 6,049

(7,717,454)

Variable

Movement in variable

Impact on profit

Impact on equity

Impact on profit

Impact on equity

Property Discount rate +1% 16,654 16,654 19,861 19,861

Claims handling expense +1% (48,476) (48,476) (46,089)

(46,089)

Inflation rate +1% (47,044) (47,044) (17,419)

(17,419)

Public liability

Discount rate +1% 20,618 20,618 28,404 28,404


(30,028)

Inflation rate +1% (14,700) (14,700) (27,053)

(27,053)

Motor

Discount rate +1% 2,614 2,614 4,882 4,882


(37,310)

Inflation rate +1% (1,628) (1,628) (3,136)

(3,136)



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5 Risk management policies and procedures

The financial operation of the Consolidated Entity is affected by a number of key risks including insurance discretionary protection risks, interest rate risk, credit risk and liquidity risk. Notes on the Consolidated Entity‟s policies and procedures in respect of managing these risks are set out in this note.

The Consolidated Entity‟s risk management objective is to control risk acceptance thereby reducing uncertainty and volatility. The cornerstone of the Consolidated Entity‟s overall risk management strategy is the effective governance and management of the risks that impact the amount, timing and associated uncertainty of cash flow arising from risk protection and risk acceptance and pricing.

Key aspects of the processes established by the Board to mitigate risks include:

Risk is retained to a predetermined set level to optimise risk and allocation of capital and the balance of risk is transferred using the discretionary protection and other recovery. Level of risk retention reflects level of risk the Consolidated Entity is prepared to take;

Pricing of risk is carried out relevant to the specific risk being undertaken and also relevant to the geographic condition;

Discretionary protection is undertaken on a treaty basis in accordance with the requirement of the Consolidated Entity‟s risk management strategy;

Level of risk retention and protection is assessed on the anniversary of its contract renewal to determine their effectiveness based on current risk exposure, historical losses and future loss based on future growth plans;

The maintenance and use of management information systems, which provide data on risks to which the business is exposed at any point in time;

Entry into the mutual is assessed on a case by case basis to ensure that potential beneficiaries maintain a similar risk profile to the current membership base;

The Consolidated Entity seeks to ensure the adequacy of outstanding claims provision by ensuring that all claims advices are captured and updated on a timely basis and with a realistic assessment of the ultimate claims costs;

Consolidated Entity‟s outstanding claims provision is reviewed by external actuary annually; IBNR estimates are set in conjunction with experienced external actuary; Despite not being an insurance company regulated by APRA, the Company has adopted a

conservative net claims liability valuation model which is otherwise applicable to the insurance company in order to achieve 75% probability of sufficiency of outstanding claims liability;

The regulatory environment in Australia and New Zealand continues to evolve in response to economic, political and industry developments. The Consolidated Entity works closely with regulators to oversee regulatory requirement to assess its potential impact on its ability to meet financial service licence conditions issued by ASIC;

Documented procedures are followed for accepting protection risks and settlement of claims; The diversification of business over numerous classes of business and geography seeks to

reduce variability in loss experience; The terms and condition attaching to risk protection agreement affect the level of protection risk

accepted by the Consolidated Entity. The company provides discretionary cover to members. There are no special terms and conditions in any non-standard contracts that have a material impact on the financial statement;

Concentration of protection risk- o The Consolidated Entity‟s exposure to concentration of insurance risk is mitigated by a

portfolio diversified across Australia and New Zealand. Product diversification is achieved through a strategy of developing strong risk acceptance and pricing skills in a wide variety of classes of portfolio. A combination of core products and retaining risk up to a predetermined retention level minimises concentration of risk in relation to risk protection revenue receivable.



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5 Risk management policies and procedures (continued)

The geographical concentration of the Consolidated Entity‟s protection contract is noted below. The disclosure is based on the countries where the business is written.

2013 2012

Gross outstanding

claims liability

Discretionary Protection and other

receivables

Net liabilities

Gross outstanding

claims liability

Discretionary Protection and other

receivables

Net liabilities

Australia 10,374,760 (2,814,700) 7,560,060 11,268,205 (3,460,638) 7,807,567

New Zealand 1,755,240 (476,300) 1,278,940 979,914 (300,947) 678,967

Total 12,130,000 (3,291,000) 8,839,000 12,248,119 (3,761,585) 8,486,534

6 Revenue


2013 2012 2013 2012

$ $ $ $

Protection revenue

Protections written in the period

37,257,362

34,149,565

37,257,362

34,149,565

Movement in unearned protection revenue

(1,676,598)

(1,345,804)

(1,676,598)

(1,345,804)

Earning of revenue during the periods

35,580,764

32,803,761

35,580,764

32,803,761

Interest revenue

Interest received

120,078

115,139

116,414

102,339

Other Income

Non-recourse funding received under the terms of the SIA -

400,000 -

400,000

Discretionary protection and other recoveries revenue

Discretionary protection and other recoveries revenue

2,220,804

3,350,856

2,220,804

3,350,856

Total revenue

37,921,646

36,669,756

37,917,982

36,656,956



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7 Net claims incurred

Consolidated and The Company

2013 2012

Current Prior

Total Current Prior

Total Year Years Year Years

$ $ $ $ $ $

Gross claims expense

1

Gross claims incurred – undiscounted

(18,875,231)

2,462,117

(16,413,114)

(23,850,297)

3,084,139

(20,766,158)

Discount movement 105,773 (128,258) (22,485) 145,905 (197,743) (51,838)

(18,769,458) 2,333,859 (16,435,599) (23,704,392) 2,886,396 (20,817,996)

Discretionary protection and other recoveries

Discretionary protection and other recoveries – undiscounted 1,891,050

335,023 2,226,073

4,103,335

(793,681)

3,309,654

Discount movement (22,389) 17,120 (5,269) (61,383) 102,585 41,202

1,868,661 352,143 2,220,804 4,041,952 (691,096) 3,350,856

Net claims incurred (16,900,797) 2,686,002 (14,214,795) (19,662,440) 2,195,300 (17,467,140)

1 Current year amounts relate to risks borne in the current financial year. Prior year amounts relate to a

reassessment of the risks borne in all previous years.



31

8 Other operating expenses


2013 2012 2013 2012

$ $ $ $

Expenses by nature:

Actuary costs

(115,074)

(234,785)

(115,074)

(234,785)

Audit and consulting fees

(156,727)

(163,662)

(146,675)

(154,019)

Bank charges

(18,701)

(6,537)

(14,069)

(5,690)

Directors‟ fees

(130,442)

(126,735)

(130,442)

(126,735)

Legal fees

(256,456)

(382,082)

(256,456)

(382,082)

Other consulting fees

(604,420)

(204,929)

(604,420)

(204,929)

Management fees

(6,849,838)

(4,405,975)

(6,849,838)

(4,405,975)

Marketing fees

(5,098)

(6,536)

(5,098)

(6,536)

CSL collection charges 25(c)

(789,628)

(766,030)

(789,628)

(766,030)

NZ Fire Service contributions

(72,668)

(169,785)

(72,668)

(169,785) Reversal of provision (input tax credits overclaimed)

359,697

(871,358)

359,697

(871,358)

Other expenses

(69,970)

(68,114)

(69,970)

(63,818)

(8,709,325)

(7,406,528)

(8,694,641)

(7,391,742)

9 Income tax


2013 2012 2013 2012

$ $ $ $

The major components of income tax expense are:

Statement of comprehensive income

Current income tax

Current income tax charge 22,940 142,525 22,940 141,525

Adjustments in respect of current income tax of previous years (18,685) 534 (16,364) 2,372

Deferred income tax

Relating to origination and reversal of temporary differences 295 549 295 549

Income tax expense reported in the statement of comprehensive income 4,550 143,608 6,871 144,446

CAPRICORN MUTUAL LIMITED for the year ended 30 June 2013

Notes to the Financial Statements

32

9 Income tax (continued)


2013 2012 2013 2012

$ $ $ $

A reconciliation between tax expense and the accounting profit before income tax multiplied by the Consolidated Entity‟s applicable income tax rate is as follows:

Accounting profit before tax from continuing operations

3,607,656

149,657

3,642,274

144,710

Income tax calculated @ 30% (2012: 30%) 1,082,297 44,897 1,092,682 43,413 Adjustments in respect of current income tax of previous years (18,685) 534 (16,364) 2,372

Mutual activities not subject to tax (1,069,890) 98,661 (1,069,890) 98,661

Other non-deductible expenses 10,828 (484) 443 -

Income tax reported in the consolidated statement of comprehensive income 4,550 143,608 6,871 144,446

Deferred tax assets

Deferred income tax expense/(benefit)

2013 2012 2013 2012

$ $ $ $

Consolidated Entity and Company

Provision for audit fees 98

138 40

(97)

Accrued management fees not currently deductible 747 1,002 255 (452)

845 1,140 295 (549)

The company is limited by guarantee and operates for the mutual benefit of the members. Accordingly, the company is not liable for income tax on subscriptions received from members, nor are the related outgoings income tax deductible. The Company is however liable for income tax on interest and other income from investments.



33

10 Cash and cash equivalents

a) Reconciliation to cash flow statement


2013 2012 2013 2013

$ $ $ $

For the purpose of the cash flow statement, cash and cash equivalents comprise the following as 30 June

Cash at bank 9,119,628 7,824,331 8,945,328 7,178,552

The company has adopted a conservative policy of keeping the surplus balance in bank earning interest at floating rate based on daily bank deposit rates and is available at short call. The carrying amount of cash and cash equivalents represents fair value.

b) Reconciliation of cash flow from operating activities to net loss


2013 2012 2013 2013

$ $ $ $

Net profit from continuing operations after tax

3,603,106

6,049

3,635,402 264

Adjustments for:-

Foreign exchange gain in cash at bank (174,049) (43,985) (168,807) (42,850)

3,429,057

(37,936)

3,466,595

(42,586)

(Increase)/Decrease in receivables (1,771,423) (1,626,718) (1,771,195) (1,645,906)

(Increase)/Decrease in discretionary protection and other receivables

470,584

866,880

470,584

866,880

(Increase)/Decrease in prepaid expenses and deferred acquisition costs

(601,585)

(787,538)

(601,585)

(787,538)

(Increase)/Decrease in deferred tax assets 295

(549) 295

(549)

Increase/(Decrease) in net current tax liabilities

(117,908)

229,485

(116,908)

142,074

Increase/(Decrease) in payables and accruals

(1,143,871)

1,682,462

(705,916)

1,379,916

Increase/(Decrease) in unearned income

1,845,576

1,480,049

1,845,576

1,480,049

Increase/(Decrease) in provisions (871,358) 871,358 (871,358) 871,358

Increase/(Decrease) in outstanding claims liability (118,119) (71,360) (118,119) (71,360)

Net cash from operating activities 1,121,248 2,606,134 1,597,969 2,192,339



34

11 Trade and other receivables


2013 2012 2013 2012

$ $ $ $

Current

Contributions receivable from the members

1 14,975,065 13,184,267 14,975,065 13,184,267

Receivable from CSL 2 3,498,350 3,277,652 3,498,350 3,277,652

Other receivables 44,742 284,815 44,514 284,815

18,518,157 16,746,734 18,517,929 16,746,734

1 Members have the option to pay contribution for the protections either in one lump sum or in monthly

instalments being payable in advance. There is no interest component for the option to pay the contribution in instalments.

2 The

Company has an arrangement with CSL whereby all the instalments due to be receivable from

members are collected through CSL. CSL remits the collection to the Company on a monthly in arrears basis. CSL does not pay any interest. CSL charges 2% as a settlement discount on all contributions received from the members through CSL.

When a member is on stop credit arrangement with CSL, an arrangement is worked out directly with the concerned member to make payment direct to the Company. If the member fails to make payment direct to the Company, the protection is cancelled and carrying amount of the receivable is reduced accordingly.

12 Investment in controlled entities


2013 2012 2013 2012

$ $ $ $

Non-current

Investment in wholly owned controlled entity – at cost (i & ii) - - 91 91

- - 91 91

(i) 100 ordinary class shares in CMLNZ with a par value of $NZ 1.00 each were acquired on 6 May

2003.

(ii) 1 ordinary class share in CIOM with a par value of GBP 1 was acquired on 5 January 2009. The share is held in trust for CML by Cains Fiduciary Ltd.



35

13 Discretionary protection and other recoveries receivables


2013 2012 2013 2012

$ $ $ $

Expected future discretionary protection and other recoveries – undiscounted

On unpaid claims 3,024,000 3,325,480 3,024,000 3,325,480

Prudential margin 318,000 481,835 318,000 481,835

3,342,000 3,807,315 3,342,000 3,807,315

Discount to present value (51,000) (45,731) (51,000) (45,731)

Discretionary protection and other recoveries receivable on incurred claims

3,291,000 3,761,584 3,291,000 3,761,584

Represented by:

Current 2,843,982 3,251,000 2,843,982 3,251,000

Non-current 447,018 510,584 447,018 510,584

3,291,000 3,761,584 3,291,000 3,761,584

See note 18(c) for reconciliation of discretionary protection and other recoveries receivable movement. All discretionary protection and other recoveries receivable are generally recovered as and when the Company establishes the right to recovery based on the contractual arrangements it has with the external risk-mitigation service provider or under the common law for indemnity with the party at fault. Where the matter is a subject matter of the court, the Company may be eligible to receive interest under the common law.

When the Company is unable to recover after taking due legal action, recovery estimates are reduced and accordingly the carrying amount is also reduced.

14 Prepaid expenses


Current 2013 2012 2013 2012

$ $ $ $

Prepaid discretionary protection costs

Prepaid discretionary protection costs 2,140,025 1,926,999 2,140,025 1,926,999

2,140,025 1,926,999 2,140,025 1,926,999



36

15 Deferred acquisition costs


2013 2012 2013 2012

$ $ $ $

Current

Deferred management fees 2,348,908 1,960,349 2,348,908 1,960,349

2,348,908 1,960,349 2,348,908 1,960,349

Movement in deferred acquisition costs:

Carrying amount as at 1 July 1,960,349 1,827,126 1,960,349 1,827,126

Acquisition costs incurred 4,653,839 3,947,360 4,653,839 3,947,360

Amortisation charged to income (4,265,280) (3,814,137) (4,265,280) (3,814,137)

Carrying amount as at 30 June

2,348,908

1,960,349

2,348,908

1,960,349

16 Trade and other payables


2013 2012 2013 2012

$ $ $ $

Trade creditors (a) 145,157 570,047 69,776 56,711

Net GST payable 1,564,072 1,411,550 1,564,072 1,411,550

1,709,229 1,981,597 1,633,848 1,468,261

(a) All commercial payables are on standard credit terms of 30 days and non-interest bearing.

17 Accrued expenses


2013 2012 2013 2012

$ $ $ $

Current

Audit fees 100,086 150,000 100,086 150,000

Other accruals 293,465 983,422 293,465 983,422

Accrued management fee 910,600 1,087,201 910,600 1,087,201

Accrued discretionary protection costs

(1)

669,142 624,173 669,142 624,173

1,973,293 2,844,796 1,973,293 2,844,796

(1) Discretionary protection costs are payable in two parts, namely, deposit payment quarterly in arrear

and final amount based on actual written protection is payable on completion of the discretionary protection contract period.



37

18 Outstanding claims liability


(a) Outstanding claims liability 2013 2012 2013 2012

$ $ $ $

Central estimate 10,557,000 10,245,984 10,557,000 10,245,984

Prudential margin 1,214,000 1,680,321 1,214,000 1,680,321

Claims handling costs 527,000 512,299 527,000 512,299

12,298,000 12,438,604 12,298,000 12,438,604

Discount to present value (168,000) (190,485) (168,000) (190,485)

Liability for outstanding claims 12,130,000 12,248,119 12,130,000 12,248,119

Represented by:

Current 10,345,552 9,985,777 10,345,552 9,985,777

Non-current 1,784,448 2,262,342 1,784,448 2,262,342

12,130,000 12,248,119 12,130,000 12,248,119

(b) Prudential margin

Process for determining prudential margin:

The process used to determine the risk margin is explained in note 4.

Prudential margins applied %

2013 11.1%

2012 16.1%

A prudential margin is applied for each class of protection. The average prudential margin of 11.1% (previous year: 16.1%) is intended to achieve 75% probability of sufficiency of outstanding claims liability.



38

18 Outstanding claims liability (continued)

(c) Reconciliation of movement in discounted outstanding claims liability


Gross claims liability

Discretionary protection and other recovery

receivable

Net claims liability

Gross claims liability

Discretionary protection and other recovery

receivable

Net claims liability

2013 $ $ $ $ $ $

Brought forward 12,248,119 (3,761,584) 8,486,535 12,248,119 (3,761,584) 8,486,535

Incurred claims recognised in the income statement

16,525,835 (2,285,027) 14,240,808 16,525,835 (2,285,027)

14,240,808

Claim payments/ recoveries during the year

(16,643,954) 2,755,611 (13,888,343) (16,643,954) 2,755,611

(13,888,343)

Carried forward 12,130,000 (3,291,000) 8,839,000 12,130,000 (3,291,000) 8,839,000

2012 $ $ $ $ $ $

Brought forward 12,319,479 (4,628,464) 7,691,015 12,319,479 (4,628,464) 7,691,015

Incurred claims recognised in the income statement

20,753,646 (2,661,348) 18,092,298 20,753,646 (2,661,348)

18,092,298

Claim payments/ recoveries during the year

(20,825,006) 3,528,228 (17,296,778) (20,825,006) 3,528,228

(17,296,778)

Carried forward 12,248,119 (3,761,584) 8,486,535 12,248,119 (3,761,584) 8,486,535

(d) Maturity Profile

The maturity profile of the entity‟s discounted net outstanding claims provision is analysed below:-

Consolidated Entity/Company

1 Year or less

2 to 5 years

Total

30-Jun-13

7,501,570 1,337,430 8,839,000

30-Jun-12

6,734,777 1,751,758 8,486,535



39

18 Outstanding claims liability (continued) (e) Claims development tables – all classes of business The following tables show the development of gross and net undiscounted outstanding claims relative to the ultimate expected claims for the 5 most recent accident years.

i) Gross (Consolidated and Company)

Accident year Up to 2008 2009 2010 2011 2012 2013 Total

$ $ $ $ $ $ $

Estimate of ultimate claims cost:

At end of accident year 23,562,623 10,811,932 18,948,471 20,503,715 21,949,660 17,692,660 17,692,660

One year later 27,174,258 10,172,655 18,588,983 19,481,834 19,962,490 - 19,962,490

Two years later 28,082,702 10,046,560 18,842,883 20,412,541 - - 20,412,541

Three years later 28,977,820 9,930,666 19,025,431 - - - 19,025,431

Four years later 29,310,648 10,003,356 - - - - 10,003,356

Five years later 28,626,960 - - - - - 28,626,960

Current estimate of cumulative claims cost 28,626,960 10,003,356 19,025,431 20,412,541 19,962,490 17,692,660 115,723,438 Cumulative payments (28,626,960) (9,884,655) (18,953,721) (19,121,093) (17,954,255) (10,625,795) (105,166,479)

Outstanding claims - 118,701 71,710 1,291,448 2,008,235 7,066,865 10,556,959

Discount - (1,009) (864) (25,318) (32,938) (85,290) (145,419)

Outstanding claims - 117,692 70,846 1,266,130 1,975,297 6,981,575 10,411,540

Claims handling expenses

520,561

Prudential margin

1,197,899

Total gross outstanding claims per the statement of financial position 12,130,000

ii) Net (Consolidated and Company)

Accident year Up to 2008 2009 2010 2011 2012 2013 Total

$ $ $ $ $ $ $

Estimate of ultimate claims cost: At end of accident year 23,565,623 9,470,514 13,226,317 16,672,317 18,142,708 15,816,155 15,816,155

One year later 26,276,856 9,123,495 12,543,164 15,944,183 16,277,361 - 16,277,361

Two years later 26,582,441 8,899,343 12,182,825 16,347,432 - - 16,347,432

Three years later 26,461,048 8,763,159 12,194,240 - - - 12,194,240

Four years later 26,481,058 8,716,136 - - - - 8,716,136

Five years later 25,817,270 - - - - - 25,817,270

Current estimate of cumulative claims cost 25,817,270 8,716,136 12,194,240 16,347,432 16,277,361 15,816,155 95,168,594 Cumulative payments (25,817,270) (8,724,500) (12,171,969) (15,558,735) (15,633,064) (9,729,276) (87,634,814)

Outstanding claims - (8,364) 22,271 788,697 644,297 6,086,879 7,533,780

Discount - (601) (329) (17,878) (11,345) (69,844) (99,997)

Outstanding claims - (8,965) 21,942 770,819 632,952 6,017,035 7,433,783

Claims handling expenses

520,561

Prudential margin

884,656

Total net outstanding claims per the statement of financial position 8,839,000



40

19 Unearned protection revenue


2013 2012 2013 2012

$ $ $ $

Current

Unearned protection revenue from the members as at 1 July

16,959,140

15,479,091

16,959,140

15,479,091

Deferral of revenue on protections written during the year

18,804,716

16,959,140

18,804,716

16,959,140

Earning of revenue on protections written during the previous year

(16,959,140)

(15,479,091)

(16,959,140)

(15,479,091)

18,804,716 16,959,140 18,804,716 16,959,140

20 Interest bearing liabilities


2013 2012 2013 2012

$ $ $ $

Related party loan – CSL (1) (2) (3)

4,903,401 4,903,401 4,903,401 4,903,401

4,903,401 4,903,401 4,903,401 4,903,401

Represented by:

Current - - - -

Non-current 4,903,401 4,903,401 4,903,401 4,903,401

4,903,401 4,903,401 4,903,401 4,903,401

(1) Represents loans subordinated between CML, CSL and ASIC. In addition to the subordinated loan, CSL has also offered bank guarantees of $4.3 million issued by the Australia and New Zealand Banking Corporation Limited.

The major terms and conditions of the subordinated loan agreement and bank guarantees are -

CSL, CML and ASIC have agreed that the loan advanced shall be subordinated to all the claims demands, rights and causes of action of all unsubordinated creditors;

CSL has agreed with ASIC and CML not to prove or claim the loan in competition with any unsubordinated creditors;

CSL has agreed with ASIC not to demand or commence proceedings for repayment or recovery of the whole or any part of the subordinated loan without prior approval in writing of the ASIC. Such consent shall be granted only if ASIC is satisfied that CML is capable of complying with the financial conditions in AFSL issued to CML following withdrawal of the loan;

CML has agreed with ASIC not to repay the whole or any part of the loan to CSL without prior written approval of the ASIC;

CML has agreed not to provide to CSL any additional collateral as security for the subordinated loan without prior written approval of the ASIC;

CML to notify the ASIC in writing if any demand is made or proceedings commenced by CSL to recover the whole or any part of the loan;

The subordinated loan is payable on 31 October 2025. The term was extended to 2025 by an amending deed dated 6 June 2012;



41

20 Interest bearing liabilities (continued) The interest rate payable on the subordinated loan is the Reserve Bank of Australia‟s published daily

interbank overnight cash rate plus 3% per year;

CML has a bank guarantee in its favour from CSL for $4.3 million. This bank guarantee is an eligible instrument under ASIC Regulatory Guide 166;

CML to pay CSL all costs and charges associated by CSL providing bank guarantee to CML;

CML to compensate CSL for the difference between the rate of 10% pa and the interest income earned on the restricted cash deposit with the bank;

On 22 March 2012 the parties entered a new Financial Support Agreement that relates to the terms of the bank guarantee facility. CML to provide unconditional indemnity in favour of CSL for all losses suffered by CSL in connection with CML defaulting on the payment terms of the financial assistance or if an Event of Default occurs under the Financial Support Agreement.

CML has not yet called on the Bank Guarantee of $4.3 million in full or in part.

The carrying amount of the subordinated loan approximates its fair value. (2)

CSL and the Company have executed a loan agreement dated 12 December 2006 setting out the terms and conditions of the loan CSL has given to the Company from time to time. The loan agreement sets out certain financial undertaking to be observed by the Company. Breach of the financial undertaking by the Company can result in CSL demanding repayment of the loan subject to written approval from ASIC. During the financial year, a financial undertaking was breached by the Company. The Loan Agreement was amended on 6 June 2012 to extend the term to 31 October 2025 for repayment.

(3)

CML and CSL have signed a Scheme Implementation Agreement (SIA) dated 8th September 2011

whereby subject to the approval of members, ASIC and the court, CML will become a wholly owned subsidiary of CSL by CSL forgiving debt of $4,903,401 in consideration of CML issuing shares for full satisfaction of the current debt owed by the Company to CSL. The improved financial performance of CML together with other changes to the underlying circumstances at the time of entering the SIA have meant that the SIA was no longer the preferred option for either party. It was decided that the SIA be terminated by mutual agreement between CSL and CML effective 5 September 2013. The result being that the proposed SIA would no longer proceed.

21 Provisions


2013 2012 2013 2012

$ $ $ $

At 1 July 2012 - - - -

Arising during the year (a) - 871,358 - 871,358

At 30 June 2013 - 871,358 - 871,358

Represented by:

Current - 871,358 - 871,358

Non-current - - - -

- 871,358 - 871,358

(a) In the last financial year, a provision was recognised for potential additional GST payments relating to current and prior years That was settled with the ATO during this financial year.



42

22 Remuneration of auditors During the year the following fees were paid or payable for services provided by the auditor of the Company or any entity in the Consolidated Entity:


2013 2012 2013 2012

$ $ $ $

(a) Assurance services

Audit services

Ernst and Young Australian firm

Audit of financial reports and other audit work under the Corporations Act 2001 134,000 130,000 134,000 130,000

Total remuneration for audit services 134,000 130,000 134,000 130,000

Other assurance services Ernst and Young Australian firm Audit of regulatory returns - - - -

Total remuneration for other assurance services - - - -

Total remuneration for assurance services 134,000 130,000 134,000 130,000

(b) Taxation services

Ernst and Young Australian firm

Tax compliance services 226,032 24,019 226,032 24,019

Other non-audit services - - - -

Ernst and Young New Zealand firm

Tax compliance services, including review of controlled entity income tax returns

10,052 9,643 - -

Total remuneration for taxation services 236,084 33,662 226,032 24,019

It is the Consolidated Entity‟s policy to employ Ernst & Young on assignments additional to their statutory audit duties where Ernst & Young‟s expertise and experience with the Consolidated Entity are important. These assignments principally include taxation advice.



43

23 Financial risk management

The operating activities of the Consolidated Entity and the Company expose it to financial risks such as market risk, credit risk and liquidity risk. The Consolidated Entity and the Company operate internationally and are exposed to foreign exchange risk arising from currency exposure with respect to the New Zealand dollar as a result of offering risk protection product to New Zealand members. The Company is not exposed to foreign exchange risk in relation to transactions entered into by CIOM, as they are all denominated and settled in Australian dollars. The Company has subordinated loans from CSL on which interest is payable at market rate exposing it to the fluctuation in interest rate risk. Credit risk arises when there is a possibility of the Consolidated Entity‟s debtors defaulting on their contractual obligations, resulting in financial loss to the Consolidated Entity. Credit risk also arises from cash and investments held by the Consolidated Entity. Liquidity risk is the risk that the Consolidated Entity will be unable to meet its obligations when they fall due. The key objective of the Consolidated Entity‟s asset and liability management strategy is to ensure sufficient liquidity is maintained at all times to meet the Consolidated Entities‟ obligations, including its settlement of contractual protection liabilities and within these parameters, to optimise and enhance the long term value of members. The Company‟s risk management process is underpinned by evaluating risk and reward in order to reduce uncertainty and volatility. All risks are subject to rigorous identification and evaluation throughout the business cycle. Risk management frameworks are in place for each of the categories of risk faced by the Company:

Credit risk – The Company draws its membership base from CSL which has rigorous credit related check reducing the credit related risk.

Funds management – The Company‟s financial instruments consists solely of bank balance, accounts receivable, accounts payables and subordinated loan drawn from CSL.

Exchange risk – Due to low value of both, accounts receivables and payables in NZ$ comparative to the costs involved in hedging the exposure, it has been decided to leave the exposure open leaving them to the natural hedge.

Interest risk – The Company has decided to leave the interest rate risk unhedged as cost of hedging the risk outweighs the potential benefit.

Following are further analyses of risks the Company faces. (A) Market risk As outlined earlier, market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market factors. Market risk comprised three types of risk: currency risk (due to fluctuation in foreign exchange rates), interest rate risk (due to fluctuations in market interest rates) and price risk (due to fluctuations in market prices).

(i) Currency risk

The analysis below demonstrates the impact on profit/(loss) after tax and accumulated equity of a movement in foreign currency exchange rates against the Australian dollar on our NZ$ currency exposure using the foreign currency exposures at the reporting date:



44

23 Financial risk management (continued)

Consolidated 2013 Carrying amount

Sensitivity analysis of foreign exchange risk

(Exposure to NZ$)

-5% 5%

Loss after tax

Accumulated loss

Loss after tax

Accumulated loss

$ $ $ $ $

Financial Assets

Cash and cash equivalents

3,023,597

(143,980) (143,980)

159,137 159,137

Receivables

2,935,188

(139,771) (139,771)

154,484 154,484

Total decrease /(increase)

(283,751) (283,751)

313,621 313,621

Financial Liabilities

Premium tax payable

91,223

4,339 4,339

(4,801) (4,801)

Claims payable

995,255

47,398 47,398

(52,382) (52,382)

Total decrease /(increase)

51,737 51,737

(57,183) (57,183)

Net decrease / (increase)

(232,014) (232,014)

256,438 256,438

Consolidated 2012

Carrying amount


(Exposure to NZ$)

-5% 5%

Loss after tax

Accumulated loss

Loss after tax

Accumulated loss

$ $ $ $ $

Financial Assets


1,079,016

(51,416) (51,416)

56,832 56,832

Receivables

2,453,509

(116,912) (116,912)

129,228 129,228

Total (increase)/ decrease

(168,328) (168,328)

186,060 186,060


Premium tax payable

208,671

9,943 9,943

(10,991) (10,991)

Claims payable

979,914

46,694 46,694

(51,613) (51,613)


56,637 56,637

(62,604) (62,604)

Net (increase)/ decrease

(111,691) (111,691)

123,456 123,456



45


(i) Currency risk (continued)

The Company‟s exposure to foreign exchange risk at the reporting date was as follows:

The Company 2013 Carrying amount


(Exposure to NZ$)

-5% 5%

Profit after tax

Accumulated loss

Profit after tax

Accumulated loss

$ $ $ $ $

Financial Assets

Cash and cash equivalents 3,006,397 (143,162) (143,162) 158,231 158,231

Receivables 2,935,188 (139,771) (139,771) 154,484 154,484

Total (increase)/ decrease (282,933) (282,933) 312,715 312,715


Claims payable 995,254 47,393 47,393 (52,382) (52,382)

Total (increase)/ decrease 47,393 47,393 (52,382) (52,382)

Net (increase)/ decrease (235,540) (235,540) 260,333 260,333

The Company 2012

Carrying amount


(Exposure to NZ$)

-5% 5%

Profit after

tax Accumulated

loss Profit after

tax Accumulated

loss

$ $ $ $ $

Financial Assets


987,634

(47,062) (47,062)

52,019 52,019

Receivables

2,453,509

(116,912) (116,912)

129,228 129,228


(163,974) (163,974) 181,247 181,247


Claims payable

979,914

46,694 46,694

(51,613) (51,613)


46,694 46,694 (51,613) (51,613)

Net (increase)/ decrease

(117,280) (117,280) 129,634 129,634



46


A 5% (previous year 5%) fluctuation in the exchange rate as at 30 June 2013 is considered as most suitable in the current economic situation due to current economic environment both the countries are experiencing. The movements are mainly as a result of foreign exchange losses/gains on translations of New Zealand dollar held accounts.

The Consolidated Entity and the Company have adopted the policy of minimising the management of the risk given the relative stability of its currency in comparison to the Australian dollar which can help to outweigh the cost of hedging versus potential loss through adverse movement in currency in view of relatively lower exposure of NZ currency risk relative to total financial assets.

(ii) Interest rate risk

The Consolidated Entity and the Company‟s main interest rate risk arise from cash and cash equivalents and interest bearing loan. There are no interest rates derivatives open at reporting date.

The following table summarises the sensitivity of the consolidated financial assets and financial liabilities to interest rate risk:-

Consolidated 2013

- 50 Basis Points + 50 Basis Points

Carrying amount

Loss after tax

Accumulate

d loss

Loss after tax

Accumulate

d loss

$ $ $ $ $

Financial Assets


9,119,628

(31,919)

(31,919)

31,919 31,919


Interest bearing liabilities

4,903,401

24,517 24,517

(24,517)

(24,517)

Total Decrease/(Increase)

(7,402)

(7,402)

7,402 7,402

Consolidated 2012


Carrying amount

Loss after tax

Accumulated loss

Loss after tax

Accumulated loss

$ $ $ $ $

Financial Assets


7,824,331

(27,385)

(27,385)

27,385 27,385



4,903,401

24,517 24,517

(24,517)

(24,517)

Total (Decrease)/Increase

(2,868)

(2,868)

2,868 2,868



47

23 Financial risk management (continued) (ii) Interest rate risk (continued)

The following table summarises the sensitivity of the Company‟s financial assets and financial liabilities to interest rate risk:

The Company 2013

Carrying amount - 50 Basis Points + 50 Basis Points

$

Loss after tax $

Accumulate

d loss $ Loss after

tax $

Accumulate

d loss $

Financial Assets


8,945,328

(31,309)

(31,309)

31,309 31,309



4,903,401

24,517 24,517

(24,517)

(24,517)

Total Decrease/(Increase)

(6,792)

(6,792)

6,792 6,792

The Company 2012 Carrying amount


$ Loss after

tax $ Accumulated

loss $ Loss after

tax $ Accumulated

loss $

Financial Assets


7,178,552

(25,125)

(25,125)

25,125 25,125



4,903,401

24,517 24,517

(24,517)

(24,517)

Total (Decrease)/Increase

(608) (608)

608 608

The net movement in profit after tax and accumulated losses for the Company and the Consolidated Entity is as a result of interest income from cash and cash equivalents and interest obligation on interest bearing liabilities.

50 Basis points fluctuation is considered as closer to the current prevalent economic environment for next twelve months and selected to demonstrate the impact on after tax profit and loss statement and equity of the Company. The net effect on profit/ (loss) and equity due to a reasonably possible change in risk variable is outlined as above, for interest rate risk. A reasonably possible change in risk variable has been determined after taking into account past performance, future expectations, economic forecasts and management‟s knowledge and experience of the financial markets. The sensitivity analysis is based on risk exposures in existence at the reporting date. The analysis is performed on the same basis for 2012. The analysis assumes that all other variables remain constant. (iii) Price Risk The Consolidated Entity and the Company minimised price risk as it has no exposure to equity securities but rather invests conservatively in cash holdings thereby eliminated equity related price fluctuations.



48

23 Financial risk management (continued) (B) Credit risk The carrying amount of financial assets in the Consolidated Entity and the Company‟s statement of financial position represents the maximum exposure to risk. Risk also arises from the Consolidated Entity having discretionary protection contract with a single counter party. However, the Consolidated Entity is selective in choosing the counter party having a minimum acceptable credit rating to alleviate the risk arising from the counter party credit default. The impairment of receivable is carried out by directly adjusting the carrying amount of the receivable. No collateral is held by the Consolidated Entity and the Company. The Consolidated Entity and the Company have not granted any financial guarantees. The Consolidated Entity and the Company‟s investing activities are restricted to deposit with banks, i.e. within highly regulated markets which considerably reduces the exposure to credit risk. Also refer to Note 5 Risk management policies and procedures.

Credit quality table

Consolidated

2013 rating 2012 rating 2013 2012

$ $

Cash at bank

P-1 / A-1+ P-1 / A1+ 9,119,628 7,824,331

Trade and other receivables Not rated Not rated 18,473,415 16,461,919

Discretionary protection recoveries

AAA / A+ / A AA- / A+ / A- 1,542,000 974,256

Other claim recoveries

Not rated Not rated 1,749,000 2,787,329

30,884,043 28,047,835

The Company

2013 rating 2012 rating 2013 2012

$ $

Cash at bank

P-1 / A-1+ P-1 / A1+ 8,945,328 7,178,552

Trade and other receivables Not rated Not rated 18,473,415 16,461,919

Discretionary protection recoveries

AAA / A+ / A AA- / A+ / A- 1,542,000 974,256

Other claim recoveries

Not rated Not rated 1,749,000 2,787,329

30,709,743 27,402,056

Aging table There are no past due and impaired receivables for Consolidated Entity and the Company at reporting date. (C) Liquidity risk The Company and Consolidated Entity continuously manage this risk through rolling forecasts of the liquidity reserve on the basis of expected cash flow.



49

23 Financial risk management (continued) The financial liabilities that exist are trade and other payable, accrued expenses, current tax liability, interest bearing liability and outstanding claims liability. These liabilities are based on undiscounted contractual obligation basis except for outstanding claims liabilities which are discounted based on estimated timing of their settlement. These liabilities have the following maturity pattern.

Maturity profile of payables and liabilities

1 year or less

2 to 5 years Over 5 years

Total

$ $ $ $

Consolidated 2013

Trade and other payables

1,709,229 - - 1,709,229

Current tax liabilities

12,271 - - 12,271

Accrued expenses

1,973,293 - - 1,973,293

Interest bearing liabilities and interest payable - - 4,903,401 4,903,401

Outstanding claims liability

10,345,552 1,784,448 - 12,130,000

14,040,345 1,784,448 4,903,401 20,728,194

Consolidated 2012

Trade and other payables

1,981,597 - - 1,981,597


130,179 - - 130,179

Accrued expenses

2,844,796 - - 2,844,796

Interest bearing liabilities and interest payable

128,285 -

4,903,401 5,031,686

Outstanding claims

9,985,777 2,262,342 - 12,248,119

15,070,634 2,262,342 4,903,401 22,236,377

The Company 2013

Trade and other Payables

1,633,848 - - 1,633,848


12,271 - - 12,271

Accrued expenses

1,973,293 - - 1,973,293

Interest bearing liabilities and interest payable - -

4,903,401 4,903,401

Outstanding claims

10,345,552 1,784,448 - 12,130,000

13,964,964 1,784,448 4,903,401 20,652,813

The Company 2012

Trade and other Payables

1,468,261 - - 1,468,261


129,179 - - 129,179

Accrued expenses

2,844,796 - - 2,844,796

Interest bearing liabilities and interest payable

128,285 -

4,903,401 5,031,686

Outstanding claims

9,985,777 2,262,342 - 12,248,119

14,556,298 2,262,342 4,903,401 21,722,041



50

23 Financial risk management (continued) (D) Derivative instruments The Company is not a party to any derivative financial instruments in the normal course of business

24 Contingent liabilities

The Board of CML is not aware of any contingent liabilities at the date of signing this report.

25 Related party transactions

(a) Wholly owned group

The Company provides a range of protection related benefits to members of CSL, who join as members in CML.

The wholly-owned group consists of the Company and its wholly-owned controlled entities, CMLNZ and CIOM.

Transactions between the Company and its controlled entities during the year ended 30 June 2013 consisted of:

Agreement for Insurance Protection between CIOM and CMLNZ. The terms of the protection provided by CMLNZ are similar to the terms it has with its reinsurer.

Agreement for Discretionary Protection between the Company and CIOM. The terms of the protection provided by CIOM to CML are similar to the terms CMLNZ ultimately has with its reinsurer.

Payment of audit fees and other administrative overheads by the Company on behalf of the controlled entities.

(b) Ownership interests by related parties

The Company owns 100% interest in its controlled entities CMLNZ and CIOM.

(c ) Transactions with related parties

The subordinated loan provided by CSL at reporting date amounts to $4,903,401 (2012: $4,903,401). The total interest paid against the loan during the period was $300,384 (2012: $361,795).

The bank guarantee provided by CSL at reporting date amounts to $4,300,000 (2012: $4,300,000). The amount paid for the Bank Guarantee “compensation amount” under the Financial Assistance Agreement of 2006 and the replacement Financial Support Agreement of 2012 was $226,261 (2012: $201,724).

During the year, CML paid management fees of $10,204,518 (2012: $8,220,112) to CMM and accrued a bonus fee of $910,600 (2012: Nil) under the terms of the management agreement.



51

25 Related party transactions (continued)

During the year, CSL had a protection cover with CSL and paid contributions of $742 (2012: $115,645).

During the year total contribution from members collected by CSL was $39,247,250 (2012: $35,651,126). As at 30 June 2013, total contribution receivable from CSL is $3,498,350 (2012: $3,277,652). During the year, the company paid a 2% collection charges/settlement discount amounting to $789,628 (2012: paid $335,892 and accrued $430,138).

During the year, CML paid to CIOM an amount of $4,759,199 (2012: $4,118,233) in connection with the discretionary protection provided to the Company. CMLNZ has accrued $669,142 (2012: $624,174) as balance of Insurance Protection receivable from CIOM towards the contractual arrangement. CML has accrued $669,142 (2012: $624,174) as balance of Discretionary Protection fee payable to CIOM. CMLNZ charged the same rate for the Insurance Protection Fees that it paid to the ultimate reinsurance companies.

The Company has recovered an amount of $842,342 (2012: $1,113,046) from the discretionary deed of indemnity it has with its controlled entity and is carrying $1,387,969 as receivable.

(d) Terms and conditions

Refer to note 20 for the terms and conditions of the loan availed from CSL.

26 Director and executive disclosures

(a) Directors

The following persons were directors of the Consolidated Entity during the financial year:

(i) Chairman – non-executive

Michael McLeod

(ii) Non-executive directors

Wayne Negus Vincent O‟Neill Russell Green Colin Heavyside

(iii) Company secretary

Andrew Griffiths

(b) Management

The following persons employed by the Managers were the individuals with the greatest authority for the management and operations of the Company during the year:

Name Position Employer Period

Greg Wall Director CMM CSL 01/07/2012 to 30/06/2013

Tremayne West Director CMM CSL 01/07/2012 to 30/06/2013



52

26 Director and executive disclosures (continued)

(a) Details of directors remuneration

Details of the remuneration of each director of the Company and the Consolidated Entity are set out in the following tables. The member directors have decided not to receive any remuneration effective from 1 December 2009.

2013 2012

Name

Short-term employee benefits

Post-employment

benefits Total

Short-term employee benefits

Post-employment

benefits Total

$ $ $ $ $ $

Wayne Negus - - - - - -

Russell Green - - - - - -

Vincent O‟Neill - - - - - -

Colin Heavyside - - - - - -

Michael McLeod 119,671 10,771 130,442 116,379 10,356 126,735

Total 119,671 10,771 130,442 116,379 10,356 126,735

(d) Other transactions with directors

Wayne Negus, Russell Green, Vincent O‟Neill, Colin Heavyside and Michael McLeod are all Directors and members of the Company and their financial transactions with the Company are on the same terms and conditions as all other members. The aggregate value of transactions between the directors and the Company are as follows:

2013 2012

$ $

Gross written contributions

41,550 42,732

Net claims paid

3,235 8,166

Claims outstanding

- -

27 Investments in controlled entities

Country of

Incorporation

2013 2012

% %

Controlled entity

CMLNZ

New Zealand

100% 100%

CIOM

Isle of Man 100% 100%



53

28 Economic dependency

Since inception, CML has received financial support from CSL amounting to $4,903,401 (2012: $4,903,401) all of which is subordinated with ASIC. The Australia and New Zealand Banking Group Limited has also provided a bank guarantee of $4,300,000 on behalf of CSL to the Company (2012: $4,300,000).

CML is also dependant on CSL for the collection of receivables from its members.

29 Commitments for expenditure CML has a contract with CMM to manage its operations until June 2013. The fee payable to CMM is as approved by the CML Board in its Budget. If CML makes profit after tax, CMM will be eligible to receive 20% of CML‟s profit after tax as a bonus for the year. The Board has been presented with a draft budget for 2013/14 fiscal year. Based on the draft budget presented to the Board and duly approved by the board, the management fees for the 2013/14 would be $10,540,000 and the bonus fee is expected to be $402,704.

30 Capital Management Requirements The Company holds an AFSL issued by ASIC. The condition 7(c) of the licence requires the company to have assets exceeding adjusted liabilities. Previously, the Company had breached the licence condition and have rectified the breach by way of additional loan given by CSL and/or bank guarantee issued by Bank on behalf of CSL. The bank guarantees were amended to meet the requirements of ASIC. The Company has not yet called in any bank guarantee issued previously in its favour. As at 30 June 2013, the Company‟s adjusted assets exceed its adjusted liabilities. Under the SIA executed in the 2011, CSL is contractually obligated to provide the financial assistance (on a non-recourse basis) to ensure that CML's financial headroom in respect of the AFSL does not fall below $1,000,000, on the condition that CML participates in the transaction. The improved financial performance of CML together with other changes to the underlying circumstances at the time of entering the SIA have meant that the SIA was no longer the preferred option for either party. It was decided that the SIA be terminated by mutual agreement between CSL and CML effective 5 September 2013. The result being that the proposed Scheme of Arrangement would no longer proceed. The directors are of the view that the Company will be in a position to manage the financial conditions of AFSL and thereby the Capital Management Requirement.

31 Contingencies As disclosed in note 30, the Company holds an AFSL issued by ASIC. The condition 7(c) of the licence requires the company to have adjusted assets exceeding the adjusted liabilities. As disclosed in note 28, to meet the financial services licence condition, the Company has received financial support from CSL amounting to $4,903,401 (2012: $4,903,401), which have been subordinated with ASIC (refer note 20 for further details on terms & conditions incidental to the subordination). Further, CSL, through Australia and New Zealand Banking Group Limited (Bank), has provided bank guarantees of $4,300,000 to the Company. In the event of Company‟s assets falling short of its adjusted liabilities, a request will be made to the bank for the guaranteed amount, which will be added as a part of interest bearing liabilities. As at 30 June 2013, the Company‟s assets exceed its adjusted liabilities, accordingly no request has been made to the bank for the guaranteed amount; accordingly no liability has been recognised in respect of the Bank Guarantees of $4,300,000.

32 Subsequent Events Scheme Implementation Agreement The Scheme Implementation Agreement (SIA) entered into with CSL on 8 September 2011 and reported on in the Directors Report of financial year 2010/11 and in note 2 to the financial statements was terminated by mutual agreement on 5 September 2013.

CAPRICORN MUTUAL LIMITED Directors‟ declaration

54

In accordance with a resolution of the directors of Capricorn Mutual Limited, we state that:

In the opinion of the directors:

(a) the financial statements and notes of the Company and the consolidated entity are in accordance with the Corporations Act 2001, including:-

i) giving a true and fair view of the Company's and consolidated entity‟s financial position as at 30 June 2013 and of its performance for the year ended on that date; and

ii) complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001;

(b) the financial statements and notes also comply with International Financial Reporting Standards as disclosed in note 2; and

(c) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable.

This declaration is made in accordance with a resolution of the directors.

___________________________

Michael McLeod

Wayne Negus

Chairman Vice Chairman Dated: 18 October 2013 Dated: 18 October 2013 Sydney Perth

55 Liability limited by a scheme approved

under Professional Standards Legislation FD:MJ:CML:059

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