AS IF EESTI KINDLUSTUS ANNUAL REPORT

Transcription

1 2006 AS IF EESTI KINDLUSTUS ANNUAL REPORT

2 ANNUAL REPORT 2 ANNUAL REPORT Business name AS If Eesti Kindlustus Registry code Address Pronksi 19, Tallinn Telephone Fax info@if.ee Web page Main field of activity non-life insurance services Beginning of financial year 1 January 2006 End of financial year 31 December 2006 Managing director Auditor Ernst & Young Baltic AS ANNUAL REPORT 2006

3 TABLE OF CONTENTS 3 TABLE OF CONTENTS MANAGEMENT REPORT 4 FINANCIAL HIGHLIGHTS 11 FINANCIAL STATEMENTS 12 MANAGEMENT REPRESENTATION TO THE FINANCIAL STATEMENTS 12 CONSOLIDATED INCOME STATEMENT 13 CONSOLIDATED BALANCE SHEET 14 CONSOLIDATED CASH FLOW STATEMENT 15 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY 16 NOTES TO THE FINANCIAL STATEMENTS 17 Note 1. Accounting principles and basis of estimations used in the preparation of the financial statements 17 Note 2. First time adoption of IFRS 27 Note 3. Risk management 32 Note 4. Premiums earned, net of reinsurance 33 Note 5. Return on investments 34 Note 6. Claims paid, net of reinsurance 35 Note 7. Operating expenses 35 Note 8. Cash and cash equivalents 36 Note 9. Receivables related to insurance activities 36 Note 10. Accrued income and prepaid expenses 37 Note 11. Financial assets 39 Note 12. Intangible assets 40 Note 13. Property, plant and equipment 41 Note 14. Liabilities related to insurance activities 42 Note 15. Accrued expenses and prepaid expenses 42 Note 16. Liabilities related to insurance contracts and reinsurance assets 43 Note 17. Investment into subsidiary 45 Note 18. Owner s equity 45 Note 19. Operating lease 46 Note 20. Related party transactions 46 Note 21. The parent company s unconsolidated income statement 49 Note 22. The parent company s unconsolidated balance sheet 50 Note 23. The parent company s unconsolidated cash flow statement 51 Note 24. The parent company s unconsolidated statement of changes in equity 52 AUDITOR S REPORT 53 PROFIT ALLOCATION PROPOSAL 54 SIGNATURES OF THE MANAGEMENT BOARD AND SUPERVISORY BOARD TO THE ANNUAL REPORT ANNUAL REPORT 2006

4 MANAGEMENT REPORT 4 MANAGEMENT REPORT AS If Eesti Kindlustus belongs to the Swedish insurance group If P&C Insurance Holding Ltd, which in turn is a part of the concern of Sampo Plc companies. AS If Eesti Kindlustus has operated in the Estonian insurance market as the market leader since The company s market share in 2006 amounted to 36.1% (2005: 39.2%). The collected premiums were divided across insurance categories as follows: voluntary motor own damage insurance (35%), property insurance (31%), mandatory motor third party liability insurance (25%) and other insurance (9%). In 2006, AS If Eesti Kindlustus collected insurance premiums in the total amount of 1,130.3 million kroons (2005: 1,058.3 million kroons), earning a net profit of 215 million kroons (2005: 180 million kroons). The year was successful both in terms of corporate growth and an increase in the quality of selected risks insured, as a result of which the company s combined ratio rose from 87.1% in 2005 to 82.5% in As of , the company s liabilities arising from insurance contracts (net of reinsurance) amounted to 830 million kroons (a 10.2% increase from 2005), for which financial investments amounting to 1,558 million kroons provide a strong liquidity reserve (a 25.8% increase from 2005). The net return on financial assets was 1.7% in 2006, which compared to 2005 (4.59%) remained modest as a result of a decrease in the market value of the bond and equity portfolio due to the European Central Bank s interest rate hike. AS If Eesti Kindlustus has its sales and customer service offices all over Estonia, with the largest centres located in Tallinn (incl. the company s management), Tartu and Pärnu. The company s business activities involve both direct sales of insurance products to corporate and private customers, and sales through brokers and other intermediaries. The average number of employees was 437 people in 2006 (incl. 62 sales people). In conjunction with the growth of automation of business processes and the increased efficiency, the number of employees has decreased from year to year (2005: 472; 2004: 503). In 2006, wages and salaries amounted to million kroons (incl. taxes on salaries and wages), including the remuneration of the members of the Management Board (also performing the responsibilities of executive management) of 7.2 million kroons. No remuneration was paid to the members of the Supervisory Board in the financial year. No dividends have been scheduled for payment from the profit of A change occurred in the company s management in February 2006 the hitherto Sales Director was appointed the. The company s Management Board was extended by three members Heinar Olak as the head of the administrative units, Algis Suik as the head of the sales unit and Maarja Kens as the head of the financial unit. ANNUAL REPORT 2006

5 MANAGEMENT REPORT 5 ECONOMIC ENVIRONMENT AND NON-LIFE INSURANCE MARKET The Estonian economy has shown extremely rapid growth in recent years (7.1% in 2003; 8.1% in 2004; 10.5% in 2005; forecast for 2006: 11.8%*) compared to the growth in the world economy (4.5%). According to all presumptions, the peak was reached in 2006 and the growth is expected to slow down in the coming years (forecast for 2007: 8.3% and forecast for 2008: 7.6%). The growth of the Estonian economy continues to be based on strong domestic demand, which is turn is based on the loan boom financed from abroad and the rapid increase in income. The expected inflation in 2006 is 4.4% (forecast for 2007: 4.5% and forecast for 2008: 4.7%), which is due to the alcohol, tobacco and fuel excise being increased, although the price increase resulting from a rise in wages and salaries also plays a role. The growth of the non-life insurance market in 2006 amounted to 16.1% (growth in 2005: 14%), the main indicators of which are the rapid economic growth inputs, although social awareness of the need for insurance has also increased compared to previous years. The advertising money inserted to the market in the last six months gave a strong push to the growth of spontaneous reputation. Besides If, Hansa Varakindlustus, Seesam Kindlustus and Salva Kindlustus started investing into media in 2006, which probably contributed to the increase of social awareness of non-life insurance. Survey results showed that the number of people unable to name no insurance companies has dropped to 26% (survey result from the beginning of the year: 38%). Similarly to previous years, growth in the insurance market for private individuals (approx 20%) is facilitated by the low level of interest rates for housing loans and leasing as well as easy access to loans. The forecast growth in private consumption in 2006 is 15.4%, which is supported by the high level of employment and the average of 12% increase in real wages. Growth in the market for legal persons was somewhat lower than the average growth (approx 12%), as they have more possibilities to hedge their risks in foreign companies, using the services of local brokerage firms or the branches of foreign companies in Estonia. This has forced the Estonian insurance companies to adjust their tariffs in order to keep their customers. Despite the somewhat lower expectations to the economic growth in the coming years, we forecast a continued growth of 15-16% for the non-life insurance market. In 2006, the total of 3.1 billion kroons was collected in insurance premiums, which amounts to 1.5% of the GDP. * Bank of Estonia ANNUAL REPORT 2006

6 MANAGEMENT REPORT 6 STRUCTURE OF THE INSURANCE PORTFOLIO: Estonian non-life insurance market 2006/ % 40% 35% 30% 25% 20% 15% 10% 5% 0% 39,7% 38,3% 28,8% 29,6% 11,4% 11,8% 11,2% 10,6% 2,1% 2,2% 3,9% 4,2% 2,9% 3,3% Motor TPL Motor own Household Corporate Liability Personal accident Other damage property property The Estonian non-life insurance market is characterised by a big share of motor vehiclerelated insurance categories (68.5%), which has increased even more from the previous year (0.6% point). The rapid development of the real estate market has influenced the growth of the proportion of home insurance premiums to 11.2% (10.6% in 2005). The portion of motor own damage and motor third party liability insurance in the insurance portfolio of AS If Eesti Kindlustus is somewhat lower than in the overall market. The relative importance of property insurance among insurance premiums collected by the company is higher than that of the market, both for corporate and private clients. 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% STRUCTURE OF THE INSURANCE PORTFOLIO: If Eesti Kindlustus vs. the Estonian non-life insurance market 25,1% 28,8% 39,7% 34,9% 16,5% 11,2% 14,7% 11,4% Motor TPL Motor own damage Household property Corporate property If Eesti Kindlustus Estonian non-life insurance market Competition has increased in the Estonian non-life insurance market in the past two years. Estonia s rapid economic growth and the high profitability of the non-life insurance sector are attractive for foreign companies (Parex Kindlustus, Fennia, BTA, Codan), who have established their branches here. Brokerage firms are their main sales channel and thanks to their lower cost level they can offer insurance cover at rates lower than the market average. ANNUAL REPORT 2006

7 MANAGEMENT REPORT 7 The second half of 2006 saw the launch of Hansa Varakindlustus, which offers both motor vehicle and property insurance products mainly to its leasing and loan portfolio clients. Due to the aforementioned events, the market share of AS If Eesti Kindlustus has dropped to 36.1% in 2006 (39.2% in 2005). MARKET DISTRIBUTION: Estonian non-life insurance market 2006/ % 40% 35% 30% 25% 20% 15% 10% 5% 0% 39,2% 36,1% 26,2% 26,5% 18,6% 16,8% 11,7% 11,6% 3,6% 3,3% 2,6% 2,5% 1,1% 0,0% If Eesti Kindlustus Ergo Seesam Salva Inges QBE Hansa Varakindustus The development of the non-life insurance market will definitely be positively affected by the amendment to the Insurance Activities Act, which will be enforced in the second half of 2007 and according to which both the insurance brokers and insurance agents have to disclose the price of the brokerage service to the client. FINANCIAL RESULTS OF AS IF EESTI KINDLUSTUS With regard to economic activities, AS If Eesti Kindlustus had a successful year in The volume of insurance premiums increased by 6.8% from 2005, and although this remained below the average market growth, the company s profitability grew considerably in the same period. The net profit in the financial year amounted to 215 million kroons (180 million in 2005), of which the profit from insurance activities made up million kroons (129.8 million kroons in 2005). The company s cost ratio decreased to 24% (24.9% in 2005) as a result of enhancing the efficiency of business processes. Improving the quality of the insurance portfolio by way of professional risk assessment has reduced the loss ratio by 2.2% (60% in 2006; 62.2% in 2005). As a result of changes in the recognition of receivable reimbursement claims the loss ratio decreased by another 1.5%, remaining at the level of 58.5% at the end of Despite the increased volume of financial investments, return on investments decreased from 2005, due to a decrease in the market value of equity securities and bonds at the beginning of the financial year. ANNUAL REPORT 2006

8 MANAGEMENT REPORT 8 With the positive cash flow from insurance activities, the volume of assets increased from 1,530.3 million kroons at the beginning of the year to 1,840.5 million kroons as of The additional funds were invested in financial assets, resulting in a growth in the investment portfolio to 1,558.1 million kroons (as of , 1,238.9 million kroons). At the end of the year, the total amount of financial investments exceeded the insurance technical provisions by 728 million kroons, providing the company with strong liquidity reserves. INVESTMENT ACTIVITIES The company earned a total of 30.6 million kroons as return on investments in the financial year (54.4 million in 2005). The decrease in the return compared to 2005 was due to the loss sustained from the decrease in the market value of shares and bonds, which was caused mainly by the European Central Bank s decision to increase the interest rate. The volume of financial investments grew by 25.8% in the financial year, exceeding 1.5 billion kroons as of The net yield of the portfolio was 1.67% (4.59% in 2005), including the 2.0% yield of the bond portfolio, (-)10.5% yield of the equity portfolio, and 8.3% yield of deposits. Direct investment-related expenses made up 0.27% of the total volume of assets under management (0.32 in 2005). The company changed its investment policy in 2006, considerably reducing the proportion of equity securities in the portfolio (1.3% as of ; 5% as of ). 1,3% 1,5% 2,7% Equity Deposits Money market funds Bonds 94,5% As of the end of the year, 94.5% of the portfolio has been invested in fixed-interest bonds, 2.7% in bond and money market funds, 1.5% in deposits and 1.3% in equity securities. Regionally, the entire portfolio had been invested as follows: 31.8% in the Baltic States, 29.4% in Western Europe, 34% in Central Europe, 2.7% in regionally dispersed equity and bond funds, and 2.1% in other regions. The average credit rating of the bond portfolio is A- (Standard & Poor s). 53% of the bond portfolio is made up of a conservative strategy portfolio (the average rating higher than A), while 25% of assets have been invested in higher-risk bonds (rating BBB to B) and 22% of the bonds are not rated. The currency risk has been minimised by keeping 83% of the investments in euros, 12% in Estonian kroons, 2% in Latvian latts and 3% in Lithuanian litts. In 2006, the investment portfolio is managed by Sampo Baltic Asset Management. ANNUAL REPORT 2006

9 MANAGEMENT REPORT 9 BUSINESS ACTIVITIES IN THE FINANCIAL YEAR, AND PLANS FOR THE FUTURE In order to increase the efficiency of the company s business activities, the company focused on increasing the efficiency of business processes in 2006, contributing into the development of novel information technological solutions. In 2006, we started actively using the sales and customer management process developed for providing services to corporate customers, which enables providing the best service quality to the customer. Corporate customers are serviced by the best specialists in their respective areas, who work in offices located in major county centres. We continued working on the development of electronic channel, updating the functionality of the 1211 information hotline, thus considerably improving the availability of insurance specialists. We also extended our product range on the Internet in addition to motor third party liability insurance customers can now buy home, travel and comprehensive insurance, doing it 15% cheaper than from other sales channels. Despite the contract management being concentrated to central service channels and the considerable reduction of sales staff, we still have sales offices all over Estonia. In 2006, we opened five new sales points: two of them in Tallinn (in Norde Centrum and the Rimi Sõpruse Av. shopping centres), one each in Kuressaares, Narva and Kohtla-Järve. Becoming more available to customers through increasing the number of sales points is also one of the priorities for With the competition increasing, we turn ever more attention to the quality of customer service. As a result of an independent market survey conducted by OÜ Dive Service Quality Development, AS If Eesti Kindlustus was declared the insurance company with the best service level last year. The reputation of If Eesti Kindlustus has also grown considerably a survey conducted by TNS Emor in the second half of the year showed that 53% of Estonian people aged named If as the first insurance company that spring to mind (40% at the beginning of the year). An important priority in non-life insurance business in 2006 was to find solutions for making communication with the company the easiest and least time-consuming for the customer in case of an insurance event. For this, we have created the option of filing notices of insurance events related to motor vehicles at car sales rooms and car repair workshops without having to come to the company. By today, we have concluded cooperation contracts with 40 partners and in 2007 intend to expand the partner network considerably in counties. Filing notices of insurance events over the Internet has gained a lot of popularity among the customers, as a result of which the number of notices has grown by 50% from If provides safety to its customers by promoting the loss-preventative way of thinking. Assisting customers in hedging and avoiding their possible risks is very important for us. For several years running, we have been organising information days and distributing information on how to prevent losses. We shall continue our cooperation with the Fire Fighting Union, the Rescue Board, the Neighbourhood Watch and other safety experts also in Our loyal customers receive a loss prevention card as a present, with which they will get discounts from several security service providers. In 2006, AS If Eesti Kindlustus celebrated the 140 th anniversary of the foundation of the Tallinna Alevite Vastastikuse Tulekinnituse Selts (mutual fire insurance association of Tallinn quarters), being the carrier of its continuity. ANNUAL REPORT 2006

10 MANAGEMENT REPORT 10 One of the objectives of If Eesti Kindlustus is to be the employer of preference on the labour market, as well as ensure staff motivation and continual development of employees. The company s training activities are governed by the competence development principles applied in the entire If group. Training plans are prepared on the basis of both the overall development directions of the company, the customers expectations and the individual development needs of our employees. The priority training areas include product training and sales training. With the entire group becoming increasingly international, special attention is also paid to language training. In addition to local training, several training sessions were conducted by international lecturers in 2006 on both insurance and management. In order to ensure high-quality customer service, the sales staff and claims handlers are evaluated on annual basis. Mihkel Uibopuu Member of the Management Board Heinar Olak Member of the Management Board Maarja Kens Member of the Management Board Algis Suik Member of the Management Board ANNUAL REPORT 2006

11 FINANCIAL HIGHLIGHTS 11 FINANCIAL HIGHLIGHTS Consolidation group Premiums earned Premiums earned, net of reinsurance Claims incurred, net of reinsurance Total operating expenses Net profit Combined ratio 82,5% 87,1% Expense ratio 24,0% 24,9% Loss ratio 58,5% 62,2% Financial investments Annual return on investments 1,67% 4,59% Balance sheet volume Owners' equity Formulae: Expense ratio Loss ratio Combined ratio Annual return on investments Total contract conclusion fees and administrative expenses (-) investment expenses (+) reinsurance commissions Premiums earned, net of reinsurance Claims incurred, net of reinsurance Premiums earned, net of reinsurance Expense ratio + loss ratio Return on investments (-) investment expenses Weighted average volume of financial investments in the period ANNUAL REPORT 2006

12 FINANCIAL STATEMENTS 12 FINANCIAL STATEMENTS MANAGEMENT REPRESENTATION TO THE FINANCIAL STATEMENTS The Management Board hereby takes responsibility for the correctness of the preparation of the financial statements 2006 of AS If Eesti Kindlustus set out on pages 12-52, and confirms that, to the best of its knowledge: - the consolidated financial statements have been prepared in accordance with the International Financial Reporting Standards (IFRS), as adopted by the European Union; - the consolidated financial statements give a true and fair view of the financial position of the group, as well as the results of its operations and cash flows; - the group and the parent company are able to continue as a going concern. Juhatuse esimees Mihkel Uibopuu Juhatuse liige Heinar Olak Juhatuse liige Maarja Kens Juhatuse liige Algis Suik Juhatuse liige Tallinn, February 14, 2007

13 FINANCIAL STATEMENTS 13 CONSOLIDATED INCOME STATEMENT (The financial statements have been prepared in Estonian kroons) REVENUE Note Premiums earned, net of reinsurance Premiums earned Premiums ceded Total Other income Reinsurance commissions Return on investments Total Total revenue EXPENSES Claims incurred, net of reinsurance Claims incurred, gross Claims handling expenses Reinsurer's share in claims paid Total Expenses Insurance contract acquisition costs Administrative expenses Total Total expenses NET PROFIT FOR THE FINANCIAL YEAR The notes to the financial statements set out on pages 17 to 52 form an integral part to the consolidated financial statements.

14 FINANCIAL STATEMENTS 14 CONSOLIDATED BALANCE SHEET (The financial statements have been prepared in Estonian kroons) ASSETS Note Cash and cash equivalents Financial investments Receivables related to insurance activities Accrued income and prepaid expenses Reinsurance assets Non-current asset held for sale Intangible assets Property, plant and equipment TOTAL ASSETS LIABILITIES AND OWNER'S EQUITY Payables related to insurance activities Accrued expenses and prepaid revenues Liabilities arising from insurance contracts Total liabilities Share capital Share premium Mandatory reserve Retained earnings Total owner s equity TOTAL LIABILITIES AND OWNER S EQUITY The notes to the financial statements set out on pages 17 to 52 form an integral part to the consolidated financial statements.

15 FINANCIAL STATEMENTS 15 CONSOLIDATED CASH FLOW STATEMENT (The financial statements have been prepared in Estonian kroons) Cash flow from operating activities Note Premiums received 3, 8, Premiums ceded 3, Claims paid, incl. claims handling expenses 5, 6, Cash flow from reinsurance Employee-related and service-related expenses Cash flow from operating activities, net Cash flow from investing activities Investments in shares Proceeds from disposals of shares Investments in fixed income securities Proceeds from disposals of fixed income securities Investments in term deposits Return on term deposits Purchase of property, plant and equipment, and intangible assets 12, Proceeds from disposals of property, plant and equipment, and intangible assets Dividends received Interest received Cash flow from investing activities, net Change in cash flow, net Cash and cash equivalents at the beginning of the period Cash and cash equivalents at the end of the period The notes to the financial statements set out on pages 17 to 52 form an integral part to the consolidated financial statements.

16 FINANCIAL STATEMENTS 16 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (The financial statements have been prepared in Estonian kroons) Share capital Share premium Mandatory reserve Retained TOTAL earnings As of Transfer to mandatory reserve Net profit for the financial year As of Net profit for the financial year As of Additional information on owner s equity has been disclosed in Note 18. The notes to the financial statements set out on pages 17 to 52 form an integral part to the consolidated financial statements.

17 FINANCIAL STATEMENTS 17 NOTES TO THE FINANCIAL STATEMENTS NOTE 1. ACCOUNTING PRINCIPLES AND BASIS OF ESTIMATIONS USED IN THE PREPARATION OF THE FINANCIAL STATEMENTS 1. THE GROUP AND ITS ACTIVITIES AS If Eesti Kindlustus (registry code: ) is an insurance company which has been registered at Pronksi 19, Tallinn (Republic of Estonia), and forms the AS If Kinnisvarahaldus group together with its subsidiary. The main activity of AS If Eesti Kindlustus is the provision of non-life insurance services. 2. BASIS OF PREPARATION The consolidated financial statements 2006 of AS If Eesti Kindlustus have been prepared in accordance with the International Financial Reporting Standards (IFRS), and the interpretations of the International Financial Reporting Interpretations Committee (IFRIC), as passed by the European Union. The consolidated financial statements have been prepared on a historic cost principle, except for certain financial investments which are recorded at fair value in the income statement. The financial statements have been presented in Estonian kroons, unless another measurement unit is referred to. The Annual Report which is prepared by the Management Board and approved by the Supervisory Board and includes the financial statements, is approved by the General Shareholder's Meeting in accordance with the Commercial Code of the Republic of Estonia. Shareholders have the right not to approve the Annual Report prepared by the Management Board and approved by the Supervisory Board, and demand preparation of a new Annual Report. NEW IFRS STANDARDS PASSED DURING THE FINANCIAL YEAR The group has implemented if necessary the standards which entered into force during the financial year, and restated the comparative data, where necessary, in order to bring the data into line with the presentation of this financial year. These standards include IAS 19 "Employee benefits: actuarial gains and losses, group plans and disclosures, IFRIC 4 Determining whether an arrangement contains a lease, IFRS 6 Exploration for and evaluation of mineral resources, IFRIC 5 Rights to interests arising from decommissioning, restoration and environmental funds, IFRS 4 Insurance contracts: financial guarantee contracts (revised), IAS 39 Financial instruments: recognition and measurement (revised) and IAS 1 "Presentation of financial statements (revised)". The implementation of new and revised standards has no effect on the group's owner's equity as of

18 FINANCIAL STATEMENTS 18 NEW IFRS STANDARDS AND INTERPRETATIONS New or revised standards and interpretations, which have been approved by the European Union by the balance sheet date, but which will enter into force after the balance sheet date have no effect on the accounting principles applied by the group. These standards include IFRS 7 "Financial instruments: disclosures", IAS 1 "Presentation of financial statements (revised)", IFRS 8 "Operating segments", IFRIC 7 "On applying the restatement approach under IAS 29 "Financial reporting in hyperinflationary economies"", IFRIC 8 "Scope of IFRS 2", IFRIC 9 "Reassessment of Embedded Derivatives", IFRIC 10 "Interim financial reporting and impairment", IFRIC 11 "IFRS 2 Group and Treasury Share Transactions", IFRIC 12 "Service Concession Arrangements". The group is in process assessing their impact on the financial statements. 3. MATERIAL JUDGEMENTS, ESTIMATES AND RESOLUTIONS The preparation of financial statements requires the passing of resolutions on the basis of previous judgements and estimates. The judgements and estimates have an effect on the assets and liabilities recorded at balance sheet date, and the income and expenses of the financial year. Although the judgements are based on the management s best knowledge as well as concrete facts, the actual results may differ from the estimates. A) EVALUATION OF LIABILITIES FROM INSURANCE CONTRACTS Judgements are made both for establishing allowances for the incurred and recognised losses as of the balance sheet date, and for accounting for the allowance for unrecognised losses. The time period during which the final claims are incurred may be extensive. In some insurance categories, the allowance for claims may consist of incurred but unrecognised losses. Forecasts regarding allowances for future claims are based on the claims actually incurred in previous periods. Each balance sheet date, estimates on allowances for claims in previous periods are revaluated, with any changes reported in the income statement. The allowances for claims are not changed in accordance with fluctuations in the value of money over time. B) VALUATION OF THE FAIR VALUE OF FINANCIAL ASSETS Calculation of the fair value of financial assets has been described in Note 1.4 (h). Financial assets measured at fair value amounted to 1,558,108 thousand kroons (2005: 1,238,891 thousand kroons) in the income statement in The technical insurance provisions, however, amounted to 888,339 thousand kroons at the end of 2006 (2005: 806,450 thousand kroons), of which the reinsurer's share made up 58,354 thousand kroons (2005: 52,954 thousand kroons). Technical insurance provisions have been described in Note 1.4 (n), (o) and (q). 4. MAIN ACCOUNTING PRINCIPLES A) BASIS OF CONSOLIDATION The consolidated financial statements include the financial information of all subsidiaries controlled by the parent company, consolidated line-by-line. All intra-group transactions and balances have been eliminated. Subsidiaries are consolidated from the date on which significant influence of joint control is transferred to the group, and cease to be consolidated from the date on which the significant influence or joint control is transferred out of the group.

19 FINANCIAL STATEMENTS 19 Control is presumed to exist, if the parent company holds over 50% of the voting shares of the subsidiary, or is otherwise able to control the operating or financial policies of the subsidiary, or if the parent company has the right to appoint or remove a majority of the members of the Supervisory Board of the subsidiary. Purchase of subsidiaries is recorded based on the purchase method. The acquisition cost of business combinations, accounted for by using the purchase method, is divided between the fair values of assets, liabilities and contingent liabilities on the acquisition date. The portion of the acquisition cost which exceeds the fair value of the acquired assets, liabilities and contingent liabilities is recognised as goodwill. The subsidiary prepared its financial statements on the same period, and uses the same accounting principles applied by the parent. B) ACCOUNTING FOR THE SUBSIDIARY IN THE PARENT COMPANY'S UNCONSOLIDATED FINANCIAL STATEMENTS Investments in subsidiaries are recognised in the parent company's unconsolidated financial statements at cost. This means that the investment is initially recognised at acquisition cost, consisting of the fair value of the payable amount, adjusted thereafter by the impairment losses arising from the drop in the value of the investment. Impairment tests will be conducted in order to determine whether or not the recoverable amount of the investment (the higher of the fair value less sales expenses, or value in-use) has dropped below the carrying value, if there is any indication that the carrying amount may not be recoverable. The impairment losses are charged to the financial expenses in the parent company's income statement. The write-down will be reversed, if the circumstances change and the write-down is no longer justifiable. The reversal of the write-down is recorded as a reduction of the expenses during the period when the reversal occurred. Dividends paid by the subsidiary are recorded when the parent company's right to receive the dividends (as financial income) is established, except for the portion of dividends payable at the expense of available shareholders' equity generated by the subsidiary before the group acquires the company. The respective portion of the dividends is recorded as a reduction of the investment. C) SEGMENT REPORTING The company only operates in a single business segment non life insurance. The services are rendered in Estonia. No segment reporting has thus been presented. D) FOREIGN CURRENCY TRANSACTIONS The Estonian kroon is the underlying currency of the parent company, and the reporting currency of the consolidated financial statements of the group and the unconsolidated financial statements of the parent company. All other currencies are considered foreign currencies. Foreign currency transactions are translated into Estonian kroons on the basis of the exchange rates of the European Central Bank, used in the entire If Group. Monetary assets and liabilities denominated in foreign currency are translated into Estonian kroons on the basis of the currency exchange rates of the European Central Bank officially valid on the balance sheet date. Foreign exchange gains and losses resulting from the revaluation are recorded in the income statement of the reporting period.

20 FINANCIAL STATEMENTS 20 E) REVENUE RECOGNITION Revenue is recognised at the fair value of the received/receivable income. Revenue from sales of services is recorded upon rendering of the service. Interest income is recorded on accrual basis, based on the effective interest rate of the asset item. Dividend income is recognised when the respective right of claim arises. Insurance premiums The collected insurance premiums are recorded upon entry into force of the insurance policy and adjusted with the changes in prepaid premiums, calculated based on the pro rata method. Premiums collected are premiums received and receivable under the insurance contracts, or, in case of instalment payments, those instalment payments with the due date in the accounting period. If the due date of the first instalment payment is later than the effective date of the contract, the recognition of insurance premiums will be based on the effective date of the contract. Insurance premiums and instalment payments received for contracts whose effective date is later than the balance sheet date, are recognised as a prepayment. Reinsurance commissions Reinsurance commission fees consist of the commission fees received from reinsurers under the reinsurance contract. F) EXPENSES The company's expenses are divided according to their function as follows: acquisition costs direct and indirect expenses arising from the acquisition of insurance contracts, incl. direct expenses, such as commission fees for mediators, expenses on preparation of insurance documents or inclusion of contracts in the portfolio, as well as indirect expenses, such as advertising expenses, administrative expenses related to the processing of applications and issue of policies. claims handling expenses consist of expenses directly related to particular losses, as well as administrative expenses directly related to claims handling. Expenses include both direct payments to third parties and the respective expenses incurred by the insurer, incl. wages and salaries, social tax and administrative expenses related to claims handling. administrative expenses expenses related to premium collection, portfolio management as well as bonus and benefit handling. These expenses include insurance-related expenses which do not constitute acquisition costs or claims handling expenses. Claims handling expenses are included in claims paid in the income statement. Insurance contract acquisition costs have been adjusted with the changes in the deferred acquisition costs, net of reinsurance. G) CASH AND CASH EQUIVALENTS For the purposes of the cash flow statement, cash and cash equivalents include cash in hand and demand deposits at fair value, term deposits with a maturity of up to 3 months, and money market fund units. The cash flow statement is prepared based on the direct method.

21 FINANCIAL STATEMENTS 21 H) FINANCIAL ASSETS Financial assets are initially recognised at cost, being the fair value of the consideration given. The acquisition cost includes all expenditures directly related to the purchase of the financial asset, including service charges payable to brokers and advisors, non-refundable taxes and other similar expenditures, except for expenses related to the acquisition of financial assets recognised at fair value in the income statement. All regular way purchases and sales of financial assets are recognised on the trade date i.e. the day when the group commits (e.g. concludes a contract) to purchase or sell the particular financial asset item. Regular way transactions are purchases and sales transactions that require delivery of the financial asset to be purchased or sold by the seller to the buyer within the time frame generally established by regulation or convention in the marketplace. Following initial recognition, financial assets are divided into the following groups: Financial assets measured at fair value in the income statement (shares held for trade and bonds which are not intended to be held to maturity, as well as other securities and derivative instruments with a positive value); loans and receivables (loans granted, accounts receivable and other receivables); available-for-sale financial assets (all other financial assets not mentioned above; the group had no such investments in the reporting period and the comparative period). The financial assets of the first group are measured at fair value on the balance sheet date. The fair value of listed securities is based on the closing price of the security, as well as the official exchange rate of the European Central Bank on the balance sheet date. Unlisted securities are measured at their fair value on the basis of the information available to the group on the value of the investment. Gains and losses from the changes in fair value are recorded under "Return on investments" in the income statement. Interest and dividends related to the financial assets of the first group are also recorded under "Return on investments" in the income statement. Financial assets are classified as "financial assets recorded at fair value in the income statement" on the basis of the following criteria: assets held for trading; assets classified as such, since this provides more relevant financial information; Financial assets which are not held for trading may be classified under this group if: - this serves the purpose of eliminating any differences in the recognition of income and expenses arising from measurement of assets and the related liabilities i.e. helps to reduce the so-called accounting discrepancy; or - the group of financial assets are managed together, and the results measured at fair value in accordance with documented risk management or investment strategy, and the corresponding information is forwarded to the top management. Equity instruments which have no listed market price on the active market and the fair value of which cannot be reliably determined, cannot be measured at fair value.

22 FINANCIAL STATEMENTS 22 Loans and receivables are measured at their amortised cost by using the effective interest rate method. Amortised cost is calculated by taking into account any discount or premium on acquisition, as well as expenses directly related to the transaction, over the year to maturity. Financial assets measured at amortised cost are written down, if it is probable that their recoverable amount is lower their carrying amount (the write-down of doubtful receivables is recorded under assets with a "-" sign, and doubtful receivables are written off from the balance sheet). The recoverable amount of a financial asset measured at amortised cost is the net present value of future cash flows from the financial asset, discounted, upon its initial recognition, with the effective interest rate. Receivables are measured on individual basis, considering the information available regarding the customer's solvency. The write-down of financial assets related to operating activities is charged to expenses in the income statement (under "Administrative expenses ) while the writedown of financial assets related to investing activities is recorded as a reduction of Return on investments in the income statement. Collection of receivables that have been previously expensed is recorded as a reduction of the allowance for doubtful receivables, and as a reduction of expenses in the income statement of the reporting period. Interest income from loans, receivables and investments intended to be held to maturity is recorded under "Return on investments" in the income statement. The derecognition of financial assets will take place when the group no longer controls the rights arising from the financial assets, or when the all the cash flows attributable to the asset, and a majority of the risks and benefits related to the financial asset are transferred to a third party. Receivables from customers, reinsurance receivables and other receivables are recognised at nominal value when incurred (on the transaction date), and, subsequent to initial recognition, at cost. Receivables are measured on individual basis. Receivables will be written down if their collection by the group under the established conditions is unlikely. If a receivable has become uncollectible, it will be written off from the balance sheet. I) PROPERTY, PLANT AND EQUIPMENT Assets with an acquisition cost of over 10,000 kroons and a useful life of over 1 year are recognised as PPE. PPE are recorded at cost, consisting of the purchase price and expenditures directly related to the acquisition. Following initial recognition, an item of PPE is carried in the balance sheet at its cost, less accumulated depreciation and any accumulated impairment losses. If the recoverable amount of the non-current asset item drops below its carrying amount, the asset will be written down to its recoverable amount (the higher of the fair value, less sales expenses, or the value-in-use). Impairment tests will be conducted, if there is any indication that the carrying amount may not be recoverable. Impairment losses are charged to expenses in the income statement, under "Insurance contract acquisition costs", "Claims handling expenses", and "Administrative expenses" in accordance with the functionality. On each balance sheet, the group assesses whether there is any indication that the previous impairment is no longer justified. If there is any such indication, the group will assess the recoverable amount and, if necessary, reverse the previous write-down. The reversal of the write-down is recorded as a reduction of the expenses during the period when the reversal occurred.

23 FINANCIAL STATEMENTS 23 Depreciation is calculated from the moment the asset can be used for the purposes established by the management, until the assets' classification into available-for-sale assets, or removal from use. If fully amortised assets are still being used, the acquisition cost and the accumulated depreciation of the assets will be recorded in the balance sheet until the assets have been removed from use. The depreciable amount of the PPE item (i.e. the difference between the acquisition cost and final value) is charged to expenses over the useful life of the item. As an exception, land is not depreciated. Depreciation is calculated on a straight-line basis, in accordance with the useful life of the asset item, as follows: Buildings 50 years Computer equipment 3 years Transport vehicles 5 years Other non-current assets 3-5 years If the PPE item consists of distinguishable components with different useful lives, these components are separately recorded under assets, and the depreciation rates specified separately thereof in accordance with their useful lives. J) INTANGIBLE ASSETS Intangible assets are initially recorded at acquisition cost, consisting of the purchase price and expenses directly related to the acquisition. Subsequent recognition depends on whether the asset has a finite or indefinite useful life. Intangible assets with a finite useful life are carried in the balance sheet at cost, less accumulated amortisation and any accumulated impairment losses. These assets are amortised on a straight-line basis, on the basis of the useful life of the asset item: Patents, licenses and other contractual rights, computer software: 5 years Intangible assets with a finite useful life are written down to the recoverable amount (the higher of the fair value, less sales expenses, or the value-in-use), if the carrying amount is no longer recoverable. Impairment tests will be conducted, if there is any indication that the carrying amount may not be recoverable. Impairment losses are charged to expenses in the income statement, under "Insurance contract acquisition costs", "Claims handling expenses", and "Administrative expenses" in accordance with the functionality. On each balance sheet, the group assesses whether there is any indication that the previous impairment is no longer justified. If there is any such indication, the group will assess the recoverable amount and, if necessary, reverse the previous write-down. The reversal of the write-down is recorded as a reduction of the expenses during the period when the reversal occurred. Intangible assets with an indefinite useful life (incl. goodwill) are not depreciated. However, the group conducts an impairment test on these assets on each balance sheet date. The group had no intangible assets with an indefinite useful life in the reporting period or in the comparative period.

24 FINANCIAL STATEMENTS 24 K) NON-CURRENT ASSET HELD FOR SALE Non-current asset held for sale consist of non-current assets (PPE and intangible assets) which are likely to be sold within the next 12 months, provided that active sale of the assets has been launched. The asset recognition is changed in accordance with the valid IFRS immediately before classification of the assets as non-current assets. The non-current assets are subsequently recorded at the lower of book value or fair value less sales expenses. L) FINANCIAL LIABILITIES Financial liabilities are initially recognised at their acquisition cost, consisting of the fair value of the amounts received thereof. Following initial recognition, financial liabilities are measured at their amortised cost by using the effective interest rate method. Transaction costs are taken into consideration upon calculating the effective interest rate, and charged to expenses over the term of the financial liability. Any expenses related to the financial liability (incl. interest expenses) are charged to the expenses of the period on accrual basis. The financial liability will be derecognised when the liability is paid, cancelled or expired. M) DEFERRED ACQUISITION COSTS Acquisition costs directly related to premiums that are carried over to the next period are recognised in the balance sheet as deferred acquisition costs. Direct acquisition costs are capitalised on the basis of the ratio of the provision for unearned premiums to premiums written. Deferred acquisition costs include direct insurance contract acquisition costs, such as commission fees to mediators, provision fees to sales employees (incl. taxes) and policy sheet expenses. N) PROVISION FOR UNEARNED PREMIUMS The provision for unearned premiums is set up for future losses and operating expenses that may arise during the term of the insurance contract, depending on which portion of the collected insurance premium has been received for the future insurance service. The provision for unearned premiums is calculated separately for each contract, based on the share of the unexpired term of the contract of the total term of the contract. O) PROVISION FOR CLAIMS OUTSTANDING The provision for claims outstanding is set up for claims incurred but not yet settled, including claims incurred but not yet reported (IBNR). In order to cover claims handling expenses of incurred future claims, a provision for claims handling expenses is set up under the provision for claims outstanding. The provision for claims outstanding is calculated using the valuation of single claims as well as statistical methods (IBNR provision). The provision for claims outstanding is not discounted, except for the provision for motor third party liability annuities that are discounted to the net present value using standard actuarial methods, and the index of the pension increase and the discount rate recommended by the guarantee fund. P) LIABILITY ADEQUACY TEST The insurer assesses the adequacy of technical insurance provisions on each balance sheet date, by using current estimates on future cash flows from insurance contracts. The adequacy test is conducted on all insurance categories. The test is based on the current estimates on all future contractual cash flows and the related cash flows, including claims handling expenses. If the test reveals that the liability is inadequate for all insurance categories, the deficit will be recorded as loss. The test conducted in 2006 revealed no deficit.