ABCD KPMG d.o.o. Beograd Kraljice Natalije 11 11000 Belgrade Serbia Telephone: Fax: E-mail: Internet: +381 11 20 50 500 +381 11 20 50 550 info@kpmg.rs www.kpmg.rs Independent Auditors Report TO THE SHAREHOLDERS OF WIENER RE A.D.O. BEOGRAD We have audited the accompanying financial statements of Wiener RE a.d.o. Beograd ( the Company ), which comprise the balance sheet as at 31 December 2013, the income statement, statement of changes in equity and cash flow statement for the year then ended, and notes, comprising a summary of significant accounting policies and other explanatory information. Management s Responsibility for the Financial Statements Management is responsible for the preparation and true and fair view of these financial statements in accordance with the Law on Accounting of the Republic of Serbia, the Insurance Law and other relevant by-laws issued by National Bank of Serbia, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the Law on Auditing of the Republic of Serbia, the Decision on the content of reports on the audit of financial statements of an insurance company and International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the preparation and true and fair view of financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 2014 KPMG d.o.o. Beograd, a Serbian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. Matični broj:17148656 PIB: 100058593 Račun: 265-1100310000190-61 KPMG d.o.o. Beograd je jednočlano društvo.
ABCD Opinion In our opinion, the financial statements give a true and fair view of the financial position of the Company as at 31 December 2013, and of its financial performance and its cash flows for the year then ended in accordance with the Law on Accounting of the Republic of Serbia, the Insurance Law and other relevant by-laws issued by National Bank of Serbia. Belgrade, 20 March 2014 KPMG d.o.o. Beograd (L.S.) Dušan Tomić Certified Auditor This is a translation of the original Independent Auditors Report issued in the Serbian language. All due care has been taken to produce a translation that is as faithful as possible to the original. However, if any questions arise related to interpretation of the information contained in the translation, the Serbian version of the document shall prevail. Belgrade, 20 March 2014 KPMG d.o.o. Beograd (L.S.) Dušan Tomić Certified Auditor 2
Wiener Re a.d.o. Beograd Financial statements from 1 January to 31 December 2013 INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2013 In thousands of RSD Note 2013 2012 Operating income Calculated reinsurance premium and retrocession 4 3,012,791 2,942,376 Premium transferred through reinsurance retrocession and retrocession 4 (2,641,569) (2,268,284) Increase in unearned reinsurance premiums and retrocession 3.4, 4 (17,316) (349,312) Income from placement of technical reserve funds 5 50,034 96,536 Other operating income 6 860,987 706,771 Total 1,264,927 1,128,087 Operating expenses Expenses for long-term provisions and functional contributions 3.6, 7 - (8,151) Settled claims - share of claims in reinsurance and retrocession 8 (1,267,287) (927,806) Expenses from investigation, assessment and settlement costs 8 (4,669) (5,347) Income from reinsurance and retrocession participation in payment claims 8 1,101,626 811,624 Provisions for outstanding claims - decrease / (increase) 3.5, 9 (597) 53 Expenses from placement of technical reserve funds 10 (22,694) (43,944) Other operating expenses 11 (957,612) (833,895) Total (1,151,233) (1,007,466) Gross operating profit 113,694 120,621 Insurance administration costs Acquisition costs Other acquisition costs 3.7, 12.2 (13,149) (13,702) Administrative costs Depreciation 3.7, 12.3 (1,220) (832) Costs of material, energy, service and intangible costs (6,758) (5,377) Salaries, fringe benefits and other personal expenses (22,481) (22,373) Other costs of managing (12,514) (11,053) Other administrative costs (3,428) (3,631) Total 3.7, 12.1 (59,550) (56,968)
Wiener Re a.d.o. Beograd Financial statements from 1 January to 31 December 2013 Net operating profit/(loss) 54,144 63,653 Financial income 3.8, 13 32,544 62,130 Financial expenses 3.8, 14 (11,447) (24,660) Income from asset value adjustment and other income 3.9-1,956 Impairment losses and other expenses 3.3, 16 (9,389) (2) Net gaines/losses from discontinued operations 1,465 (1,725) Gain before tax 67,317 101,352 Income tax 3.10, 17.1 (5,928) (10,073) Deferred tax 3.10, 17.1 104 (293) NET PROFIT 61,493 90,986
Wiener Re a.d.o. Beograd Financial statements from 1 January to 31 December 2013 BALANCE SHEET AS AT 31 DECEMBER 2013 In thousands of RSD Note 2013 2012 ASSETS Non-current assets Intangible assets 3.1, 18 2,159 1,711 Property, plant and equipment 3.1, 18 8,219 7,588 Investments in other legal entities 3.2, 19.1 25,569 22,931 Other long-term financial investments 3.2, 19.1 545,087 317,143 Total non-current assets 581,034 349,373 Current assets Inventories 495 511 Receivables 3.3, 20 1,072,288 1,144,273 Current income tax receivables 9,287 - Short-term financial investments 3.2, 21.1 352,772 429,329 Cash and cash equivalents 22 70,677 102,243 Prepayments and deferred expenses 23 143,392 114,827 Unearned reinsurance premiums charged to co insurer and reinsurer 23 781,185 766,331 Provisions for outstanding claims charged to co insurer and reinsurer 23 220,196 224,784 Total current assets 2,650,292 2,782,298 TOTAL ASSETS 3,231,326 3,131,671 EQUITY AND LIABILITIES Equity Share capital 24 631,919 631,919 Reserves 24 13,149 13,149 Unrealized gains on securities available for sale 24 6,992 5,005 Unrealized losses on securities available for sale 24 (61) - Accumulated earnings/(loss) 24 119,390 91,029 Total equity and reserves 24 771,389 741,102 Liabilities and provisions Risk equalisation reserves 3.6 482 9,073 Other long-term provisions 25 184 70 Short term financial liabilities 26 67 - Liabilities for claims and agreed amounts 26 556,519 401,260 Liabilities for premiums, payroll and other liabilities 26 666,743 792,444 Liability for income tax 26-1,509 Unearned reinsurance premium 3.4, 27 801,528 784,212 Provisions for outstanding claims 3.5, 27 292,110 287,509 Other deferred income 27 140,862 113,286 Deferred tax liabilities 3.10, 28 1,442 1,206 Total liabilities and provisions 2,459,937 2,390,569 TOTAL EQUITY AND LIABILITIES 3,231,326 3,131,671
Wiener Re a.d.o. Beograd Financial statements from 1 January to 31 December 2013 CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2013 CASH FLOW FROM OPERATING ACTIVITIES Inflows from operating activities Reinsurance and retrocession premiums 2,140,642 1,641,212 Cash receipts from participation in settlement of claims 350,623 191,844 Other receipts from operating activities 14,459 53,685 Total inflows from operating activities 2,505,724 1,886,741 Outflows from operating activities Claims paid and participation in claims settlement from reinsurance and retrocession (789,881) (741,766) Paid coinsurance, reinsurance and retrocession premiums (1,525,971) (1,017,012) Salaries, benefits and other personal expenses (25,809) (24,344) Income tax (16,724) (2,101) Payments of contributions and other charges (31,317) (22,008) Other payments from ordinary activities (33,516) (29,437) Total outflows from operating activities (2,423,218) (1,836,668) Net cash inflow from operating activities 82,506 50,073 CASH FLOW FROM INVESTMENT ACTIVITIES Inflows from investment activities Interest received 29,245 28,035 Total inflows from investment activities 29,245 28,035 Outflows from investment activities Purchase of intangible assets, property and equipment (2,775) (2,868) Net outflows from depositing and other financial investments (116,629) (322,659) Total outflows from investment activities (119,404) (325,527) Net cash (outflow) / inflow from investment activities (90,159) (297,492) CASH FLOW FROM FINANCIAL ACTIVITIES Inflows from financial activities Increase in equity - 57,945 Total inflows from financial activities - 57,945 Outflows from financial activities Paid dividends and profit share (29,807) - Total outflows from financial activities (29,807) - Net cash (outflow) / inflow from financial activities (29,807) 57,945 Net cash (outflow) / inflow (37,460) (189,474) CASH AT THE BEGINNING OF THE YEAR 102,243 299,596 Foreign exchange gains on cash translation 34,936 38,807 Foreign exchange losses on cash translation (29,042) (46,686) CASH AT THE END OF THE YEAR 70,677 102,243
Wiener Re a.d.o. Beograd Financial statements from 1 January to 31 December 2013 STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2013 In thousands of RSD Share capital Share premium Unrealized gains and losses on securities available Accumulated for sale earnings/ (loss) Total Balance as at 1 January 2012 540,366 12,996 1,479 33,804 588,645 Share capital issue 57,792 153 - - 57,945 Decrease/Increase in revaluation reserves - - 3,526-3,526 Changes in market values of securities available for sale Current year profit - - - 90,986 90,986 Dividend paid - - - - - Transfer between different forms of capital-increase/decrease 33,761 (33,761) - Balance as at 31 December 2012 631,919 13,149 5,005 91,029 741,102 Balance as at 1 January 2013 631,919 13,149 5,005 91,029 741,102 Share capital issue - - - - - Decrease/Increase in revaluation reserves - - 1,926-1,926 Current year profit - - - 61,493 61,493 Dividend paid - - - (33,132) (33,132) Balance as at 31 December 2013 631,919 13,149 6,992 119,390 771,389 to produce a translation that is as faithful as possible to the original. However, if any questions arise related to interpretation of the
WIENER RE A.D.О. BEOGRAD Notes to the Financial Statements 2013 21 February 2014 1
1. FOUNDATION AND ACTIVITY Wiener Re a.d.o. Beograd (hereinafter: the Company ) was established on 24 July 2008 based on the Agreement on Establishment of a Closed Joint Stock Company. The Company s founders and shareholders are Wiener Stadtische Versicherung AG, Vienna Insurance Group, Schottering 30, A-1011, Vienna, Austria and Novak Lukic, PIN 0804959710173, Deligradska Street number 10, Belgrade. WIENER STÄDTISCHE Versicherung AG Vienna Insurance Group on 23 July 2010 sold all the shares in the reinsurance company "Wiener Re" a.d.o. to reinsurance company VIG RE Zajištovna a.s from Prague (6,046 shares). On 11 November 2008 the National Bank of Serbia issued a license for conducting reinsurance, decision number 8033. Registration in the Serbian Business Registers Agency was confirmed by decision number BD 145442/2008 dated 10 December 2008. Managing bodies of the Company are: the Shareholder s Assembly, Executive Board and Supervisory Board. Persons responsible for the preparation of financial statements for 2013 are Vidan Slana, General Manager,and Radmila Miletic, Executive Board member. The Company provides reinsurance and retrocession of risks to domestic and foreign insurance companies (reinsurance business) and transfers surplus risk from reinsurance to retrocession to domestic and foreign reinsurance companies (retrocession). The Company is headquartered in Belgrade, Trešnjinog cveta no. 1. Registration number of the Company is 20483733, and taxpayer identification number is 105892185. As at 31 December 2013 the Company has 13 employees of which 8 with higher education (2012: 8). 2. BASIS OF PREPARATION OF THE FINANCIAL STATEMENTS 2.1. Basis of preparation and presentation of the financial statements (a) Statement of compliance The financial statements have been prepared in accordance with the following laws and regulations: Law on Accounting ( Official Gazette of the RS, no. 62/2013), Insurance law ( Official Gazette of the RS, no. 55/2004, 70/2004, 61/2005, 85/2005, 101/2007, 63/2009, 107/2009, 99/2011, 119/2012 and 116/2013), Law on Companies ("Official Gazette of the Republic of Serbia ", no. 36/2011 and 99/2011), Corporate profit tax law ( Official Gazette of the Republic of Serbia, no. 25/2001, 80/2002, 43/2003, 84/2004, 18/2010, 101/2011, 119/2012, 47/2013 and 108/2013), Law on the Capital Market ("Official Gazette of the Republic of Serbia " no. 31/2011), Regulation on the Chart of Accounts and Contents of Accounts in the Chart of Account of Insurance Companies (Official Gazette of the RS, no. 15/07, 3/09 and 35/2010) and relevant bylaws based on mentioned laws and general documents of the Company. 2
In accordance with the Law on Accounting, legal entities and entrepreneurs in Republic of Serbia prepares and presents financial statements in accordance with the law, professional and internal regulations, where under the professional regulations are considered applicable Framework for the Preparation and Presentation of Financial Statements ( Framework ), International Accounting Standards ( IAS ), International Financial Reporting Standards ( IFRS ) and interpretations that are part of the standard, in regard to text of IAS and IFRS which has been implemented, does not include grounds for concluding, illustrating examples, guidelines, comments, opposing views, elaborated examples and other supplementary material. Changes to existing standards and translation of new IFRS, as well as interpretations which are an integral part of the standards issued by the International Accounting Standards Board ( IASB ) and International Financial Reporting Interpretations Committee ( IFRIC ) until 1 January 2009, were formally adopted following the decision of the Minister of Finance no. 401-00-1380/2010-16 and published in the Official Gazette of RS no. 77/2010. Amended or issued IFRIC and interpretations of standards, after this date, have not been translated and published, and therefore have not been applied in preparing for these financial statements. The accompanying financial statements are prepared in a form prescribed by Rules on the content and form of financial statements of the insurance companies ( Official Gazette of RS no. 3/2009, 7/2009 and 5/2010), which prescribes the application of a set of financial statements which form and content are aligned with those specified in the revised IAS 1 Presentation of Financial Statements, whose application is mandatory for accounting periods beginning on or after 1 January 2009. Management estimates the impact of changes in the IAS, the new IFRS and interpretations on the financial statements, and although many of these changes are not applicable to the Company, Company management does not express an explicit and unreserved statement of compliance of these financial statements with IAS and IFRS applicable for periods shown in the accompanying financial statements. Accordingly, and given the potentially significant financial effects of the deviation of Serbia accounting regulations and IFRS and IAS to the reality and objectivity of the financial statements, enclosed financial statements cannot be treated as financial statements prepared in accordance with IFRS and IAS. (b) Basis of measurement Financial statements are prepared based on the historical cost principle, except for the following items: Financial instruments at fair value through profit and loss, which are measured at fair value; Available-for-sale financial instruments, which are measured at fair value; and Derivatives, which are measured at fair value. (c) Going concern concept The financial statements are prepared on a going concern basis which presupposes that the Company will continue as a going concern for an indefinite period of time into the foreseeable. (d) Functional and reporting currency The Company s financial statements are disclosed in thousands of dinars (RSD). The dinar is the functional currency and the currency used for financial reporting purposes in the Republic of Serbia. 3
(e) Use of estimates and judgements Presentation of financial statements requires of Company management to use best estimates and reasonable assumptions, which have effect on presented values of assets and liabilities and disclosure of potential receivables and liabilities as at balance sheet date, and income and expenses items during the reporting period. These estimates and assumptions are based on previous experience, as well as different information available as at balance sheet date, and that seem realistic and reasonable in the given circumstances. In continuing to use best estimates and reasonable assumptions available as at balance sheet date the Company seeks to determine their effects on reported values of assets and liabilities, which cannot be confirmed in another, more precise way. Actual results may differ from estimated values. Estimates, as well as assumptions on which the estimates are based, are the result of regular reviews. If through review we find that a change occurred in the estimated value of assets and liabilities, related effects are recognized in the financial statements in the period when the change in estimate occurred, if the change in estimate affects only that financial period, or in the period when changes in the evaluation occurred and subsequent financial periods, if the change in estimate affects the current and subsequent financial periods. Key accounting estimates and judgements Through continual use of best estimates and reasonable assumptions available as at balance sheet date, the Company seeks to establish their effect on reported amounts of assets and liabilities, income and expenses, as well as their effect on future events. Actual results may differ from these estimates. When adjustments become necessary, they are disclosed to the income statement in the period when they came to attention. The most significant estimates relate to assessment of financial assets held for sale impairment, actuarial categories and fair value estimation. /i / Impairment of financial assets In accordance with International Accounting Standard 39, if decrease in value of an asset available for sale is deemed significant and long-term, such asset should be impaired by transferring or cancelling revaluation reserves and charging the corresponding amount to the income statement. Additional criteria used in estimating fair value of such assets include: the financial position of the investee, stock exchange volume for investment, liquidity of each individual security, etc. /ii/ Actuarial categories Rates for property insurance are determined on the basis of frequency of occurrence of insured risks. In order for the rate be determined more precisely there is need for monitoring risks which are being insured for many years. This represents the largest source of uncertainty given the lack of adequate statistics for precisely determining tariffs. Property insurance is usually short-term so that there is certain protection that if the rate is incorrectly estimated, it can be immediately corrected. Besides that, additional protection is also provided by reinsurance because risk is accepted by the reinsurer on the basis of rates at which reinsurance is agreed. 4
/iii/ Fair value The determination of fair value for financial assets and liabilities for which there is no readily available market price requires the use of valuation techniques. For financial instruments that trade infrequently and have little price transparency, fair value is less objective, and requires varying degrees of judgment depending on liquidity, concentration, uncertainty of market factors, pricing assumptions and other risks affecting the specific instrument. (f) Reconciliation of receivables and payables In compliance with statutory regulations, the Company reconciled its receivables and payables with its creditors and debtors. Of the total number of requests for reconciliation sent, there were no unreconciled balances. (g) Comparative data The Company presented comparative data for the income statement for the period from 1 January to 31 December 2012, the balance sheet, statement of changes in equity and the cash flow statement for the year ended 31 December 2012. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company is consistent in its application of its accounting policies in all periods presented in the financial statements. Basic accounting policies applied in the preparation of the 2013 financial statements are presented below. 3.1. Intangible assets, property, plant and equipment /i/ Recognition and measurement Intangible assets, property, plant and equipment are reported at cost reduced for accumulated depreciation. Property, plant and equipment consist of equipment, fixed assets under construction, leasehold improvements and advances for fixed assets, while intangible assets comprise licenses, computer software, advances for intangible assets and intangible assets under construction. Initial recognition of intangible assets, property, plant and equipment is at cost which comprises the amount invoiced by supplier and all costs associated with bringing the asset into use. Subsequent measurement after initial recognition is at cost reduced for accumulated depreciation and any impairment. /ii/ Subsequent costs Costs of replacement of a part of a fixed asset are recognised at carrying amount, if there is a likelihood that future economic benefits will flow to the Company and if the cost of such part can be measured reliably. Spare parts and servicing equipment are recorded in the income statement when used. 5
/iii/ Depreciation In establishing the base for depreciation of intangible assets, property, plant and equipment, the cost of an asset is reduced for residual value of the asset. Depreciation of intangible assets, property, plant and equipment is provided on a straight line basis. Depreciation of an asset commences in the month subsequent to the month when it is put into use. Depreciation/ Useful life (years) Amortization rate (%) Intangible assets 5 20.00 Computers 5 20.00 Transport equipment 6.5 15.50 Machinery and office furniture 6 14 7 16.5 Once a year and at the latest by balance sheet date the Company reviews remaining useful lives of assets and makes adjustments to initially applied depreciation rates in order to better reflect remaining useful lives of assets. 3.2. Financial investments /i/ Classification The Company classifies its financial assets into the following categories: financial assets at fair value through profit and loss, loans and receivables, financial assets available for sale and financial assets held to maturity. Classification depends on the purpose for which assets were acquired. Management classifies its financial assets at the moment of initial recognition. In view of the statutory financial statement forms, the Company reported all of its financial investments, irrespective of their classification, in the balance sheet as short-term and long-term financial investments. /ii/ Recognition Purchase or sale of a financial asset or liability is accounted for appropriately as at transaction date. /iii/ Measurement Financial instruments are initially recognised at market value which includes transaction costs for all financial assets or liabilities, except those that are measured at fair value through profit and loss. Initial recognition of financial assets at fair value through profit and loss is at fair value, with related transaction costs charged to operating expenses in the income statement. After initial recognition financial assets available for sale and financial assets at fair value though profit and loss are measured at fair value. Loans and receivables, as well as financial assets held to maturity, are measured at amortised cost using the effective interest rate method. After initial recognition, financial liabilities are disclosed at amortised cost using the effective interest rate method, except for financial liabilities at fair value through profit and loss. 6
/iv/ Derecognition The Company derecognises financial assets when the right to cash inflows from an asset expires or when such right is transferred to another party. All rights related to a transferred financial asset, whether created or retained by the Company, are recognised as a separate asset or liability. The Company derecognises liabilities when a liability is settled, cancelled or transferred to another party. /v/ Measurement at amortised cost Amortised cost of a financial asset or liability is the value at which the asset or liability is initially recognised, reduced for payment of principal, and increased or decreased for accumulated amortised cost using the effective interest rate method applied to the difference between initial value and nominal value as at date of maturity, reduced for any impairment. /vi/ Measurement at fair value Fair value of financial instruments is the value at which an asset can be exchanged, or liability settled, through an arm s length transaction between informed parties. Fair value is determined using available market information as at reporting date and other valuation methods used by the Company. Fair value of particular financial instruments reported at nominal value is approximately equal to their net book value. Such instruments comprise cash, as well as receivables and liabilities without contractual dates of maturity and without contractual fixed interest rate. Other receivables and liabilities are reduced to their present value by discounting future cash flows, using current interest rates. Management holds that due to the nature of the Company s business and its general policies, there are no significant differences between the net book value and fair value of financial assets and liabilities. /vii/ Impairment Financial assets are tested for impairment as at balance sheet date to assess whether there is objective evidence of impairment. If there is evidence of impairment, the recoverable value of the asset is assessed. For adequate and efficient credit risk management the Company defined separate policies and procedures in its internal regulations for identifying and managing bad assets. Company management estimates the collectability of receivables and provisions for individual estimates of the risk of receivables. Risk receivables are deemed to be all receivables that are overdue. The Company estimates the collectible amount of receivables and investments, keeping in mind the regularity of settlement, the financial position of the debtor and quality of collateral, as well as the contractual cash flow and historical information on losses. The Company makes provision for the estimated amount of impairment and charges it to period expenses in the period when the impairment occurred. If in subsequent periods the Company determines that circumstances have changed and that there is no longer any impairment, the previously made provision is reversed and credited to income. Reversal of a provision cannot result in a higher carrying amount of the asset than the value such asset would have had had no provision been made previously. 7
/viii/ Financial assets held to maturity Financial assets held to maturity are non-derivative financial assets with fixed or determined payment schedules and fixed maturities, which the Company has the intention and ability to hold to maturity. Such financial assets comprise old foreign currency savings bonds issued by the Republic of Serbia, corporate bonds and short-term and long-term deposits. In the event the Company decides to sell a significant portion of its financial assets held to maturity, the entire category will be reclassified as available for sale. Financial assets held to maturity are classified as long-term financial assets, except if maturities fall within less than 12 months as of balance sheet date, when they are classified as short-term assets. Financial assets held to maturity are initially recognised at cost, and as at balance sheet date they are reported at amortised cost which is the present value of future cash flows discounted using the effective interest rate specific to the instrument. As at 31 December 2013 the Company owns coupon bonds issued by RS and corporate bonds that are classified as securities held to maturity. /ix/ Financial assets at fair value through profit and loss Financial assets at fair value through profit and loss are financial assets held for trading. A financial asset is classified into this category if it is acquired principally for sale within the short term. Derivatives are also classified as assets held for trading, unless they are used for hedging risks. Assets in this category are classified as short-term financial investments. Financial assets at fair value through profit and loss are initially recognised at cost and as at balance sheet date are reported at market value. Changes in market value are reported in the Company s income statement as income or expense from adjustment in value of assets. The Company reports gains or losses on the sale of such securities. As at 31 December, 2013 the Company did not have any assets within this category. /x/ Financial assets available for sale and equity investments Available-for-sale financial assets are non-derivative financial assets that are designated as available for sale and are not classified as loans and receivables, financial assets held to maturity or financial assets at fair value through profit and loss. Available-for-sale financial assets are investments for which there is an intention to hold them for an indefinite period of time and that can be sold for liquidity purposes or due to fluctuations in interest rates, exchange rates or market prices. If there is no active market for available-for-sale financial assets, if they have fixed maturities, available-for-sale financial assets are measured at amortised cost using the effective interest rate method. Available-for-sale financial assets are initially measured at cost and as at balance sheet date at market value, if available. Changes in market value are reported within equity, credited or debited against revaluation reserves, up to the date when securities are sold when revaluation reserves are transferred to income. Equity investments are characterised by the intention of holding them for an indefinite period of time. Such investments can be sold in case of cash shortage or in the event of change in market price. Equity investments for which there is no active market are measured at cost. 8
There was no trade on the secondary market or the volume of trade was at the level which did not indicate significant change in market value of coupon bonds of the Republic of Serbia held by the Company. If there is no active market for available-for-sale financial assets, and if they have fixed maturities, available-for-sale financial assets are measured at amortised cost using the effective interest rate method. The Company s available for sale financial assets include old foreign currency savings bonds issued by the Serbian Government classified as available for sale, coupon bonds of the Republic of Serbia and investment units of the Raiffeisen Cash Investment Fund. 3.3. Receivables Receivables comprise reinsurance and retrocession premium receivables, receivables from retrocessioner for share in claim settlement, receivables from reinsurance and retrocession commissions, receivables from recourse rights, receivables for advances given, receivables for interest on deposits that the Company holds in its portfolio, as well as other receivables. If there is likelihood that the Company will not be able to collect all amounts due as per terms of contract, management estimates the amount of provision for reducing a receivable to its actual value. Provisions for short-term trade receivables are made in accordance with the National Bank of Serbia s Decision on the Method for Evaluation of the Balance Sheet and Off Balance Sheet Positions of Insurance Company and on the rules adopted by the Company based on this Decision. All receivables that are overdue by more than 90 days are provisioned in full. All doubtful and impaired receivables are also provisioned in full. In accordance with the Decision of the National Bank of Serbia on the method for evaluation of the balance sheet and off balance sheet positions of an Insurance company, the Company also performs group impairment where all related parties whose level or type of association is such that they represent a single risk are considered as a single debtor. 3.4. Unearned premium Unearned premium relates to premium that belongs to a subsequent reporting period. In accordance with business policy, calculation of unearned premium is based on the type and group of reinsurance. Unearned premium is calculated based on the gross premium principle the base for calculation is the invoiced premium. Unearned premium calculation is performed as per reinsurance and retrocession business at home and abroad, applied to total premium on a pro rata temporis basis, except for reinsurance contracts where coverage changes within the reinsurance period (reinsurance of properties under construction, liability reinsurance of construction contractor, liability reinsurance of structures under installation, liability reinsurance of installation work contractor), which ensures that in the period for which operating result is calculated only earned and invoiced premium will be recorded as income for that period. 9
In the case of reinsurance contracts when the coverage changes within the reinsurance period (reinsurance of properties under construction, liability reinsurance of construction contractor, liability reinsurance of structures under installation, liability reinsurance of installation work contractor) calculation of unearned premiums is done for reinsurance and retrocession in domestic and in foreign countries in relation to the change of coverage within the insurance period, in accordance with the Decision on Specific Criteria and the Manner of Calculating Unearned Premiums issued by the National Bank of Serbia. 3.5. Provisions for outstanding claims The Company calculates and forms from net premium funds a provision for incurred but unsettled liabilities (amount of provision for outstanding claims) related to reinsurance contracts, in accordance with the Rules for Calculating Part of Net Premium for Payment of Incurred But Unsettled Liabilities Provisions for Outstanding Claims. Provisions for outstanding claims are calculated separately by type of reinsurance for reported but not settled and for incurred but not reported claims. /i/ Reported but not settled claims Provisions for outstanding claims are formed by types of insurance and reported claims by cedants. Claims are provisioned in the amount sufficient for payment of the reinsurance share in the payment to the insurer, cedant and insured on claim settlement date. /ii/ Incurred but not reported claims The Company makes provisions for incurred but not reported claims in accordance with the Rules on Calculating Provisions for Outstanding Claims and Coefficients for Provisioning Such Claims which is harmonised with the National Bank of Serbia s Decision issued on 18 September 2007. Based on these Rules, provisions for incurred but not reported claims are made by applying the annual coefficient to the amount of provisions for outstanding claims for the year for which the financial statements are prepared. The coefficient is calculated by dividing the amount of occurred claims in the previous year and reported in the year for which the coefficient is calculated, with the total amount of reported (settled and provisioned) claims in that year. The coefficient is calculated separately for each type of insurance annually. 3.6. Risk equalisation reserves Risk equalisation reserves are calculated in compliance with the Decision on Detailed Criteria and The Manner of Calculation of Risk Equalisation Reserves issued by the NBS. Reserves are formed on the basis of standard variances in claims ratios for the current reporting period with respect to the average claims rations for each type of non-life insurance that the Company deals with in the period under consideration, in compliance with effective regulations for institutions providing insurance and reinsurance. The base for calculating reserves for risk equalisation comprises retained net premium realised in the current reporting period (quarterly and annual) and standard variances. The upper limit for forming risk equalisation reserves is calculated by multiplying the standard variance from a single to a triple variance (depending on the type of insurance) and corresponding retained net premium realised in the current year. 10
3.7. Costs of reinsurance activity The costs of reinsurance activity relate to costs of doing reinsurance business, such as material costs, rent, depreciation/amortisation, gross wages, commissions, advertising and promotion costs, entertainment expense, etc. 3.8 Financial income and expense Financial income represents interests from old foreign currency savings bonds issued by the Republic of Serbia, Treasury bills, corporate bonds and interest from deposits with banks and foreign exchange gains. Financial expenses represent foreign exchange losses and interest expenses. Accounting policies for recognition and measurement of financial income and expenses are disclosed within the relevant balance sheet position. 3.9. Foreign currency transactions Transactions in foreign currencies are translated into Dinars at the average exchange rate set by the interbanking foreign currency exchange market ruling as at transaction date. All assets and liabilities denominated in foreign currencies are translated into Dinars at the average exchange rate set by the interbanking foreign currency exchange market ruling as at balance sheet date. Foreign exchange gains and losses arising on foreign currency transactions and on translation of balance sheet items denominated in foreign currency are debited or credited to the income statement, including foreign exchange gains or losses Commitments and contingent liabilities denominated in foreign currency are translated into dinars at the average exchange rate set by the interbanking foreign currency exchange market ruling on the date of the undertaking of the commitment or contingent liability. The exchange rates of the principal currencies used in translating balance sheet items ruling at the balance sheet dates were as follows: Currency 2013 2012 EUR 114.6421 113.7183 USD 83.1282 86.1763 3.10. Taxes and contributions /i/ Income tax Current income tax relates to the amount calculated by applying the prescribed tax rate of 15% (2012: 10%) to profit before tax. The final amount of income tax liability is calculated by applying the prescribed tax rate to the tax base reported in the tax balance. In accordance with the amendments of the Corporate Income Tax Law, in 2013 the Company will use the prescribed rate of 15%, which is also used in the calculation of deferred taxes for 2013. The Serbian Tax Law does not allow tax losses of the current period to be used to recover tax paid within a specific carry back period. 11
However, current year losses may be used to decrease taxable profits for future periods, but not longer than ten years. /ii/ Deferred tax assets and deferred tax liabilities Deferred tax assets and deferred tax liabilities relate to temporary differences arising on carrying amounts of assets and liabilities disclosed for financial reporting and for taxation purposes. Effective tax rates as at balance sheet date or tax rates that went into effect after that date are used for computing the accrued amount of income tax. Deferred tax liabilities are recognised for all taxable temporary differences. Deferred tax receivables are recognised for all deductible temporary differences and effects of tax losses and credits that can be transferred to subsequent reporting periods, to the extent that taxable profits will be available against which tax losses and credits can be utilised. /iii/ Taxes and contributions which are not dependent on results Taxes and contributions which are not dependent on results relate to property taxes, and taxes and contributions in accordance with the laws and regulations specified by Serbian Government and by local municipal governments. Transfer pricing The tax balance for FY 2013 was not submitted until the date of the financial statements of the Company since the deadline for submission is 30 June 2014. The Company has calculated tax effects based on the Corporate Income Tax Law and in accordance with article 25 it has reported a tax loss. The Company has not finished the study on Transfer pricing yet, but according to management s opinion this will not cause materially significant effects on FY 2013, because transactions with related parties can be fully considered arm s length transactions. 4. INCOME FROM REINSURANCE PREMIUMS AND RETROCESSIONS Income from reinsurance premiums and retrocessions has the following structure: Calculated reinsurance premium and retrocession 3,012,791 2,942,376 Premium transferred through reinsurance retrocession and retrocession (2,641,569) (2,268,284) Increase in unearned premiums of reinsurance and retrocession (17,316) (349,312) Total 353,906 324,780 12
5. INCOME FROM PLACEMENT OF TECHNICAL RESERVE FUNDS Income from investments and depositing of technical reserves from reinsurance and retrocession business include: Interest income 28,866 26,574 - demand deposits 2,047 6,519 - term deposits 4,338 7,988 - securities held to maturity 16,045 7,850 - securities available for sale 6,436 4,217 Exchange rate gains 19,242 66,773 Foreign currency clause income 1,926 3,189 Total 50,034 96,536 6. OTHER OPERATING INCOME Other operating income in the amount of RSD 860,987 thousand (2012: RSD 706,771 thousand) represent reinsurance and retrocession commission, as well as income from reduction in liabilities for pension and disability insurance and salary tax liabilities. 7. EXPENSES FOR LONG-TERM PROVISIONS AND FUNCTIONAL CONTRIBUTIONS Expenses for long-term provisions and functional contributions consist of: Risk equalization reserves - 8,151 Total - 8,151 8. CLAIMS SETTLED AND CONTRACTED INSURANCE AMOUNTS Expenses from claims settlement and contracted insurance amounts: Settled claims - share of claims in reinsurance and retrocession 1,267,287 927,806 Expenses from investigation, assessment and settlement costs 4,669 5,347 Income from participation in claims of reinsurance and retrocession (1,101,626) (811,624) Total 170,330 121,529 13
9. PROVISIONS FOR OUTSTANDING CLAIMS Provisions for outstanding claims from reinsurance relate to: Provisions for outstanding claims incurred reported claims 902 5,262 Provisions for outstanding claims incurred but not reported 10,048 743 Provisions for outstanding claims - retrocessioner s share 4,589 (4,735) 15,539 1,270 Decrease in outstanding claims incurred reported claims (6,176) (1,585) Decrease in outstanding claims incurred but not reported claims (175) 262 Risk equalization reserves decrease (8,591) 0 (14,942) (1,323) Total 597 (53) 10. EXPENSES FROM PLACEMENT OF TECHNICAL RESERVE FUNDS Expenses from investments and depositing of technical reserves from reinsurance and retrocession business include: Loss on exchange differences 16,942 37,763 Foreign currency clause expenses 655 554 Penalty interest expenses 2 0 Expenses from depositing and investing technical reserves 5,095 5,627 Total 22,694 43,944 11. OTHER OPERATING EXPENSES Other operating expenses in the amount of RSD 957,612 thousand (2012: RSD 833,895 thousand) represent the retrocession and reinsurance commission. 12. INSURANCE ADMINISTRATION COSTS 12.1 Reinsurance administration costs relate to: Acquisition costs 13,149 13,702 Administrative costs 42,973 39,635 Other administrative costs 3,428 3,631 Total 59,550 56,968 14
12.2 Acquisition costs have the following structure: Gross salaries 5,593 5,120 Retirement benefits and jubilee awards 22 2 Costs of non-production services 1,086 1,010 Taxes and contributions paid by employer 745 675 Fees for banking services 197 144 Other personal expenses 541 1,939 Production services costs 1,821 1,635 Material costs and energy 225 222 Representation costs 159 118 Contributions 2,278 2,507 Advertising costs 58 13 Depreciation 373 288 Оther non-operating costs 50 29 Total 13,149 13,702 12.3 Administrative costs have the following structure: Gross salaries 18,280 14,812 Taxes and contributions paid by employer 2,433 1,952 Retirement benefits and jubilee awards 71 6 Other personal expenses 1,768 5,610 Contributions 7,446 7,251 Non-production costs of services 3,550 2,922 Fees for banking services 645 416 Depreciation 1,220 832 Production services costs 5,951 4,730 Material costs and energy 737 641 Representation costs 519 341 Advertising costs 190 38 Other non-operating costs 163 84 Total 42,973 39,635 12.4 Coverage of reinsurance cost is presented below: Overhead addition 102,493 96,089 Costs of reinsurance activity 59,551 56,968 Uncovered part of the cost of reinsurance activity - - 15
13. FINANCIAL INCOME Financial income consists of: Interest income - a vista deposits 1,332 4,196 - term deposits 2,822 5,141 - securities held to maturity 10,436 5,052 - securities available for sale 4,186 2,714 Exchange rate gains 12,515 42,975 Gains on effects of foreign currency clause 1,253 2,052 Total 32,544 62,130 14. FINANCIAL EXPENSES Financial expenses include the following positions: Exchange rate losses 11,019 24,303 Foreign currency clause expenses 426 357 Penalty interest expenses 2 0 Total 11,447 24,660 15. INCOME FROM ASSETS REVALUATION AND OTHER INCOME Income from assets revaluation and other income consist of: Income from reduction of impairment from share in claim settlement - 509 Income from reduction of general impairment based on client classification - 1,447 Other income - - Total - 1,956 16
16. IMPAIRMENT AND OTHER EXPENSES Impairment relates to: Write-off of receivables from share in claim settlement 170 - Write-off of receivables from reinsurance premium 647 - Write-off of receivables from impairment 2,279 - Losses from fixed assets write-offs and expenses 39 HTM corporate bonds impairment 6,253 Other expenses 1 2 Total 9,389 2 17. INCOME TAX 17.1 Income tax consists of: Current year s profit tax 5,928 10,073 Gains on deferred tax assets and reduction of tax liabilities 104 - Losses from previous years deferred tax assets decrease and deferred tax liabilities occurence - (293) Total 6,032 9,780 17.2 Reconciliation of effective tax rate is shown as follows: Current year s profit /loss 67,317 101,352 Calculated tax at tax rate of 15% 10,097 10,135 Adjustment of income and expenses Expenses which are not deductible items in Tax balance 1,081 9 Interest income (5,268) - Additional depreciation calculated for tax purposes 86 10 Severance pay and cash compensation based on employment termination, accrued and unpaid in the tax period 17 1 Taxes, contributions, fees and other fees not related to operating result, paid in the current tax period, but not paid in previous tax period, which are reported as expenses in the taxpayer s book (9) (12) Reduction in tax liability for tax credit from investments in fixed assets (77) (70) Reduction in unused long-term provisions - Оther (104) (293) Tax expense 5,823 9,780 Effective tax rate 8.65% 9.65% 17
17.3 Changes in deferred tax liabilities are shown as follows: Balance as at 1 January 1,206 194 Tax cost/income (104) 293 Decrease/increase in deferred tax liabilities in respect of forming deferred tax on the basis of revaluation reserves for securities available for sale 340 719 Total 1,442 1,206 18. INTANGIBLE ASSETS, PROPERTY, PLANT AND EQUIPMENT Intangible and fixed assets include: Software 2,159 1,711 Equipment and means of transport 8,219 7,588 Total 10,378 9,299 18.1 Changes in intangible and fixed assets are presented as follows: Intangible In thousands of RSD assets Equipment Acquisition cost Balance as at 1 January 2013 2,116 9,921 Additions 884 2,201 Disposals - (69) Balance as at 31 December 2013 3,000 12,053 Accumulated depreciation Balance as at 1 January 2013 404 2,333 Current year depreciation 437 1,531 Disposals - (30) Balance as at 31 December 2013 841 3,834 Net book value as at 31 December 2013 2,159 8,219 Net book value as at 31 December 2012 1,711 7,588 18
19. LONG - TERM FINANCIAL INVESTMENTS 19.1 Long - term financial investments relate to: Investment units available for sale 25,569 22,931 Total equity investments 25,569 22,931 Foreign currency saving bonds of the Republic of Serbia available for sale 337,141 93,636 Treasury bonds held to maturity 206,080 192,399 Corporate bonds held to maturity 3,697 31,108 Impairment corporate bonds (1,831) 0 Total other long-term financial investments 545,087 317,143 Balance as at 31 December 570,656 340,074 20. RECEIVABLES Receivables relate to: Reinsurance and retrocession premium receivables in the country 679,513 689,823 Receivables from share in claim settlement abroad 173,303 66,303 Reinsurance premium receivables abroad 176,943 336,006 Receivables from claims paid in the country 3,265 1,668 Receivables for recourse claims in the country 1,315 3,403 Receivables for reinsurance and retrocession commission 10,042 11,816 Interest receivables 1,810 247 Deposits placed arising from reinsurance operations 28,323 35,050 Receivables for sick leave over 30 days - 235 Receivables from state bodies for maternity leave 1,194 675 Receivables for overpaid NBS charges 629 - Receivables for overpaid contributions 12 12 Total 1,076,349 1,145,238 Impairment provision for receivables (4,061) (965) Balance as at 31 December 1,072,288 1,144,273 Receivables for prepaid income tax 9,287 - Balance as at 31 December 9,287-19