WIENER RE A.D.O. BELGRADE Financial statements for the year ended December 31, 2015 prepared in accordance with International Financial Reporting Standards with Independent Auditors Report
CONTENT I II Independent Auditors Report Financial Statements: Statement of Profit or Loss and Other Comprehensive Income Statement of Financial position Statement of Changes in Equity Statement of Cash Flows Notes to the Financial Statements
kpmg KPMG d.o.o. Beograd Kraljice Natalije 11 11000 Belgrade Serbia Tel.: +381 (0)11 20 50 500 Fax: +381 (0)11 20 50 550 www.kpmg.com/rs Independent Auditors Report TO THE SHAREHOLDERS 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 2015, the income statement, statement of other income, 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 fair presentation 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 the 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. 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. Matični broj:17148656 PIB: 100058593 Račun: 265-1100310000190-61
kpmg Opinion In our opinion, the financial statements give a true and fair view of the financial position of the Company as at 31 December 2015, 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 the National Bank of Serbia. Belgrade, 15 March 2016 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, 15 March 2016 KPMG d.o.o. Beograd (L.S.) Dušan Tomić Certified Auditor 2
Wiener Re. a.d.o. Belgrade Financial statements from 1 January to 31 December 2015 TRANSLATION INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2015 In thousands of RSD Note 2015 2014 Operating income Reinsurance and retrocession premium income 4,657,274 3,786,234 Premium transferred through reinsurance retrocession and retrocession (4,127,382) (3,297,486) Increase in unearned reinsurance premium and retrocession (77,543) (97,638) Decrease in unearned reinsurance premiums and retrocession - 629 Total 4 452,349 391,739 Operating expenses Expenses for long-term provisions and functional contributions 6 (80) (143) Expenditure for claim settlement - share of claims in reinsurance and retrocession 7 (3,282,104) (3,318,134) Expenses for investigation, estimation, settlement and payment for claims and contracted amounts 7 (8,694) (5,707) Income from reinsurance and retrocession share in claim settlement 7 3,074,667 3,106,324 Provisions for outstanding claims increase 8 (1,805,465) (31,229) Provisions for outstanding claims decrease 8 1,813,753 189 Increase in other technical reserves net (70) - Total (207,993) (248,700) Gross operating profit 244,356 143,039 Investment income 5 67,844 111,576 Investment expenses 9 (22,606) (29,309) Profit from investment activity 45,238 82,267 Insurance administration costs Acquisition costs Commission (1,142,024) (992,732) Other acquisition costs (16,023) (15,023) Change in deferred acquisition costs - increase 14,000 - Administrative costs Depreciation (2,505) (2,233) Costs of material, energy, service and intangible costs (9,219) (7,528) Salaries, fringe benefits and other personal expenses (30,305) (27,466) Other costs of managing (19,965) (16,365) Other administrative costs (85) - Commission from reinsurance and retrocession 10.4 991,811 917,740 Total 10.1 (214,315) (143,607) TRANSLATION NOTE: This is translation of the original document 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 contained in the translation, the Serbian version of the document shall prevail.
Wiener Re. a.d.o. Belgrade Financial statements from 1 January to 31 December 2015 TRANSLATION Net operating profit/(loss) 75,280 81,699 Financial income 11 28,358 16,878 Financial expenses 12 (33,459) (25,430) Income from asset value adjustment 13 2,519 1,863 Expenses from asset value adjustment 14.1 (797) (2,813) Other income 7 138 Other expenses 14.2 (19) (48) Net gains/losses from discontinued operations - 420 Profit before tax 71,889 72,707 Income tax 15 (4,472) (4,834) Deferred tax 15 123 133 NET PROFIT 67,540 68,006 TRANSLATION NOTE: This is translation of the original document 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 contained in the translation, the Serbian version of the document shall prevail.
Wiener Re. a.d.o. Belgrade Financial statements from 1 January to 31 December 2015 TRANSLATION STATEMENT OF OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2015 In thousands of RSD Note 2015 2014 Profit/(loss) for the year 67,540 68,006 Gains from securities available for sale 14,530 5,265 Losses from securities available for sale - - Other comprehensive income /(loss) 14,530 5,265 Total comprehensive profit / (loss) 82,070 73,271 TRANSLATION NOTE: This is translation of the original document 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 contained in the translation, the Serbian version of the document shall prevail.
Wiener Re. a.d.o. Belgrade Financial statements from 1 January to 31 December 2015 TRANSLATION BALANCE SHEET AS AT 31 DECEMBER 2015 In thousands of RSD Note 2015 2014 ASSETS Non-current assets Intangible assets 16 4,926 3,719 Software and licenses 16 800 984 Property, plant and equipment 16 5,828 6,851 Other long-term financial investments 17 9,328 24,084 Total 20,882 35,638 Current assets Inventories 772 1,265 Receivables 18 1,347,408 1,346,359 Current income tax receivables 18 7,988 12,060 Financial investments 19.1 977,393 943,373 Cash and cash equivalents 20 32,037 51,071 Accrued expenses 21.1 167,670 149,900 Technical reserves charged to reinsurer and coinsurer 21.2 2,349,856 3,586,767 Total 4,883,124 6,090,795 TOTAL ASSETS 4,904,006 6,126,433 EQUITY AND LIABILITIES Equity Share capital 22.3 631,919 631,919 Reserves 13,149 13,149 Unrealized gains on securities available for sale 26,726 12,196 Unrealized losses on securities available for sale - - Accumulated earnings/(loss) 182,046 140,136 Total equity and reserves 22.1 853,840 797,400 Liabilities and provisions Risk equalization reserves 23 705 625 Other long-term provisions 23 133 46 Deferred tax liabilities 27 1,492 2,239 Short term liabilities 24 1,411,848 1,472,000 Reserves for unearned premium 25 976,081 898,538 Other accruals 25 163,808 144,784 Provision for outstanding claims 26 1,496,029 2,810,801 Other technical reserves - up to one year 70 - Total 4,050,166 5,329,033 TOTAL EQUITY AND LIABILITIES 4,904,006 6,126,433 TRANSLATION NOTE: This is translation of the original document 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 contained in the translation, the Serbian version of the document shall prevail.
Wiener Re. a.d.o. Belgrade Financial statements from 1 January to 31 December 2015 TRANSLATION CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2015 Cash flow from operating activities Reinsurance and retrocession premiums 2,570,432 2,480,459 Cash receipts from participation in settlement of claims 2,369,214 2,397,579 Other receipts from operating activities 48,718 17,084 Claims paid and participation in claims settlement from reinsurance and retrocession (2,299,090) (2,884,139) Paid coinsurance, reinsurance and retrocession premiums (2,602,616) (1,935,867) Salaries, benefits and other personal expenses (33,828) (29,105) Income tax (400) (7,608) Payments of contributions and other charges (24,129) (19,552) Other payments from operating activities (68,670) (37,666) Net cash generated/ (used) from operating activities (40,369) (18,815) Cash flow from investment activities Inflows from depositing and other financial investments 24,500 29,593 Interest received 20,976 10,592 Purchase of intangible assets, property and equipment (746) (2,640) Net outflows from depositing and other financial investments - - Net cash (outflow) / inflow from investment activities 44,730 37,546 Cash flow from financial activities Outflows from paid dividends and profit share (25,630) (42,517) Net cash (outflow) / inflow from financial activities (25,630) (42,517) Net cash (outflow) / inflow (21,269) (23,786) CASH AT THE BEGINNING OF THE YEAR 51,071 70,677 Foreign exchange gains on cash translation 13,783 10,081 Foreign exchange losses on cash translation (11,547) (5,901) CASH AT THE END OF THE YEAR 32,037 51,071 TRANSLATION NOTE: This is translation of the original document 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 contained in the translation, the Serbian version of the document shall prevail.
Wiener Re. a.d.o. Belgrade Financial statements from 1 January to 31 December 2015 TRANSLATION STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2015 Share Unrealized gains and losses on securities Accumulated In thousands of RSD Share capital premium available for sale earnings/(loss) TOTAL Balance as at 1 January 2014 631,919 13,149 6,992 119,390 771,450 Revaluation of available for sale securities gains/(losses) - - 5,204-5,204 Current year profit - - - 68,006 68,006 Dividend paid - - - (47,260) (47,260) Balance as at 31 December 2014 631,919 13,149 12,196 140,136 797,400 Balance as at 1 January 2015 631,919 13,149 12,196 140,136 797,400 Revaluation of available for sale securities gains/(losses) - - 14,530-14,530 Current year profit - - - 67,540 67,540 Dividend paid - - - (25,630) (25,630) Balance as at 31 December 2015 631,919 13,149 26,726 182,046 853,840 TRANSLATION NOTE: This is translation of the original document 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 contained in the translation, the Serbian version of the document shall prevail.
WIENER RE A.D.О. BEOGRAD Notes to the financial statements 2015 4 March 2016-1 -
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 STÄDTISCHE Versicherung AG Vienna Insurance Group, Schottering 30, A-1011, Vienna, Austria and Novak Lukić, PIN 0804959710173, no. 10 Deligradska Street, Belgrade. WIENER STÄDTISCHE Versicherung AG Vienna Insurance Group on 23 July 2010 sold all the shares in the reinsurance company "Wiener Re" j.s.r.c 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 2015 are Vidan Slana, CEO, and Radmila Miletić, 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 headquarter is in Belgrade, no. 1 Trešnjinog cveta street. Registration number of the Company is 20483733, and taxpayer identification number is 105892185. As at 31. December 2015, the Company has 18 employees of which 16 have a higher education (2014:15). 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 and 139/2014), Decision on the Chart of Accounts and Content of Accounts in the Chart of Accounts for Insurance Companies ( Official Gazette of the RS, no. 135/2014 and 102/2015), Decision on the content and form of financial statements of insurance companies (Official Gazette of the RS, no. 135/2014, 141/2014 and 102/2015) and relevant bylaws based on mentioned laws and general documents of the Company. During 2014 and 2015, new laws and bylaws which regulate insurance activities have been adopted in the Republic of Serbia. In accordance with new regulations, the Company made following changes in the financial statements for 2015: - 2 -
The reserves which were introduced for the first time based on the Decision on technical reserves made by NBS include bonus and discount reserves, and unexpired risk reserves. Bonus and discount reserves are calculated in accordance with Decision on Detailed Criteria and the Manner of Calculation of Bonus and Discount Reserves, and are disclosed in the balance sheet (within AOP 0457), while the change of these reserve is disclosed in the income statement (within AOP 1045). Bonus and discount reserves are presented in note 28. According to prescribed calculation method, unexpired risk reserves amounted to RSD 0 as at 31 December 2015. 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. Translation of IFRS is determined by the Minister of Finance's Decision on determining translation of the Conceptual framework for financial reporting and basic IAS texts and IFRS texts No. 401-00-896 / 2014-16 dated 13 March 2014, which was published in the Official Gazette No. 35 on 27 March 2014. The mentioned translation of IFRS applies from the financial statements, which are prepared on 31 December 2014. Amended or issued IFRS and interpretations of the standards after this date, have not been translated and published, and therefore are not applied in the preparation of these accompanying financial statements. Besides that, financial statements, as well as some elements of financial statements are disclosed in accordance with the Decision on the content and form of financial statements of insurance companies (Official Gazette of the RS, no. 135/2014, 141/2014 and 102/2015) and Decision on the Chart of Accounts and Content of Accounts in the Chart of Accounts for Insurance Companies ( Official Gazette of the RS, no. 135/2014 and 102-2015), which can deviate from the requirements of IFRS. Given the foregoing and the fact that certain laws and subordinate legislation prescribes the accounting procedures, which in some cases differ from the requirements of IFRS and that the Law on Accounting established dinar as the official reporting currency, accounting regulations of the Republic of Serbia may deviate from the requirements of IFRS which may have an impact on the reality and objectivity of the accompanying financial statements. Management assesses the impact of changes in IAS, new IFRS and interpretations on the financial statements and, although many of these changes are not applicable to the Company, the Company's management does not express an explicit and unreserved statement of compliance of the accompanying financial statements with IAS and IFRS, which apply to periods shown in the accompanying financial statements. Accordingly, the accompanying financial statements can not be considered as financial statements prepared in full compliance with IFRS in the manner defined by the provisions of IAS 1 "Presentation of Financial Statements". - 3 -
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 its operations for an indefinite period of time into the foreseeable future. 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. d) Use of estimates and judgments Presentation of financial statements requires of Company s 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 of 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 of balance sheet date, and that seem realistic and reasonable in the given circumstances. In continuing to use best estimates and reasonable assumptions available as of 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 judgments 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. - 4 -
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. 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 of risks, uncertainty of market factors, pricing assumptions and other risks affecting the specific financial instrument. e) Reconciliation of receivables and payables In compliance with statutory regulations, the Company reconciled its receivables and payables with its creditors and debtors. Out of 68 requests sent for reconciliation, 41 were reconciled, 1 reconciliation in the amount of RSD 52,542 was disputed, while 26 requests for reconciliation were not answered. f) Comparative data The Company presented comparative data for the Income statement for the period from 1 January to 31 December 2014, the Balance sheet with initial and final state, Statement of changes in equity, the Cash flow statement and Other comprehensive income for the year ended 31 December 2014. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basic accounting policies applied in the preparation of the 2015 financial statements are presented below. - 5 -
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. 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. Useful life (years) Depreciation/ Amortization rate (%) Intangible assets 5 20 Computers 5 20 Transport equipment 6.5 15.5 Machinery and office furniture 6 14 7 16.5 Once a year and at the latest on 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 where changes in fair value reflects through profit and loss account, 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. - 6 -
ii. Recognition Purchase or sale of a financial asset or liability is recorded using accounting principles as of settlement 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 account. Initial recognition of financial assets at fair value through profit and loss account 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 account 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 which are disclosed at fair value through profit and loss account. 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 principal payment, 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. - 7 -
vii. Impairment In 2015, the Company has performed the change in accounting policy, after repeal of NBS Decision on assessment of balance sheet positions for insurance companies. 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 impaired 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 no provision been made previously. Since it was practically unfeasible to calculate and disclose the effects of the change in accounting policy using the comparative period (retroactive method), the Company has applied accounting policy to the earliest period for which the application was feasible, which in this case was the current period. viii. Final 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 shortterm 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 2015 the Company owns coupon bonds issued by RS and corporate bonds classified as securities held to maturity. - 8 -
ix. Financial assets at fair value through profit and loss account Financial assets at fair value through profit and loss account 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 account are initially recognised at cost and on 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, 2015 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 account. Available-forsale financial assets are investments for which there is an intention to hold them for an indefinite period of time and that could 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 on balance sheet date are reported 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. There was no trade on the secondary market or the volume of the trade was at the level which did not indicate significant changes in market value of coupon bonds of the Republic of Serbia held by the Company. Available-for-sale financial assets are measured at fair value taking into account the rate of return of the last trading with that security or if there was no trading with that security, rate of return of the last primary issue of a similar security (in terms of residual maturity). 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 advance payments, receivables for interest on deposits that the Company holds in its portfolio, as well as other receivables. - 9 -
If there is a 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. The Company evaluates the worth and collectibility of the receivables in accordance with the contracts signed and other methods in accordance with IAS 39 - Financial Instruments: Recognition and measurement. In previous periods the Company used impairment methods 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. After the nullification of this Decision, the Company changed the impairment methodology, but due to the accordance with IAS 8, which prohibits retrospective changes, the opening balance was not corrected. 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. 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. 3.4. 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. - 10 -
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 11 May 2015. 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, except MPTL insurances, where the provisions are calculated as the bigger number between the Chain Ladder method (which is based on paid claims) and the average of paid claims and incurred claim. 3.5. 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. These reserves are used for the equalization of the claims flow and are part of the technical reserves of the Company. Risk equalisation reserves are formed for each type of insurance separately. Risk equalisation reserves are increased if the annual net result is positive in the observed insurance type, and are decreased when the net result is negative. The limits of the increase or decrease are regulated by the Decision. 3.6. Bonus and discount reserves The bonus and discount reserves to which cedants have a right to are formed on several bases. The calculation of bonus and discount reserves is done according to the type of insurance in question, separately for profit sharing and future limited discounts, and separately for the return of premium. The bonus and discount reserves are the sum of these reserves. The criteria, methodology and timeframe for forming of reserves are regulated by the Decision on Detailed Criteria and the Manner of Calculation of Bonus and Discount Reserves. 3.7. Unexpired Risk Reserve Unexpired Risk Reserves are formed over the unearned premium reserves in order to cover payables from reinsurance which will be formed in the future according to the contracts from the current period. The Company forms reserves if they determine that the expected future claim amounts and costs which relate to current contracts are higher than the unearned premium reserves amount. The criteria, methodology and time frame for forming these reserves are regulated by the Decision on Detailed Criteria and the Manner of Calculation of Unexpired Risk Reserves. The Company has performed the change in accounting policy, and for the first time formed unexpired risk reserves in 2015. Since the effects of the change are not material, the Company did not correct the comparative period, in accordance with Company s Accounting manual. - 11 -
3.8. Reinsurance administration costs 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. 3.9. 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. Foreign currency transactions Transactions in foreign currencies are translated into RSD 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 RSD 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 from foreign currency transactions and during recalculation 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 RSD 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 date were as follows: Currency 2015 2014 EUR 121.626 120.958 USD 111.247 99.4641 3.10. Taxes and contributions i. Income tax Current income tax relates to the amount calculated by applying the prescribed tax rate of 15% 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 2015. - 12 -
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. However, losses from 2010 and later, reported for tax purposes can be used to reduce the tax base in future periods, but not longer than five years, while the losses of the tax balance for 2009 and previous years can be used to reduce profit in the next ten years. ii. Deferred tax assets and deferred tax liabilities Deferred tax assets and deferred tax liabilities are calculated on temporary differences arising from differences between the tax bases of assets and liabilities disclosed in the balance sheet and their carrying amounts. 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. iv. Transfer pricing The tax balance for 2015 was not submitted until the date of the financial statements of the Company since the deadline for submission is 30 June 2016. The Company has accrued tax effects on the basis of the Law on Corporate Income Tax. 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 2015, because transactions with related parties can be fully considered arm s length transactions. 4. REINSURANCE AND RETROCCESION PREMIUM Income from reinsurance premiums and retrocessions has the following structure: Reinsurance and retrocession premium income 4,657,274 3,786,234 Premium transferred through reinsurance retrocession and retrocession (4,127,382) (3,297,486) Increase in unearned reinsurance premium and retrocession (77,543) (97,638) Decrease in unearned reinsurance premiums and retrocession - 629 Total 452,349 391,739-13 -
5. INVESTMENTS INCOME Income from investments and depositing include: Interest income 50,518 47,599 - a vista deposits 3,480 3,334 - term deposits 479 1,643 - securities held to maturity 7,357 15,933 - securities available for sale 39,202 26,689 Security trading income 4,066 - Real estate sale gains 19 - Exchange rate gains 8,597 38,895 Foreign currency clause income 159 349 Foreign exchange gains from transactions with related parties 4,485 24,733 Total 67,844 111,576 6. EXPENSES FOR LONG-TERM PROVISIONS AND FUNCTIONAL CONTRIBUTIONS Expenses for long-term provisions and functional contributions consist of: Risk equalization reserves 80 143 Total 80 143 In 2015 the Company formed risk equalization reserves only for credit insurance, which represent change in accounting policy compared to 2014, while the effects of this change are immaterial. Hence, the Company did not correct the comparative period. 7. SETTLED CLAIMS AND CONTRACTED INSURANCE AMOUNTS Expenses from claims settlement and contracted insurance amounts: Expenditure for claim settlement - share of claims in reinsurance and retrocession 3,282,104 3,318,134 Expenses for investigation, estimation, settlement and payment for claims and contracted amounts 8,694 5,707 Income from reinsurance and retrocession share in claim settlement (3,074,667) (3,106,324) Total 216,131 217,517-14 -
8. PROVISIONS FOR OUTSTANDING CLAIMS Provisions for outstanding claims from reinsurance relate to: Provisions for outstanding claims reported but not settled 1,668 2,523,104 Provisions for outstanding claims incurred but not reported 497,314 493 Provisions for outstanding claims - retrocessioner s share 1,306,483 (2,492,368) 1,805,465 31,229 Decrease in risk equalisation reserves (1,813,753) (189) (1,813,753) (189) TOTAL (8,288) 31,040 In 2015 there was a significant decrease in provisions for outstanding claims reported but not settled, as well as provisions for outstanding claims - retrocessioner s share due to floods occurred in the area of Serbia and Bosnia and Herzegovina during May 2014, which were included in the provisions for outstanding claims on 31 December 2014. Increase in incurred but not reported provisions for outstanding claims is a direct consequence of the change in the calculation method of these provisions. From 31 December 2015 these provisions are calculated on a gross basis, according to the Decision on Technical Reserves by NBS. 9. INVESTMENT EXPENSE Expenses on investment in insurance assets include: Foreign exchange losses from transactions with related parties 3,839 17,456 Foreign exchange rate losses 6,646 118 Foreign currency clause expenses 15 - Impairment losses for bonds - 193 Impairment of receivables for matured coupons - 300 Other expenses from investment activities 12,106 11,242 Total 22,606 29,309-15 -