ojsc ic allianz consolidated financial statements for the ...group... · allianz notes to the...

OJSC IC Allianz

Consolidated Financial Statements

for the year ended 31 December 2014

Contents

Statement of management’s responsibilities for the preparation and approval of the consolidated financial statements for the year ended 31 December 2014 ............................................................................................ 3

Auditors’ Report .......................................................................................................................................... 4-5 Consolidated Statement of Financial Position.................................................................................................. 6 Consolidated Statement of Profit or Loss and Other Comprehensive Income ................................................. 7 Consolidated Statement of Cash Flows ............................................................................................................ 8 Consolidated Statement of Changes in Equity ................................................................................................. 9

Notes to the Consolidated Financial Statements

1. Background........................................................................................................................................... 102. Basis of Preparation .............................................................................................................................. 103. Significant Accounting Policies ........................................................................................................... 114. Cash and Cash Equivalents ................................................................................................................... 185. Deposits with Banks ............................................................................................................................. 196. Available-for-Sale Financial Instruments ............................................................................................. 197. Receivables ........................................................................................................................................... 208. Prepayments ......................................................................................................................................... 219. Goodwill ............................................................................................................................................... 2110. Property, Equipment, Intangible Assets and Investment Property ....................................................... 2211. Provision for Unearned Premiums ........................................................................................................ 2312. Loss Provision ...................................................................................................................................... 2313. Claims Development Analysis ............................................................................................................. 2514. Payables ................................................................................................................................................ 2615. Other liabilities ..................................................................................................................................... 2616. Income and Expenses Analysis by Type of Business ........................................................................... 2717. Analysis of Premiums and Claims ........................................................................................................ 2918. Interest income ..................................................................................................................................... 2919. Share Capital and Additional paid-in Capital ....................................................................................... 3020. Acquisition Costs .................................................................................................................................. 3021. Operating Expenses .............................................................................................................................. 3122. Other Commission Income ................................................................................................................... 3223. Disposal of subsidiary .......................................................................................................................... 3224. Other expenses ...................................................................................................................................... 3225. Income Tax ........................................................................................................................................... 3226. Risk Management and Internal Controls .............................................................................................. 3427. Capital Management ............................................................................................................................. 4428. Contingencies and Commitments ......................................................................................................... 4429. Fair Value of Financial Instruments ..................................................................................................... 4530. Related Party Transactions ................................................................................................................... 4731. Principal Subsidiaries and Associates................................................................................................... 48

Allianz Notes to the Consolidated Financial Statements for the Year Ended 31 December 2014 (in thousands of Russian Roubles)

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1. Background

Organization and operations

These consolidated financial statements include the financial statements of OJSC IC Allianz (the Company) and its subsidiaries. The Company and its subsidiaries together are referred to as the Group.

The Open Joint-Stock Company Insurance Company “Allianz” was registered in the Russian Federation in 1992. In December 2011 the Company changed its name to OJSC IC “Allianz” from OJSC IC “Rosno”. The principal activity of Allianz and its subsidiaries is the provision of insurance. The Group operates under insurance and reinsurance license №0290 dated 10 November 2014 issued by the Central Bank of the Russian Federation.

In accordance with the new strategy adopted in 2014, the Group stopped writing retail insurance business, such as auto-transport and other private property and liability insurance, and focused on corporate insurance business, such as medical, property and casualty insurance and reinsurance. The insurance license in obligatory motor third party liability insurance was restricted.

Insurance business written by the Group includes medical, property, casualty, life, personal insurance and reinsurance. The Group has also contracted with the Government Fund for Obligatory Medical Insurance (GFOMI), which carries out an obligatory medical insurance program to provide Russian Federation citizens with free of charge medical services via certain appointed insurers, including the Group. The Group has contracted with GFOMI to administer a portion of this program and receives commissions for providing this service.

On 2 April 2012 OJSC IC “Allianz” legally merged with CJSC “SAC Allianz”, OJCS IC “Progress Garant”, CJSC “Riscon” and CJSC IS “Progress”. As of that date the merged entity operates as OJSC IC “Allianz”.

As at 31 December 2014 the Company has 75 branches (2013: 89 branches) within the Russian Federation and its subsidiaries have 125 branches (2013: 126 branches).

The Company is registered at the following address: Russia, 115184, Moscow, Ozerkovskaya Naberezhnaya, 30.

As at 31 December 2014 and 2013 the Company is 100% ultimately owned and controlled by Allianz SE, a worldwide insurance company, which has publicly available financial statements. A list of principal consolidated subsidiaries and associates is disclosed in note 31.

Business environment

The Group’s operations are located primarily in the Russian Federation. Consequently, the Group is exposed to the economic and financial markets of the Russian Federation which display characteristics of an emerging market. The legal, tax and regulatory frameworks continue development, but are subject to varying interpretations and frequent changes which together with other legal and fiscal impediments contribute to the challenges faced by entities operating in the Russian Federation.

The recent conflict in Ukraine and related events has increased the perceived risks of doing business in the Russian Federation. The imposition of economic sanctions on Russian individuals and legal entities by the European Union, the United States of America, Japan, Canada, Australia and others, as well as retaliatory sanctions imposed by the Russian government, has resulted in increased economic uncertainty including more volatile equity markets, a depreciation of the Russian Rouble, a reduction in both local and foreign direct investment inflows and a significant tightening in the availability of credit. In particular, some Russian entities, including banks, may be experiencing difficulties in accessing international equity and debt markets and may become increasingly dependent on Russian state banks to finance their operations. The longer term effects of recently implemented sanctions, as well as the threat of additional future sanctions, are difficult to determine. Management of the Group believes that it takes all the necessary efforts to support the economic stability of the Group in the current environment.

The consolidated financial statements reflect management’s assessment of the impact of the Russian business environment on the operations and the financial position of the Group. The future business environment may differ from management’s assessment.

2. Basis of Preparation

Basis of Preparation. These consolidated financial statements are prepared in accordance with International Financial Reporting Standards (IFRS).

The Group maintains its accounting records in accordance with Russian insurance and accounting regulations. These consolidated financial statements have been prepared from those accounting records and adjusted as necessary in order to be in accordance with IFRS. These adjustments include certain reclassifications to reflect the economic substance of underlying transactions including reclassifications of certain assets and liabilities, income and expenses to appropriate financial statements captions.


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Basis of measurement. These consolidated financial statements are prepared on the historical cost basis except that available-for-sale financial instruments are stated at fair value.

Presentation currency. These consolidated financial statements are presented in Russian Roubles (RUB). Financial information presented in RUB is rounded to the nearest thousand.

Use of estimates. Management makes a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with IFRS. Actual results could differ from these estimates. In particular, information about significant areas of estimation uncertainty and critical judgments in applying accounting policies are described in the following notes:

impairment allowance for insurance and reinsurance receivables estimate - note 7

loss provision estimate - note 12

tax loss carry forward recoverability - note 25.

3. Significant Accounting Policies

The accounting policies set out below are applied consistently to all periods presented in these consolidated financial statements, and are applied consistently by Group’s entities.

Subsidiaries. Subsidiaries are investees controlled by the Group. The Group controls an investee when it is exposed to, or has rights to, variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. In particular the Group consolidates investees that it controls on the basis of de facto circumstances. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.

The acquisition method of accounting is used to account for the acquisition of subsidiaries. The assets and liabilities and contingent liabilities of a subsidiary are measured at their fair values at the date of acquisition, plus costs directly attributable to the acquisition. The Group measures goodwill as the fair value of the consideration transferred (including the fair value of any previously-held equity interest in the acquiree) and the recognized amount of any non-controlling interest in the acquiree, less the net recognized amount (generally fair value) of the identifiable assets acquired and liabilities assumed, all measured as at the acquisition date. When the excess is negative, a bargain purchase gain is recognized immediately in profit or loss. Intercompany transactions, balances and unrealized gains on transactions between Group companies are eliminated; unrealized losses are also eliminated unless cost cannot be recovered. Where necessary, accounting policies of subsidiaries are changed to ensure consistency with the policies adopted by the Group.

Non-controlling interests is that part of the net results and of the net assets of a subsidiary attributable to interests which are not owned, directly or indirectly, by the Group. Non-controlling interests are recorded within equity.

In translating the financial statements of a foreign operation into the Group’s presentation currency for incorporation in the consolidated financial statements, the Group applies IAS 21 The Effects of Changes in Foreign Exchange Rates as follows:

assets and liabilities, both monetary and non-monetary, of the foreign operation are translated into the Group’spresentation currency at the closing exchange rate of the Central Bank of Russian Federation;

income and expense items of the foreign operation are translated into the Group’s presentation currency atexchange rates of the Central Bank of Russian Federation at the approximate dates of the transactions;

all resulting exchange differences are classified within equity as foreign exchange translation reserve until thedisposal of the investment;

on disposal of the investment in the foreign operation, the foreign exchange translation reserve is transferred toprofit or loss.

Associates. Associates (note 31) are entities over which the Group has between 20% and 50% of the voting rights, or over which the Group has an ability to exercise significant influence, but which it does not control. Investments in associates are accounted for using the equity method of accounting. Under this method, the Group’s share of the post-acquisition profits or losses of associates is recognized in profit or loss, and its share of the post-acquisition other comprehensive income is recorded in other comprehensive income. The cumulative post-acquisition movements are adjusted against the cost of the investment. Unrealized gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates; unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.

When the Group’s share of losses in an associate equals or exceeds its interest in the associate, the Group does not recognize further losses unless the Group has incurred obligations or made payments on behalf of the associate. Where necessary, accounting policies used by associates have been changed to ensure consistency with the policies adopted by the Group.


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Goodwill. Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the identifiable assets, liabilities and contingent liabilities of the acquired subsidiary or associate at the date of acquisition.

After control of an entity is obtained, changes in the parent’s ownership interest that do not result in a loss of control are accounted for as equity transactions. Profit or loss is not recognized as a result of such transactions, and carrying amount of goodwill does not change.

At each reporting date the Group estimates the recoverable amount of goodwill. A write down is made if the carrying amount exceeds the recoverable amount.

On acquisition, fair values of the acquiree’s identifiable assets, liabilities and contingent liabilities are determined provisionally. Adjustments to those provisional values are recognized within twelve months of the acquisition date.

Merger of entities or businesses under common control. A merger of entities or businesses under common control is a merger in which all of the combining entities or businesses ultimately are controlled by the same party or parties both before and after the combination, and that control is not transitory. Assets and liabilities of the merger of businesses under common control are recognized in the consolidated financial statements as of the date of the merger using book value (carry-over basis) accounting. Comparative financial information is not restated.

Recognition of financial instruments. Regular way purchases and sales of financial assets and liabilities are recognized using trade date accounting.

Management determines the appropriate classification of financial instruments upon initial recognition. Financial assets and liabilities are initially recognized at fair value plus, in the case of a financial asset or financial liability not at fair value through profit or loss, transaction costs that are directly attributable to acquisition or issue of the financial asset or financial liability. The accounting policies for subsequent measurement of these items are set out below.

Cash and cash equivalents. Cash and cash equivalents are items, which can be converted into cash within one business day and includes cash on hand and in banks and has no restrictions on its availability. All short-term bank placements are included in deposits with banks.

Deposits with banks, promissory notes and originated loans. Deposits with banks, promissory notes and originated loans are loans originated by the Group by providing money directly to the counterparties. All deposits with banks, promissory notes and originated loans are recorded when cash is advanced to counterparties. Initially they are recorded at fair value, and subsequently are measured at amortized cost, using the effective interest method, less allowance for impairment.

Interest income on deposits with banks, promissory notes and originated loans is recognized in profit or loss as interest income using the effective interest rate method.

Financial assets and liabilities at fair value through profit or loss. Financial assets and liabilities at fair value through profit or loss represent securities acquired principally for the purpose of selling them in the near term, or are a part of portfolio of identified financial instruments that are managed together and for which there is evidence of a recent and actual pattern of short-term profit taking or securities that upon initial recognition are designated by the Group at fair value through profit or loss. Financial assets and liabilities at fair value through profit or loss are initially recorded and subsequently measured at fair value. Changes in fair value of financial assets and liabilities at fair value through profit or loss are recognized in profit or loss.

Available-for-sale financial instruments. This classification includes non-derivative financial assets that are designated as available-for-sale or are not classified as loans and receivables, held-to-maturity investments or financial instruments at fair value through profit or loss which management intends to hold for an indefinite period of time, that may be sold in response to needs for liquidity or changes in interest rates, exchange rates or market quotes.

Available-for-sale financial instruments are initially recorded and subsequently measured at fair value. Unrealized gains and losses arising subsequent to initial recognition are recognized as other comprehensive income (except for impairment losses and foreign exchange gains and losses) until the asset is derecognized at which time the cumulative gain or loss previously recognized in other comprehensive income is recognized in profit or loss. Coupon and interest earned on available-for-sale financial instruments are recognized in profit or loss within interest income using the effective interest rate method. Dividends received are reflected in profit or loss within other investment income.

Derecognition of financial instruments. A financial asset is derecognized when the contractual rights to the cash flows from the financial asset expire or when the Group transfers substantially all of the risks and rewards of ownership of the financial asset. Any rights or obligations created or retained in the transfer are recognized separately as assets or liabilities. The Group derecognizes a financial liability when its contractual obligations are discharged or cancelled or expire.

Receivables and prepayments. Receivables are accounted for on the accrual basis. Receivables consist of outstanding direct premiums due from policyholders, outstanding assumed premiums due from ceding companies, receivables due from claims ceded and other receivables, carried at cost less allowance for impairment.


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Prepayments are recorded on the payment date and are charged to profit or loss when the services are provided. Prepayments include prepayments made under obligatory and voluntary medical insurance programs and other prepayments.

Offsetting. Financial assets and liabilities are offset and the net amount reported in the consolidated statement of financial position only when there is a legally enforceable right to offset the recognized amounts, and there is an intention to either settle on a net basis, or to realize the asset and settle the liability simultaneously.

Fair value measurement principles. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal, or in its absence, the most advantageous market to which the Group has access at that date. The fair value of a liability reflects its non-performance risk.

When available, the Group measures the fair value of an instrument using quoted prices in an active market for that instrument. A market is regarded as active if transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis.

When there is no quoted price in an active market, the Group uses valuation techniques that maximise the use of relevant observable inputs and minimise the use of unobservable inputs. The chosen valuation technique incorporates all the factors that market participants would take into account in these circumstances.

The best evidence of the fair value of a financial instrument at initial recognition is normally the transaction price, i.e., the fair value of the consideration given or received. If the Group determines that the fair value at initial recognition differs from the transaction price and the fair value is evidenced neither by a quoted price in an active market for an identical asset or liability nor based on a valuation technique that uses only data from observable markets, the financial instrument is initially measured at fair value, adjusted to defer the difference between the fair value at initial recognition and the transaction price. Subsequently, that difference is recognised in profit or loss on an appropriate basis over the life of the instrument, but no later than when the valuation is supported wholly by observable market data or the transaction is closed out.

Impairment

Available-for-sale financial instruments. An available-for-sale debt security is impaired if there is objective evidence that a loss event has occurred, which has impaired the expected cash flows, i.e. all amounts due according to the contractual terms of the security are not considered collectible. Typically this is due to deterioration in the creditworthiness of the issuer. A decline in fair value below amortized cost due to changes in risk free interest rates does not by itself represent objective evidence of a loss event.

If there is objective evidence that the cost may not be recovered, an available-for-sale equity security is considered to be impaired. Objective evidence that the cost may not be recovered, in addition to qualitative impairment criteria, includes a significant or prolonged decline in the fair value below cost. The Group’s policy considers decline to be significant when the fair value is below the weighted average cost by more than 20% or when the fair value is below the weighted average cost for more than nine months.

If an available-for-sale equity security is impaired based upon the qualitative or quantitative impairment criteria, any further declines in the fair value at subsequent reporting dates are recognized as impairment. Therefore, at each reporting period, for an equity security that is determined to be impaired based upon the impairment criteria, an impairment is recognized for the difference between the fair value and the original cost basis, less any previously recognized impairment.

If, in a subsequent period, the fair value of an impaired available-for-sale debt security increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in profit or loss, the impairment loss is reversed, with the amount of the reversal recognized in profit or loss. However, any subsequent recovery in the fair value of an impaired available-for-sale equity security is recognized in other comprehensive income.

Financial assets carried at amortized cost. Financial assets carried at amortized cost consist principally of promissory notes and originated loans (“loans”).The Group reviews its loans, to assess impairment on a regular basis. A loan is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the loan and that event (or events) has had an impact on the estimated future cash flows of the loan that can be reliably estimated.

The Group first assesses whether objective evidence of impairment exists individually for loans that are individually significant, and individually or collectively for loans that are not individually significant. If the Group determines that no objective evidence of impairment exists for an individually assessed loan, it includes the loan in a group of loans with similar credit risk characteristics and collectively assesses them for impairment. Loans that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment of impairment.


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If there is objective evidence that an impairment loss on a loan has been incurred, the amount of the loss is measured as the difference between the carrying amount of the loan and the present value of estimated future cash flows including amounts recoverable from guarantees and collateral discounted at the loan’s original effective interest rate. Contractual cash flows and historical loss experience adjusted on the basis of relevant observable data that reflect current economic conditions provide the basis for estimating expected cash flows.

In some cases the observable data required to estimate the amount of an impairment loss on a loan may be limited or no longer fully relevant to current circumstances. This may be the case when a borrower is in financial difficulties and there is little available historical data relating to similar borrowers. In such cases, the Group uses its experience and judgment to estimate the amount of any impairment loss.

All impairment losses in respect of loans are recognized in profit or loss and are only reversed if a subsequent increase in recoverable amount can be related objectively to an event occurring after the impairment loss was recognized.

Financial assets carried at cost. Financial assets carried at cost include receivables and prepayments. If there is objective evidence of impairment, the impairment loss is calculated as the difference between the carrying amount and the present value of the estimated future cash flows discounted at the current market rate of return for a similar financial asset. All impairment losses in respect of these assets are recognized in profit or loss.

Non-financial assets. Other non-financial assets, except for deferred taxes, are assessed at each reporting date for any indications of impairment. The recoverable amount of non-financial assets is the greater of their fair value less costs to sell and their value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the cash-generating unit to which the asset belongs. An impairment loss is recognized when the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount.

All impairment losses in respect of non-financial assets are recognized in profit or loss and reversed only if there has been a change in the estimates used to determine the recoverable amount. Any impairment loss reversed is only reversed to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized.

Accrued interest income and expenses. Accrued interest income and expenses, including both accrued coupon and amortized discount, are included in the carrying values of the related asset and liability in the consolidated statement of financial position.

Property and equipment. Property and equipment are stated at cost, restated to the equivalent purchasing power of the Russian Rouble as at 31 December 2002 for assets acquired prior to 1 January 2003, less accumulated depreciation and allowance for impairment, where required.

Construction in progress is carried at cost. Upon completion, assets are transferred to property, plant and equipment at their carrying amount. Construction in progress is not depreciated until the asset is available for use.

Result on disposal of property and equipment is determined by reference to carrying amount and is recognized as profit or loss for the reporting period. Repairs and maintenance are recognized as expense in the period in which they are incurred.

Depreciation. Depreciation is applied on a straight-line basis over the estimated useful lives of the assets using the following rates:

2014 2013

Premises 2.5% per annum 2.5% per annum

Office equipment 20% per annum 20% per annum

Computer equipment 33% per annum 33% per annum

Intangible assets. Intangible assets represent software licenses obtained by the Group and computer software development costs. Costs associated with maintaining computer software are recorded as an expense as incurred. Costs that are directly associated with identifiable and unique software products controlled by the Group and that will probably generate economic benefits exceeding costs beyond one year, are recognized as intangible assets.

Expenditure, which enhances or extends the performance of computer software beyond their original specifications is recorded as a capital improvement and added to the original cost of the software. Computer software development costs recorded as assets are amortized using the straight-line method over their useful lives, not exceeding a period of 5 years.


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At each reporting date the Group assesses whether there is any indication of impairment of intangible assets. If any such indication exists, the Group estimates the recoverable amount, which is determined as the higher of an asset’s net selling price or its value in use. Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down to its recoverable amount and the difference is charged to profit or loss. An impairment loss recognized for an asset in prior periods is reversed if there has been a change in the estimates used to determine the assets recoverable amount.

Investment property. Investment property is property held by the Group to earn rental income and for capital appreciation rather than for use in the supply of services or for administrative purposes in the ordinary course of business. Investment property is measured at cost (which includes transaction costs).

Earned rental income is recorded in profit or loss within other investment income. Direct operating expenses (including repairs and maintenance) arising from investment property are recorded as incurred within investment operating expenses in profit or loss.

Borrowings. Borrowings are financial liabilities of the Group, where the contractual arrangement results in an obligation either to deliver cash or another financial asset to the creditor, or to otherwise settle an obligation. After initial recognition, borrowings are subsequently measured at amortized cost using the effective interest method. Gains and losses are recognized in profit or loss when borrowings are derecognized as well as through the amortization process.

Share capital. Contributions to share capital, made before 1 January 2003 are recognized at their cost restated for inflation. Contributions to share capital made after 1 January 2003 are recognized at cost.

Treasury shares. Where the Company or its subsidiaries purchase the Company’s equity share capital, the consideration paid including any attributable incremental external costs net of income taxes is deducted from total equity as treasury shares until they are cancelled or disposed of. Where such shares are subsequently disposed or reissued, any consideration received is included in equity.

Share premium. Share premium represents the excess of consideration over the nominal value of the shares issued.

Classification of insurance contracts. Contracts under which the Group accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder or other beneficiary if a specified uncertain future event (the insured event) adversely affects the policyholder or other beneficiary are classified as insurance contracts. Insurance risk is a risk other than financial.

Financial risk is the risk of a possible future change in one or more of a specified interest rate, security price, commodity price, foreign exchange rate, index of prices or rates, a credit rating or credit index or other variable, provided in the case of a non-financial variable that the variable is not specific to a party to the contract. Insurance contracts may also transfer some financial risk. Insurance risk is significant if, and only if, an insured event could cause the Group to pay significant claims. Once a contract is classified as an insurance contract, it remains classified as an insurance contract until all rights and obligations are extinguished or expire. Contracts under which the transfer of insurance risk to the Group from the policyholder is not significant are classified as financial instruments.

Non-life insurance operations

Premiums written. Upon inception of a contract, premiums are recognized when written and are earned primarily on a pro-rata basis over the term of the related policy coverage. Premiums are disclosed gross of commission payable to intermediaries and taxes and levies based on premiums. Premiums written include adjustments to estimates of premiums written in previous years. The earned portion of premiums written is recognized as revenue. Premiums are earned from the date of attachment of risk, over the indemnity period, based on the pattern of risks underwritten. Outward reinsurance premiums are recognized as an expense in accordance with the pattern of reinsurance service provided. The portion of outward reinsurance premiums not recognized as an expense is treated as a prepayment.

Provision for unearned premiums. Provision for unearned premiums represents the proportion of premiums written in the period that relates to unexpired terms of policies in force at the reporting date, calculated on a time apportionment basis.

Claims paid. Claims paid including claims handling expenses are charged to profit or loss as incurred.

Loss provision. Loss provision represents outstanding claims provision (OCP), provision for losses incurred but not yet reported (IBNR) and estimates of claims handling expenses (loss adjustment expenses reserve). OCP is provided in respect of claims reported, but not settled as at the reporting date. The estimation is made on the basis of information received by the Group during investigation of insurance cases after the reporting date less regresses. IBNR is actuarially determined by the Group by line of business, and includes assumptions based on prior years’ claims. The methods of determining such estimates and establishing the resulting provisions are continually reviewed and updated. Resulting adjustments are recognized as profit or loss as they arise. The loss provision is estimated on an undiscounted basis due to the relatively quick pattern of claims notification and payment.


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Liability adequacy test. At each reporting date, liability adequacy tests are performed to ensure the adequacy of the insurance contract provisions net of deferred acquisition costs (DAC). In performing this test, current best estimates of future contractual cash flows and claims handling and administration expenses are used. When unearned premiums are insufficient to meet claims and expenses, which may be incurred after the reporting date the additional liability – unexpired risk reserve (URR) is recognized. To estimate the URR the Group uses historical experience and forward looking assumptions of ultimate loss ratios (including claims handling expenses) and the level of in-force portfolio maintenance expenses. URR is provided for unexpired risks arising from general insurance contracts where the expected value of claims and expenses attributable to the unexpired periods of contracts in force at the reporting date exceeds the provision for unearned premiums in relation to such contracts after the deduction of any deferred acquisition costs. URR is calculated by reference to individual line of business which are managed together.

The expected claims are calculated with regard to events that have occurred prior to the reporting date. Any changes in URR are immediately charged to profit or loss initially by writing off DAC and by subsequent establishing a provision for losses arising from liability adequacy tests.

Life insurance operations

Premiums written. Premiums from traditional life insurance are recognized as revenue when due from the policyholder. Certain universal life contracts contain a discretionary participation feature (DPF) that entitles the policyholders to a minimum guaranteed interest rate per annum (from 2.5 to 4% p.a. depending on product type) or, when higher, a bonus rate declared by the Group from the DPF eligible surplus available (i.e. all interest and realized gains and losses arising from the assets backing these contracts). Any portion of the DPF eligible surplus that is not declared as a bonus rate and/or interest rate to individual contract holders is retained as a liability for the benefit of all policyholders until declared and credited to them individually in future periods. Discretionary participation features are included within the future policies benefits reserve.

Claims paid. Claims paid including claims handling expenses are recognized in profit or loss as incurred.

Future policies benefits reserve. The future polices benefits reserve is actuarially determined. The reserve is calculated using the net premiums method on a policy-by-policy basis. The assumptions underlying the future polices benefits reserve are based on the combination of historical experience, the best estimates of the future evolution of the main valuation parameters and provision for adverse deviation (PAD). The key valuation assumptions are as follows: discount rate or actual investment return (in terms of USD) – 5% (2013: 5%); premium collection expense – 1.7% of premium (2013: 1.7%); maintenance expenses – USD 10 p.a. (2013: USD 10 p.a.) per policy.

Reinsurance. The Group assumes and cedes reinsurance in the normal course of business. Ceded reinsurance contracts do not relieve the Group from its obligations to policyholders. Reinsurance assets include balances due from reinsurance companies for paid claims, including claims handling expenses, and premiums ceded to the Group. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. Reinsurance payables are obligations of the Group for the transfer of reinsurance premiums to reinsurers and of the Group’s share in claims in respect of insurance cases reinsured by the Group. Reinsurance receivables and payables are offset where the legal right for such offset exists.

Deferred acquisition costs. Acquisition costs, representing commissions, salaries and certain other underwriting expenses, which vary with and are incurred in connection with the acquisition or renewal of insurance policies, are deferred and amortized over the period in which the related written premiums are earned. Deferred acquisition costs are calculated separately for each line of business and are reviewed by line of business at the time of the policy issue and at the end of each reporting period to ensure they are recoverable based on future estimates.

Payables. All payables are accounted for on the accruals basis.

Obligatory medical insurance. The Government Fund for Obligatory Medical Insurance (FOMI) carries out an obligatory medical insurance program to provide Russian Federation citizens with free of charge medical services via certain appointed insurers, including the Group, which has contracted with FOMI to administer a portion of this program.

The Group receives advances from FOMI and makes payments to medical centers for services provided by these centers under the FOMI program. Funds received from FOMI by the Group, which are not paid out for medical services are retained within the Group, and treated as a liability for future medical expenses. The Group does not assume any insurance risk under this program.

The Group receives a commission for performing this service. These commissions are recognized in profit or loss within other activity result.


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Taxation. Current taxation is provided for in accordance with Russian legislation currently in force. Income tax comprises current tax and changes in deferred tax. Income tax is recognized in profit or loss except to the extent that it relates to items of other comprehensive income or transactions with shareholders recognized directly in equity, in which case it is recognized within other comprehensive income or directly within equity. Current tax is calculated on the basis of the taxable profit for the period, using the tax rates enacted during the reporting period. Taxes, other than on income, are recorded within operating expenses.

Deferred income tax is provided, using the balance sheet method, for all temporary differences arising between the tax basis of assets and liabilities and their carrying values for financial reporting purposes. Deferred tax assets and liabilities are measured at tax rates that are expected to apply to the period when the asset is realized or the liability is settled, based on tax rates that have been enacted or substantively enacted as at the reporting date. Deferred tax assets and liabilities are netted only within the individual companies of the Group, subject to any legal or regulatory restrictions to such offsetting. A deferred tax asset is recognized only to the extent that it is probable that future taxable profits will be available against which the temporary differences, unused tax losses and credits can be utilized. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realized.

Interest income and expenses, other income and expense recognition. Interest income and expense are recorded in profit or loss for all interest bearing instruments on an accrual basis using the effective interest method. The effective interest method is a method of calculating the amortized cost of a financial asset or liability and of allocating the interest income or expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or liability.

When calculating the effective interest rate, the Group estimates cash flows considering all contractual terms of the financial instrument but does not consider future credit losses. The calculation includes all fees paid or received between the parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts.

Other income is recognized in profit or loss when the related transactions are completed. Operating and other expenses are generally recorded on an accrual basis when the product is received or the service is provided. Portfolio and other management advisory and service fees are recorded based on the applicable service contracts.

Commission income. The Group receives commissions for ceding premiums to reinsurers. This type of commission is recognized in profit or loss within the insurance activity section. Commission income from ceded reinsurance transactions that represent the recovery of acquisition costs reduces the applicable unamortized acquisition costs in such a manner that net acquisition costs are capitalized and charged to expenses in proportion to net revenue recognized. Amortization of deferred commission income on reinsurance outwards is in profit or loss within net acquisition costs.

The Group also provides customers with non-insurance related services, on which the Group does not assume insurance risk and earns commissions. These commissions are included in profit or loss within other activity result.

Asset management fees related to investment funds are recorded in profit or loss proportionally over the period the service is provided.

Functional currency. Functional currency for each Group entity is determined as the currency of the primary economic environment in which the entity operates. The Russian Rouble (RUB) is selected as the functional currency for the Company and other Group entities domiciled in the Russian Federation. For Group entities domiciled outside the Russian Federation the currencies of the respective countries in which these entities are domiciled are selected as their functional currencies.

Foreign currency translation. Transactions in foreign currencies are translated to the functional currency of the relevant Group entity at the exchange rate at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated to the functional currency at the exchange rate at that date. The foreign currency gain or loss on monetary assets or liabilities is the difference between amortized cost in the functional currency at the beginning of the period, adjusted for interest accrued using the effective interest rate and payments during the period, and the amortized cost in foreign currency translated at the exchange rate at the end of the period. Non-monetary assets and liabilities denominated in foreign currencies, which are stated at historical cost, are translated to the functional currency at the exchange rate at the date of the transaction

. Foreign exchange differences arising on retranslation are recognized in profit or loss, except for differences arising on the retranslation of available-for-sale equity instruments unless the difference is due to impairment in which case foreign currency differences that have been recognized in other comprehensive income are reclassified to profit or loss.

Operating leases. Where the Group is the lessee, the total lease payments, including those on expected termination, are charged by the Group to the profit or loss on a straight-line basis over the period of the lease.


18

Provisions. Provisions are recorded when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made.

Staff costs and related contributions. The Group contributions to the Russian Federation state pension and social insurance funds in respect of its employees are expensed as incurred and included into operating expenses and acquisition costs.

Restructuring. A provision for restructuring is recognized when the Group has approved a detailed and formal restructuring plan, and the restructuring either has commenced or has been announced publicly. Future operating costs are not provided for.

New standards and interpretations that are effective from the current reporting period. The Group has adopted amendments to IAS 32 Financial Instruments: Disclosure and Presentation - Offsetting Financial Assets and Financial Liabilities that do not introduce new rules for offsetting financial assets and liabilities; rather they clarify the offsetting criteria to address inconsistencies in their application. The Amendments specify that an entity currently has a legally enforceable right to set-off if that right is not contingent on a future event; and enforceable both in the normal course of business and in the event of default, insolvency or bankruptcy of the entity and all counterparties.

New standards and interpretations that will come into effect in the next reporting periods. The following new standards, amendments to standards and interpretations are not yet effective as at 31 December 2014, and are not applied in preparing these consolidated financial statements. The Group plans to adopt these pronouncements when they become effective.

IFRS 9 Financial Instruments is to be issued in phases and is intended ultimately to replace International Financial Reporting Standard IAS 39 Financial Instruments: Recognition and Measurement. The first phase of IFRS 9 was issued in November 2009 and relates to the classification and measurement of financial assets. The second phase regarding the classification and measurement of financial liabilities was published in October 2010. The third phase of IFRS 9 was issued in November 2013 and relates to general hedge accounting. The standard was finalized and published in July 2014. The final phase relates to a new expected credit loss model for calculating impairment. The Group recognises that the new standard introduces many changes to accounting for financial instruments and is likely to have a significant impact on the consolidated financial statements. The Group has not analysed the impact of these changes yet. The Group does not intend to adopt this standard early. The standard will be effective for annual periods beginning on or after 1 January 2018 and will be applied retrospectively with some exemptions.

Various Improvements to IFRS are dealt with on a standard-by-standard basis. All amendments, which result in accounting changes for presentation, recognition or measurement purposes, will come into effect not earlier than 1 January 2015. The Group has not yet analysed the likely impact of the improvements on its consolidated financial position or performance.

4. Cash and Cash Equivalents

2014 2013

Cash on hand 3 508 16 580

Correspondent accounts with banks

- Russian Rouble denominated accounts held under FOMI program (note 8) 2 468 038 56 168

- Russian Rouble denominated accounts other than held under FOMI program 1 046 028 505 714

- Foreign currencies denominated accounts 638 782 242 986

Total cash and cash equivalents 4 156 356 821 448

The concentration of cash and cash equivalents in 3 Russian banks constitutes 96% and 77% of total cash and cash equivalents as at 31 December 2014 and 2013 respectively.


19

5. Deposits with Banks

2014 2013

Russian Rouble denominated

- Less than 30 days maturity 3 562 667 2 793 409

- More than 30 days maturity 1 732 588 3 169 424

Foreign currencies denominated

- Less than 30 days maturity 145 068 116 877

- More than 30 days maturity 290 116 526 253

Total deposits with banks 5 730 439 6 605 963

As at 31 December 2014 the largest five deposits with banks are balances with Russian banks totaling RUB 4 376 516 thousand or 76% of total deposits with banks. As at 31 December 2013 the largest five deposits with banks are balances with Russian banks totaling RUB 4 738 804 thousand or 72% of total deposits with banks.

As at 31 December 2014 and 2013 there are no overdue or impaired balances related to deposits with banks.

The average effective interest rates on deposits with banks as at 31 December 2014 are 17% p.a. (2013: 6% p.a.) on deposits in Russian Rubles, and 13% p.a. (2013: 15% p.a.) on deposits in Ukranian Hryvna. There were no deposits in Euro as at 31 December 2014 (2013: effective interest rate was equal to 2% p.a.).

All deposits with banks have fixed interest rates.

6. Available-for-Sale Financial Instruments

2014 2013

Russian Rouble denominated

- Corporate bonds 4 100 511 5 376 148

- Government bonds 1 499 237 3 628 468

- Municipal bonds 1 040 658 2 177 441

- Mutual investment funds 245 914 630 778

- Other 3 389 190 756

US dollar denominated

- Russian Corporate and Government Eurobonds 488 543 333 770

Euro denominated

- Russian Corporate and Government Eurobonds 286 183 323 772

Ukrainian Hryvna denominated

- Government bonds 36 41 609

Total available-for-sale financial instruments 7 664 471 12 702 742

In 2014 the Group recognized an impairment loss of RUB 121 889 thousand in respect of mutual investment funds, an impairment loss of RUB 184 057 thousand in respect of investments in non-state pension fund and an impairment loss of RUB 2 691 thousand in respect of other investments. In 2013 the Group recognized an impairment loss of RUB 37 333 thousand in respect of mutual investment funds and other investments.

As at 31 December 2014 Russian Rouble denominated corporate bonds have maturity dates ranging from 2015 to 2020 (2013: from 2014 to 2018), coupon rates of 7-10% p.a. (2013: 7-14% p.a.) and an average effective yield to maturity of 15% p.a. (2013: 8% p.a.), depending on the type of bond issue.

As at 31 December 2014 Russian Rouble denominated government bonds have maturity dates ranging from 2015 to 2036 (2013: from 2014 to 2036), coupon rates of 6-8% p.a. (2013: 6-12% p.a.) and an average effective yield to maturity of approximately 14% p.a. (2013: 7% p.a.), depending on the type of bond issue.


20

As at 31 December 2014 Russian Rouble denominated municipal bonds have maturity dates ranging from 2015 to 2021 (2013: from 2014 to 2020), coupon rates of 6-12% p.a. (2013: 6-15% p.a.) and an average effective yield to maturity of 13% p.a. (2013: 8% p.a.), depending on the type of bond issue.

As at 31 December 2014 US dollar denominated eurobonds are bonds issued by the Russian government and Russian companies that have maturity dates ranging from 2017 to 2034 (2013: from 2014 to 2030), coupon rates of 7-9% p.a. (2013: 3-9% p.a.) and an average effective yield to maturity of 8% p.a. (2013: 4.7% p.a.) depending on the type of bond issue. As at 31 December 2014 Euro denominated eurobonds are bonds issued by the Russian government and Russian companies that have maturity dates ranging from 2018 to 2023 (2013: from 2016 to 2023), coupon rates of 3-7% p.a. (2013: 3-6,6% p.a.) and an average effective yield to maturity of 8% p.a. (2013: 3% p.a.) depending on the type of bond issue. As at 31 December 2014 and 2013 there are no overdue available-for-sale financial instruments. All interest-bearing available-for-sale financial instruments have fixed interest rates.

7. Receivables

2014 2013

Direct insurance operations 3 165 507 4 262 652 Claims ceded 2 307 214 1 584 656 Premiums assumed 244 286 437 180 Other 924 072 1 185 713 6 641 079 7 470 201 Less: Allowance for impairment (2 152 414) (1 052 858)

Total receivables 4 488 665 6 417 343

Receivables that are past due but not impaired less than one month amount to RUB 43 076 thousand (2013: RUB 76 560 thousand).

Receivables from claims ceded from one reinsurance company of RUB 1 267 764 thousand (2013: RUB 737 541 thousand) are more than two years overdue and are fully provided for.

Receivables that are more than one month overdue of RUB 1 717 908 thousand (2013: RUB 1 776 876 thousand) are allocated an impairment allowance of RUB 884 650 thousand (2013: RUB 315 317 thousand).

Movements in the allowance for impairment of receivables are as follows:

2014 2013

Allowance for impairment of receivables as at 1 January 1 052 858 1 263 520 Charge (recovery) for the year 729 896 (18 622) Effect of foreign currency translation 569 674 53 247 Write-offs (200 014) (245 287)

Allowance for impairment of receivables as at 31 December 2 152 414 1 052 858

Information on related party balances is disclosed in note 30.


21

8. Prepayments

2014 2013

Obligatory medical insurance program 5 202 898 6 810 214 Voluntary medical insurance programs 172 057 148 980 Rent and subscription 2 870 3 722 Other 52 189 45 147

Total prepayments 5 430 014 7 008 063

Obligatory medical insurance program

The Federal Fund for Obligatory Medical Insurance, being an insurer, carries out an obligatory medical insurance program to provide Russian Federation citizens with free of charge medical services via TFOMI. Medical insurance companies, including the Group, contract with TFOMI to administer this program. The Group does not assume any insurance risk under this program.

During 2014 the Group received funds from TFOMI of RUB 153 341 078 thousand (2013: RUB 128 230 574 thousand) and made payments to medical institutions for services provided by these institutions of RUB 157 466 145 thousand (2013: RUB 128 010 633 thousand). Funds received from FOMI by the Group, which are not paid out for medical services are retained within the Group, and treated as a liability for future medical expenses. As at 31 December 2014 Group had liabilities on obligatory medical insurance in total amount of RUB 7 667 834 thousand (2013: RUB 6 864 307 thousand).

The Group also received funds from medical institutions of RUB 9 874 077 thousand (2013: RUB 5 630 043 thousand) as penalties for violation of service quality.

As at 31 December 2014 the Group made prepayments to medical institutions for purchases of medical equipment and for medical services, that are not yet provided, in total amount of RUB 5 202 898 thousand (2013: RUB 6 810 214 thousand). During 2014 the Group received a commission of RUB 2 380 925 thousand (2013: RUB 2 098 899 thousand) for performing these services (note 22).

9. Goodwill

2014 2013

Net book value as at 1 January 230 943 230 943

Disposal of subsidiary (note 23) (17 124) -

Net book value as at 31 December 213 819 230 943

As at 31 December 2014 and 2013 total allowance for impairment of goodwill is RUB 10 724 thousand.


22

10. Property, Equipment, Intangible Assets and Investment Property

Premises Office and computer

equipment Intangible

assets Construction

in progress Total

Cost

Balance as at 1 January 2013 1 711 592 1 206 380 921 354 236 802 4 076 128

Additions 1 413 192 276 84 284 - 277 973

Disposals (1 310) (146 297) (12 638) (236 802) (397 047)

Effect of foreign currency translation - 2 897 606 - 3 503

Balance as at 31 December 2013 1 711 695 1 255 256 993 606 - 3 960 557

Additions 254 77 106 112 623 - 189 983

Reclassification of investment property 80 436 - - - 80 436

Disposals (8 724) (165 511) (65 030) - (239 265)

Disposal of subsidiary (note 23) (1 091) (18 975) (41 564) - (61 630)

Effect of foreign currency translation - (4 279) (1 557) - (5 836)

Balance as at 31 December 2014 1 782 570 1 143 597 998 078 - 3 924 245

Accumulated depreciation

Balance as at 1 January 2013 345 161 972 243 557 356 - 1 874 760

Depreciation and amortization charge 41 689 103 841 141 396 - 286 926

Disposals (1 084) (111 096) (12 638) - (124 818)

Effect of foreign currency translation - 1 459 303 - 1 762

Balance as at 31 December 2013 385 766 966 447 686 417 - 2 038 630

Depreciation and amortization charge 45 811 104 709 150 835 - 301 355

Disposals (3 522) (141 808) (50) - (145 380)

Disposal of subsidiary (note 23) (357) (16 904) (39 704) - (56 965)

Effect of foreign currency translation - (3 297) (592) - (3 889)

Balance as at 31 December 2014 427 698 909 147 796 906 - 2 133 751

Carrying amount

As at 31 December 2013 1 325 929 288 809 307 189 - 1 921 927

As at 31 December 2014 1 354 872 234 450 201 172 - 1 790 494

Investment property

In 2014 the Group reclassified investment property in amount of RUB 80 436 thousand to category for own use.


23

11. Provision for Unearned Premiums

Movements in the provision for unearned premiums in 2014 and 2013 are as follows:

2014 2013

Gross Reinsurer’s

share Net Gross Reinsurer’s

share Net

Provision for unearned premiums as at 1 January 17 816 442 (1 310 178) 16 506 264 12 450 793 (1 239 081) 11 211 712

Change in provision for the year (5 743 006) 62 069 (5 680 937) 5 351 768 (65 284) 5 286 484

Change in provision for unexpired risk 297 301 - 297 301 - - -

Effect of foreign currency translation (34 084) 14 980 (19 104) 13 881 (5 813) 8 068

Provision for unearned premiums as at 31 December 12 336 653 (1 233 129) 11 103 524 17 816 442 (1 310 178) 16 506 264

12. Loss Provision

Analysis of loss provision as at 31 December 2014 and 2013 is as follows:

2014 2013

Outstanding claims

provision and IBNR

Loss adjustment

expense reserve

Future polices

benefits reserve Total

Outstanding claims

provision and IBNR

Loss adjustment

expense reserve

Future polices


Gross loss provision 11 701 384 1 693 779 239 982 13 635 145 7 613 531 826 663 139 551 8 579 745

Reinsurers' share of loss provision (3 420 793) (258 353) - (3 679 146) (1 748 486) (105 395)

- (1 853 881)

Loss provision, net of reinsurance 8 280 591 1 435 426 239 982 9 955 999 5 865 045 721 268 139 551 6 725 864

As at 31 December 2014 the largest three occurred claims reserves ceded to reinsurance excluding parent company and its subsidiaries amounted to RUB 811 194 thousand or 36% of total occurred claims reserves ceded to reinsurance. As at 31 December 2013 the largest three occurred claims reserves ceded to reinsurance excluding parent company and subsidiaries amounted to RUB 177 367 thousand or 15% of total occurred claims reserves ceded to reinsurance.

Movements in the loss provision during 2014 and 2013 are as follows:

2014 2013

Outstanding claims

provision and IBNR

Loss adjustment

expense reserve

Future polices


Outstanding claims

provision and IBNR

Loss adjustment

expense reserve

Future polices


Loss provision, net of reinsurance, as at 1 January 5 865 045 721 268 139 551 6 725 864 3 808 914 330 002 131 254 4 270 170

Change in loss provision, gross 3 463 445 867 115 143 4 330 703 2 418 142 412 448 (1 858) 2 828 732

Change in reinsurer’s share in loss provision (1 248 911) (152 957) - (1 401 868) (393 108) (21 182) - (414 290)

Effect of foreign currency translation 201 012 - 100 288 301 300 31 097 - 10 155 41 252

Loss provision, net of reinsurance, as at 31 December 8 280 591 1 435 426 239 982 9 955 999 5 865 045 721 268 139 551 6 725 864


24

Assumptions and sensitivities used in estimating the loss provision

Process used to determine the assumptions. The assumptions used in the estimation of insurance assets and liabilities are intended to result in provisions which are sufficient to cover any liabilities arising out of insurance contracts so far as can reasonably be foreseen. However, given the uncertainty in establishing a provision for outstanding claims, it is likely that the final outcome will prove to be different from the original liability established.

Provision at the reporting date represents the expected ultimate cost of settlement of all claims incurred in respect of events up to that date, whether reported or not, together with related external claims handling expenses, less amounts already paid. The loss provision is not discounted for the time value of money.

In calculating the estimated cost of unpaid claims (both reported or not), the Group estimation techniques are a combination of loss-ratio-based estimates (where the loss ratio is defined as the ratio between the ultimate cost of insurance claims and premiums earned in a particular reporting year in relation of such claims) and an estimate based upon actual claims experience using predetermined formulae where greater weight is given to actual claims experience as time passes.

The estimation of IBNR is generally subject to a greater degree of uncertainty than the estimation of the cost of settling claims already notified to Group, where information about the claim event is available. IBNR claims may not be apparent to the insured until many years after the event that gave rise to the claims has happened.

In estimating the loss provision the Group considers any information available from loss adjusters and information on the cost of settling claims with similar characteristics in previous periods. Large claims are assessed on a case-by-case basis or projected separately in order to allow for the possible distortive effect of their development and incidence on the rest of the portfolio.

Where possible, the Group adopts multiple techniques to estimate the required level of provisions. This provides a greater understanding of the trends inherent in the experience being projected. The projections given by the various methodologies also assist in estimating the range of possible outcomes. The most appropriate estimation technique is selected taking into account the characteristics of the business class and the extent of the development of each accident year.

Assumptions. The initial loss-ratio estimate is the assumption that has the greatest effect on the measurement of the loss reserves. The initial loss-ratio estimate is based on previous years’ experience, adjusted for factors such as premium rate change, anticipated market experience and historical claims inflation. In addition, when determining the loss provision, the projection of future cash flows includes estimated values of parameters that can affect the amount of an individual claim (e.g. frequency of claims, risks connected with the insurance contract – death as a result of an accident, persistent effects, recovery time, time between date of occurrence of the insured event and the settlement date).

Sensitivity analysis. Management believes that, due to short-tailed nature of the Group’s business, the performance of the Group’s portfolio is sensitive mainly to changes in expected loss ratios. The Group adjusts its insurance tariffs on a regular basis based on the latest developments in these variables so that any emerging trends are taken into account. However, the sensitivity of certain assumptions, such as legislative change, is not possible to quantify. Furthermore because of delays that arise between the occurrence of a claim and its subsequent notification and eventual settlement, the claims provisions are based on estimates.

Consequently the ultimate liability will vary as a result of subsequent developments. Differences resulting from reassessment of the ultimate liabilities are recognized in the period when reassessment is made.

The table below indicates the effect of changes in the expected loss ratios of certain lines of business (auto-transport insurance and voluntary medical insurance) related to the period of claim, which conforms with the related reporting period, to the profit and loss before tax and equity before reinsurance. Listed lines of business are more sensitive to changes in loss provision assumptions than others. Reinsurance does not significantly affect profit and loss.

2014 2013

Impact on profit or loss

before tax

Impact on

equity


before tax

Impact on

equity

Autotransport insurance

10% increase in expected loss ratios (1 777 958) (1 422 366) (1 037 779) (830 223)

10% decrease in expected loss ratios 1 941 148 1 552 919 1 037 779 830 223

Voluntary medical insurance

10% increase in expected loss ratios (186 268) (149 014) (394 933) (315 946)

10% decrease in expected loss ratios 71 963 57 570 394 933 315 946


25

13. Claims Development Analysis

The claims development analysis is provided for the lines of business for which uncertainty about the amount and timing of claims payments is typically resolved within more than one year, except for motor own damage insurance included in Autotransport in the table below for which uncertainty about the amount and timing of claims payments is typically resolved within one year. The estimate of claims at the end of a particular underwriting year does not include claims filed and paid during the year. Other lines of business do not include Voluntary medical insurance, Travel insurance and Green card insurance.

Autotransport

Year of claim 2010 2011 2012 2013 2014 Total

Estimate of cumulative claims:

At end of underwriting year 1 198 701 1 199 350 1 640 845 3 429 581 4 588 065 4 588 065

One year later 1 204 711 1 425 230 1 949 992 4 867 077 - 4 867 077 Two years later 1 310 731 1 453 623 2 154 976 - - 2 154 976 Three years later 1 282 265 1 404 359 - - - 1 404 359 Four years later 1 267 629 - - - - 1 267 629

Estimate of cumulative claims 1 267 629 1 404 359 2 154 976 4 867 077 4 588 065 9 694 041 Cumulative payments (1 252 758) (1 389 474) (2 015 245) (3 830 752) - (8 488 229) Provision for claims incurred before 2010 7 268

Total provision for outstanding claims 14 871 14 885 139 731 1 036 325 4 588 065 5 801 145

Property



At end of underwriting year 478 317 1 010 848 529 815 623 110 2 667 075 2 667 075

One year later 261 928 887 080 553 873 324 459 - 324 459

Two years later 223 449 636 066 568 635 - - 568 635

Three years later 237 160 909 784 - - - 909 784

Four years later 222 850 - - - - 222 850

Estimate of cumulative claims 222 850 909 784 567 099 324 459

2 667 075 1 824 914

Cumulative payments (222 274) (687 538) (390 431) (231 619) - (1 531 861) Provision for claims incurred before 2010 6 957

Total provision for outstanding claims 574 222 246 178 204 92 840 2 667 075 3 167 898

Other



At end of underwriting year 362 220 387 267 424 036 921 128 1 061 730 1 061 730

One year later 274 462 231 560 535 400 1 169 967 - 1 169 967

Two years later 243 321 249 371 568 700 - - 568 700

Three years later 271 620 299 858 - - - 299 858

Four years later 292 073 - - - - 292 073

Estimate of cumulative claims 292 073 299 858 568 700 1 169 967 1 061 730 2 330 598

Cumulative payments (277 943) (243 375) (334 053) (646 539) - (1 501 910) Provision for claims incurred before 2010 11 528

Total provision for outstanding claims 14 130 56 483 234 647 523 428 1 061 730 1 901 946


26

14. Payables

2014 2013

Premiums ceded 2 349 255 2 005 886

Insurance premiums received in advance 549 668 336 658

Agents commissions 470 058 859 158

Payroll and social funds 407 513 644 862

Taxation 39 072 40 009

Payables arising out of claims assumed 17 736 18 127

Other payables 236 512 106 142

Total payables 4 069 814 4 010 842

Information on related party balances is disclosed in note 30.

As at 31 December 2014 the largest three payables on reinsurance excluding parent company and its subsidiaries amounted to RUB 1 438 527 thousand or 63% of total payables on reinsurance. As at 31 December 2013 the largest three payables on reinsurance excluding parent company and subsidiaries amounted to RUB 929 297 thousand or 59% of total payables on reinsurance.

15. Other liabilities

2014 2013

Provision for guarantee issued to MTS Bank 241 000 -

Accrued penalties 50 122 19 960

Provision for court expenses 22 607 28 402

Provision for obligatory insurance - 53 388

Other 22 942 548

Total other liabilities 336 671 102 299


27

16. Income and Expenses Analysis by Type of Business

Analysis of income and expense by type of business for 2014 is as follows:

Russian

Non-Life

UkraineNon-Life and Life

Asset management

in Russia Inter-

company TotalINSURANCE Gross premiums written 25 392 388 658 817 - - 26 051 205

Premiums ceded (4 499 995) (190 210) - - (4 690 205)

20 892 393 468 607 - - 21 361 000Change in provision for unearned premiums, net 5 414 841 (31 205) - - 5 383 636

Net premiums earned 26 307 234 437 402 - - 26 744 636

Gross claims paid (20 578 559) (249 455) - - (20 828 014)

Claims ceded 1 845 981 40 185 - - 1 886 166

(18 732 578) (209 270) - - (18 941 848)Claims handling expenses (3 001 694) (37 271) - - (3 038 965)

Change in loss provision, net (2 902 030) (26 805) - - (2 928 835)

Net claims incurred (24 636 302) (273 346) - - (24 909 648)

Acquisition costs (8 280 883) (128 615) - - (8 409 498)

Insurance operating expenses (1 818 826) (117 242) - (12 508) (1 948 576)

Change in allowance for impairment of insurance receivables (747 389) 2 075 - 15 418 (729 896)

Other insurance income 4 021 - - - 4 021

Insurance activity result (9 172 145) (79 726) - 2 910 (9 248 961)

INVESTMENT

Interest income 1 145 769 63 207 12 931 - 1 221 907

Net (loss) gain on available-for-sale financial instruments (70 932) 1 148 (2 452) - (72 236)

Impairment of investments in associated undertakings (9 903) - - - (9 903)

Impairment of available-for-sale financial instruments (308 637) - - - (308 637)

Other investment income 575 - 3 - 578

Investment operating (expenses) income (56 805) (1 005) (212 029) 55 323 (214 516)

Investment activity result 700 067 63 350 (201 547) 55 323 617 193

OTHER

Other commission income 2 380 925 - 102 949 (42 815) 2 441 059

Other operating expenses (2 101 135) (3 067) - - (2 104 202)

Net foreign exchange losses (208 655) (27 872) (260) - (236 787)

Disposal of subsidiary - - (97 122) - (97 122)

Other income 226 088 19 253 2 (15 418) 229 925

Other expenses (242 006) - - - (242 006)

Other activity result 55 217 (11 686) 5 569 (58 233) (9 133)

Loss before tax (8 416 861) (28 062) (195 978) - (8 640 901)Income tax (expense) benefit (547 184) (19 091) 15 959 - (550 316)

Loss for the year (8 964 045) (47 153) (180 019) - (9 191 217)


28

Analysis of income and expense by type of business for 2013 is as follows:

Russian

Non-Life

UkraineNon-Life and Life

Asset management

in Russia Inter-

company TotalINSURANCE Gross premiums written 34 882 635 690 282 - - 35 572 917

Premiums ceded (4 307 335) (312 486) - - (4 619 821)

30 575 300 377 796 - - 30 953 096Change in provision for unearned premiums, net (5 201 089) (85 395) - - (5 286 484)

Net premiums earned 25 374 211 292 401 - - 25 666 612

Gross claims paid (16 090 290) (231 133) - - (16 321 423)

Claims ceded 1 218 802 87 359 - - 1 306 161

(14 871 488) (143 774) - - (15 015 262)Claims handling expenses (1 655 327) (33 632) - - (1 688 959)

Change in loss provision, net (2 416 351) 1 909 - - (2 414 442)

Net claims incurred (18 943 166) (175 497) - - (19 118 663)

Acquisition costs (9 475 110) (67 466) - - (9 542 576)

Insurance operating expenses (1 987 004) (116 570) - - (2 103 574)

Change in provision for impairment of insurance receivables 18 731 (109) - - 18 622

Other insurance income 22 325 - - - 22 325

Insurance activity result (4 990 013) (67 241) - - (5 057 254)

INVESTMENT

Interest income 1 101 269 79 822 15 679 - 1 196 770

Net (loss) gain on available-for-sale financial instruments 110 716 - 287 - 111 003

Impairment of available-for-sale financial instruments (37 333) - - - (37 333)

Other investment income 7 580 - - - 7 580

Investment operating (expenses) income (62 111) (1 414) (235 820) 43 461 (255 884)

Investment activity result 1 120 121 78 408 (219 854) 43 461 1 022 136

OTHER

Other commission income 2 098 899 - 171 335 (43 461) 2 226 773

Other operating expenses (1 963 591) (1 230) - - (1 964 821)

Net foreign exchange income (losses) 1 504 (1 656) 1 - (151)

Other income 159 937 10 618 421 - 170 976

Other expenses (5 786) - - - (5 786)

Other activity result 290 963 7 732 171 757 (43 461) 426 991

(Loss) profit before tax (3 578 929) 18 899 (48 097) - (3 608 127)Income tax benefit (expense) 378 085 (38 298) 8 129 - 347 916

Loss for the year (3 200 844) (19 399) (39 968) - (3 260 211)


29

17. Analysis of Premiums and Claims

An analysis of premiums and claims by line of business for 2014 is provided in the following table:

Auto-transport insurance

Voluntary medical

insuranceProperty

insurance FinancePersonal accident

Other insurance Total

Gross premiums written 8 024 012 8 724 711 3 986 712 1 315 177 2 469 576 1 531 017 26 051 205Premiums ceded (153 429) (272 766) (2 407 914) (973 042) (198 690) (684 364) (4 690 205)

7 870 583 8 451 945 1 578 798 342 135 2 270 886 846 653 21 361 000Change in provision for unearned premiums, net 4 115 584 337 830 397 685 192 225 369 091 (28 779) 5 383 636

Net premiums earned 11 986 167 8 789 775 1 976 483 534 360 2 639 977 817 874 26 744 636

Gross claims paid (11 447 822) (6 279 666) (1 491 428) (749 460) (701 184) (158 454) (20 828 014)Claims ceded 45 369 123 705 1 060 818 462 990 121 712 71 572 1 886 166

(11 402 453) (6 155 961) (430 610) (286 470) (579 472) (86 882) (18 941 848)

Claims handling expenses (2 486 950) (307 784) (113 002) (43 684) (65 745) (21 800) (3 038 965)Change in loss provision, net (2 526 598) 73 846 (43 646) 9 826 (348 471) (93 792) (2 928 835)

Net claims incurred (16 416 001) (6 389 899) (587 258) (320 328) (993 688) (202 474) (24 909 648)

An analysis of premiums and claims by line of business for 2013 is provided in the following table:

Auto-transport insurance

Voluntary medical

insuranceProperty

insurance FinancePersonal accident

Other insurance Total

Gross premiums written 14 473 159 8 591 912 4 005 490 2 091 461 4 661 954 1 748 941 35 572 917 Premiums ceded (114 277) (141 465) (2 329 703) (883 854) (229 280) (921 242) (4 619 821)

14 358 882 8 450 447 1 675 787 1 207 607 4 432 674 827 699 30 953 096Change in provision for unearned premiums, net (1 612 738) (576 351) 122 005 (533 303) (2 790 448) 104 351 (5 286 484)

Net premiums earned 12 746 144 7 874 096 1 797 792 674 304 1 642 226 932 050 25 666 612

Gross claims paid (8 754 509) (5 286 451) (1 317 091) (239 715) (424 152) (299 505) (16 321 423)Claims ceded 42 696 72 437 851 163 120 790 32 009 187 066 1 306 161

(8 711 813) (5 214 014) (465 928) (118 925) (392 143) (112 439) (15 015 262)Claims handling expenses (1 113 649) (325 059) (142 461) (10 744) (52 766) (44 280) (1 688 959)Change in loss provision, net (2 109 509) 30 274 153 967 (161 146) (302 443) (25 585) (2 414 442)

Net claims incurred (11 934 971) (5 508 799) (454 422) (290 815) (747 352) (182 304) (19 118 663)

18. Interest income

2014 2013

Available-for-sale financial instruments 945 320 839 511

Deposits with banks 239 375 340 970

Cash and cash equivalents 32 305 10 181

Promissory notes and originated loans 4 907 6 108

Total interest income 1 221 907 1 196 770


30

19. Share Capital and Additional paid-in Capital

As at 31 December 2014 and 2013 authorised, issued and outstanding share capital of the Company comprises 146 530 499 ordinary shares. All shares have a nominal value of RUB 40, rank equally and carry one vote per share at annual and extraordinary general meetings of the Company’s shareholders.

As at 31 December 2014 and 2013 share capital recognized in the financial statement prepared under Russian statutory requirements is RUB 5 861 220 thousand. The difference in the accounting for Russian statutory purposes and IFRS results from the application of IAS 29 Financial Reporting in Hyperinflationary Economies under which contributions to share capital, made prior to 1 January 2003 have been increased by the amount of RUB 1 180 074 thousand to account for changes in the general purchasing power of the RUB.

In 2014 the Company received financial aid of RUB 4 354 389 thousand (2013: RUB 2 220 762 thousand) from Allianz SE presented in these consolidated financial statements as increase of additional paid-in capital.

No dividends were declared or paid during 2014 and 2013.

20. Acquisition Costs

Acquisition costs comprise the following: 2014 2013

Deferrable costs Brokerage and agents commission 4 572 446 7 153 180 Salary costs 1 016 397 1 580 797 Social security and related employee costs 492 391 897 842 Other 120 785 223 247

Total deferrable costs 6 202 019 9 855 066 Non-deferrable costs Salary costs and social security 1 076 574 891 047 Administration expenses 424 043 522 094 Rent 402 627 488 812 Advertising and marketing 42 504 420 716 Communication expenses 38 856 60 632 Transport 15 590 26 974 Depreciation 14 014 12 588 Business trip expenses 12 550 30 091 Сonsulting and legal service fees 8 491 11 866 Other 177 915 162 305 Total non-deferrable costs 2 213 163 2 627 125

Total acquisition costs 8 415 182 12 482 191 Less: Commission income on reinsurance ceded (654 260) (603 935) Net change in deferred acquisition costs 648 576 (2 335 680)

Acquisition costs 8 409 498 9 542 576

Changes in deferred acquisition costs during 2014 and 2013 are presented below:

2014 2013

Deferred acquisition costs as at 1 January 4 795 918 2 458 561

Change in deferred acquisition costs (1 281 466) 3 139 575

Change in deferred commission income on reinsurance outwards (46 931) (18 846)

Provision for unexpired risks 679 921 (785 049)

Net change in deferred acquisition costs (648 576) 2 335 680

Effect of foreign currency translation (4 951) 1 677

Deferred acquisition costs as at 31 December 4 142 391 4 795 918


31

21. Operating Expenses

Insurance operating expenses comprise the following:

2014 2013

Salary costs and bonuses 586 888 982 908

Administration expenses 402 552 229 756

Information and consulting 260 206 57 627

Depreciation 239 122 225 814

Social security and related employee costs 143 445 247 304

Communications 84 630 104 049

Rent 44 132 45 471

Bank fees 38 202 47 714

Transport 23 893 24 265

Business trip expenses 14 970 26 371

Repair 12 515 33 143

Advertising and marketing 3 985 16 120

Legal service fees 3 691 5 765

Other expenses 90 345 57 267

Total insurance operating expenses 1 948 576 2 103 574

Administration expenses in 2014 include write-off of intangible asset (program software) of RUB 161 896 thousand.

Investment operating expenses comprise the following:

2014 2013

Salary costs and bonuses 131 552 134 920




Depreciation and amortization 5 884 8 554


Rent 1 607 17 930


Business trip expenses 594 729

Other 12 994 13 232

Total investment operating expenses 214 516 255 884

Other operating expenses comprise the following:

2014 2013

Salary costs and bonuses 1 065 804 939 026



Rent 147 420 129 250



Depreciation and amortization 42 335 39 970

Transport 24 729 24 398


Low value items and materials 21 436 49 772

Other 51 718 49 565

Total other operating expenses 2 104 202 1 964 821


32

22. Other Commission Income

2014 2013

Obligatory medical insurance (note 8) 2 380 925 2 098 899

Asset management 60 134 127 874

Total other commission income 2 441 059 2 226 773

23. Disposal of subsidiary

On 19 December 2014 the Group disposed of its investment in Allianz Investments. The subsidiary contributed RUB 277 141 thousand to the loss for the year, including the loss on disposal of RUB 97 122 thousand.

The disposal of the subsidiary had the following effect on assets and liabilities at the date of disposal:

Carrying amount at the date of disposal

Net identifiable assets and liabilities

Cash and cash equivalents 18 046

Promissory notes and originated loans, net 2 424

Investment securities available-for-sale 108 444

Receivables 5 572

Prepayments 2 981

Deferred tax asset (note 25) 73 439

Other assets 2 255

Property and equipment (note 10) 4 665

Payables (57 386)

Net identifiable assets and liabilities 160 440 Consideration received 87 787 Cash disposed of (18 046)

Net cash inflow 69 741

Consideration received 87 787 Transaction fees accrued (7 345) Net identifiable assets and liabilities (160 440) Goodwill write-off (note 9) (17 124)

Loss on disposal recognized in profit or loss (97 122)

24. Other expenses

Other expenses for 2014 mainly comprise accrual of liability on financial guarantee issued to MTS Bank in amount of RUB 241 000 thousand.

25. Income Tax

Income tax expense is comprised of the following:

2014 2013

Current tax charge 230 431 222 785

Deferred taxation movement due to origination and reversal of temporary differences 319 885 (570 701)

Total income tax expense (benefit) 550 316 (347 916)

In 2014 and 2013 income tax rate applicable to the majority of the income of the Company and its subsidiaries is 20%. In accordance with the Ukrainian Law the subsidiary in Ukraine is taxed on net premiums written at 3%, other operations - at 19% and premiums ceded to non-residential reinsurers with no rating – at 12%.


33

Reconciliation between the expected and the actual taxation charge is provided below.

2014 2013

Loss before tax (8 640 901) (3 608 127)

Theoretical tax benefit at the applicable statutory rate of 20% 1 728 180 721 625

Tax effect of items which are not deductible or assessable for taxation purposes:

- Non-deductible expenses (347 284) (160 973)

- Income on government securities taxed at different rates 18 965 19 335

- (Over) underprovided in prior years 36 439 (59 781)

- Income taxed at different rate (24 428) (34 464)

- Income exempt from taxation 45 219 26 165

- Other (2 001) (1 497)

Unrecognised deferred tax asset (2 005 406) (162 494)

Total income tax (expense) benefit (550 316) 347 916

Differences between IFRS and statutory taxation regulations give rise to certain temporary differences between the carrying amount of certain assets and liabilities for financial reporting purposes and for profits tax purposes. In 2014 and 2013 the tax effect of the movement on these temporary differences is recorded at the rate of 20%, except for income on government and municipal securities that is taxed at 9-15%.

The net deferred tax asset represents income taxes recoverable through future revenues and is recorded as an asset. A deferred tax asset is recorded for tax loss carryforwards only to the extent that realization of the related tax benefit is probable.

In the context of the Group’s current structure, tax losses and current tax assets of different companies may not be offset against current tax liabilities and taxable profits of other companies and, accordingly, taxes may accrue even where there is a net consolidated tax loss. Therefore, a deferred tax asset of one company of the Group may not be offset against a deferred tax liability of another company.

Deferred tax assets have not been recognised in respect of the following items:

2014 2013

Tax losses 2 005 406 162 494

The tax losses expire in 2023. Deferred tax assets have not been recognised because it is not probable that future taxable profit will be available against which the Group can utilise the benefits therefrom.

Management has determined that the recoverability of losses is in doubt.


34

1 January

2013

Recognizedin profit or

loss

Recognizedin other compre-hensive income

31 December 2013

Recognizedin profit or

loss

Disposal of subsidiaries

(note 23)

Recognized in other compre-hensive income

31 December 2014

Tax effect of deductible temporary differences

Receivables, prepayments and payables 715 639 (2 655) - 712 984 (176 635)

- - 536 349

Provision for unearned premiums 119 944 (119 944) - - -

- - -

Financial instruments - - - - 29 697 - 296 642 326 339Loss reserves - 292 663 292 663 423 697 - - 716 360Other - 99 188 - 99 188 193 424 (73 439) - 219 173

Gross deferred tax asset before tax loss carried forward 835 583 269 252 10 556 1 104 835 470 183

(73 439) 296 642 1 798 221

Tax loss carryforwards 413 307 188 141 - 601 448 (601 448) - - -

Gross deferred tax asset 1 248 890 457 393 10 556 1 706 283 (131 265) (73 439) 296 642 1 798 221

Tax effect of taxable temporary differences

Deferred acquisition costs (488 306) (458 881) - (947 187) 132 539 - - (814 648)Provision for unearned premiums - (54 353) - (54 353) (313 815)

- - (368 168)

Loss reserves (680 043) 680 043 - - - - -Financial instruments (89 909) 54 077 46 388 10 556 (10 556) - - -Property and equipment (96 959) (119 077) - (216 036) 3 212 - (212 824)Other (11 499) 11 499 - - - - -

Gross deferred tax liability (1 366 716) 113 308 46 388 (1 207 020) (188 620) - - (1 395 640)

Net deferred tax asset (liability) (117 826) 570 701 46 388 499 263 (319 885)

(73 439) 296 642 402 581

Comprising of: Deferred tax asset 120 703 378 560 - 499 263 (23 243) (73 439) - 402 581Deferred tax liability (238 529) 192 141 46 388 - (296 642) - 296 642 -

26. Risk Management and Internal Controls

Insurance risk

The primary insurance activity carried out by the Group assumes the risk of loss from individuals or organizations that are directly subject to the risk. As such the Group is exposed to the uncertainty surrounding the timing and severity of claims under the insurance contract. Such risks relate to:

Auto-transport insurance which includes fully comprehensive motor insurance (Casco), obligatory motor third party liability insurance (OMTPL) and voluntary motor third party liability insurance (VMTPL). Under Casco contracts, corporate entities and individuals are reimbursed for any loss of, or damage caused to their vehicles. MTPL contracts provide indemnity cover to the owner of the motor vehicle against compensation payable to third parties for property damage, death or personal injury.


35

Voluntary medical insurance under which the Group pays benefits to policyholders for medical treatment and hospital expenses. The portfolio consists predominantly of collective corporate policies.

Property insurance, including both private property insurance and industrial property insurance which indemnifies the policyholder, subject to any limits or excesses, against the loss or damage to their own tangible property.

Finance insurance under which the Group indemnifies policyholders for losses resulting from business interruption insured events and agricultural losses (e.g. loss of crops).

The Group also provides coverage for life insurance, inwards reinsurance, cargo, marine, liability and a number of other lines of business under which the Group indemnifies the policyholders for the risk of losses.

The Group cedes insurance risk to limit exposure to underwriting losses under various agreements that cover individual and portfolio risks. These reinsurance agreements spread the risk and reduce the effect of losses. The amount of each risk retained depends on the Group’s evaluation of the specific risk.

Under the terms of the reinsurance agreements, the reinsurer agrees to reimburse the ceded amount in the event the claim is incurred. However, the Group remains liable to its policyholders with respect to ceded insurance if any reinsurer fails to meet the obligations it assumes.

When selecting a reinsurer the Group considers their relative creditworthiness. The creditworthiness of the reinsurer is assessed from public rating information and from internal investigations.

The risk under any one insurance contract is the possibility that the insured event occurs and the uncertainty of the amount of the resulting claim. By the very nature of an insurance contract, this risk is random and therefore unpredictable.

For a portfolio of insurance contracts where the theory of probability is applied to pricing and provisioning, the principal risk that the Group faces under its insurance contracts is that the actual claims and benefit payments exceed the carrying amount of the insurance liabilities. This could occur because the frequency or severity of claims and benefits are greater than estimated. Insurance events are random and the actual number of amount of claims and benefits will vary from year to year from the estimate established using statistical techniques.

Experience shows that the larger the portfolio of similar insurance contracts, the smaller the relative variability about the expected outcome will be. In addition, a more diversified portfolio is less likely to be affected across the board by a change in any subset of the portfolio. The Group has developed its insurance underwriting strategy to diversify the type of insurance risks accepted and within each of these categories to achieve a sufficiently large population of risks to reduce the variability of the expected outcome.

Factors that aggravate insurance risk include lack of risk diversification in terms of type and amount of risk, geographical location and type of industry covered.

The Group manages these risks through its underwriting strategy, adequate reinsurance arrangements and proactive claims handling. The underwriting strategy attempts to ensure that the underwritten risks are well diversified in terms of type and amount of risk, industry and geography. Underwriting limits are in place to enforce appropriate risk selection criteria. The Group has the right to re-price the risk or renewal. It also has the ability to impose deductibles and reject fraudulent claims.

The reinsurance arrangements include excess and catastrophe coverage. The Group has a group-wide retention limit. In addition, under the Group reinsurance program, individual business units are permitted to purchase additional reinsurance protection.

Financial risk

The financial risk management function within the Group is carried out in respect of credit, market (which includes foreign exchange, interest rate and equity price risks), currency and liquidity risks. The primary objectives of the financial risk management function are to establish risk limits, and then ensure that exposure to risks stays within these limits.

The Board of Directors of the Group has overall responsibility for the oversight of the risk management framework, monitoring the management of key risks and reviewing the Group’s risk management policies and procedures as well as approving significant large exposures.

The day to day financial risk management function is carried out primarily by the Risk Management department and Treasury, heads of both departments report directly to the Chief Financial Officer.


36

The Group manages open positions in financial risk within an investment framework that has been developed to achieve long-term investment returns in excess of the Group obligations under insurance and investment contracts. The principal technique of the investment framework is to match assets to the liabilities arising from insurance and investment contracts by reference to the type of benefits payable to contract holders. For each distinct category of liabilities, a separate portfolio of assets is maintained. The Group’s investment framework is integrated with the management of financial risks associated with the other financial assets and liabilities not directly associated with insurance and investment liabilities (in particular borrowings and investments in foreign operations).

Additional financial risk mitigation is imposed by Russian legislation (Prikaz of Ministry of Finance №149n detailing requirements for types and structure of assets which are admitted for coverage of insurer’s equity). The Treasury makes the balance sheet forecast for the Group on a quarterly basis to ensure compliance with legislative requirements.

Credit risk

The Group takes on exposure to credit risk which is the risk that counterparty will be unable to pay amounts in full when due. The major credit risk exposure is through settlement accounts and deposits with banks, promissory notes and originated loans and available-for-sale financial instruments which form the majority of investment portfolio. Credit risk management procedures are primarily focused on setting counterparty limits and monitoring of compliance with these limits.

Group counterparty credit limits are updated by the Risk Management department and approved by the Investment Committee on a monthly basis. The internal methodology for setting of limits is based on analysis of counterparties’ official financial reports and certain non-financial information.

Monitoring of compliance with existing credit limits is performed by the Risk Management department on a monthly basis.

The Group structures its credit risks by placing limits on the amount of risk accepted from individual counterparties and types of debt instrument.

The Group’s maximum exposure to credit risk is presented in the following table. The impact of possible netting of assets and liabilities to reduce potential credit exposure is not significant.

2014 2013

Cash and cash equivalents - correspondent accounts with banks 4 152 848 804 868

Deposits with banks 5 730 439 6 605 963

Promissory notes and originated loans 15 137 34 492

Available-for-sale financial instruments 7 664 471 12 702 742

Receivables 4 488 665 6 417 343

Reinsurers' share of loss provision 3 679 146 1 853 881

Total maximum exposure to credit risk 25 730 706 28 419 289

The maximum exposure to credit risk from unrecognised contractual commitments (guarantee issued to MTS Bank) as at 31 December 2014 is RUB 241 000 thousand.

The following table details geographical concentration of credit risk as at 31 December 2014. Included in Commonwealth of Independent States (CIS) countries are primarily balances of Ukrainian subsidiary.

Russian

Federation CIS Europe Other

countries Total

Cash and cash equivalents - correspondent accounts with banks 4 129 255 23 593 - - 4 152 848 Deposits with banks 5 295 255 435 184 - - 5 730 439 Promissory notes and originated loans 15 137 - - - 15 137 Available-for-sale financial instruments 7 664 435 36 - - 7 664 471 Receivables 3 786 517 115 767 533 468 52 913 4 488 665 Reinsurers' share of loss provision 48 050 - 3 502 943 128 153 3 679 146

Total maximum exposure to credit risk 20 938 649 574 580 4 036 411 181 066 25 730 706


37

The following table details geographical concentration of credit risk as at 31 December 2013.

Russian

Federation CIS Europe Other

countries Total

Cash and cash equivalents - correspondent accounts with banks 797 520 7 348 - - 804 868 Deposits with banks 6 099 622 506 341 - - 6 605 963 Promissory notes and originated loans 34 492 - - - 34 492 Available-for-sale financial instruments 12 003 591 41 609 657 542 - 12 702 742 Receivables 5 350 449 197 007 608 422 261 465 6 417 343 Reinsurers' share of loss provision 143 140 349 344 1 350 491 10 906 1 853 881

Total maximum exposure to credit risk 24 428 814 1 101 649 2 616 455 272 371 28 419 289

Financial assets that are neither past due nor impaired are graded according to the current international credit rating they have been awarded by an internationally regarded rating agencies. The Group uses the rating scale provided by Standard&Poors and Fitch depending on the availability of the rating for the respective counterparties. The following table details the credit ratings of financial assets held by the Group as at 31 December 2014:

AA A BBB BB Below BB Not rated Total

Cash and cash equivalents - correspondent accounts with banks - 131 4 075 014 24 409 36 435 16 859 4 152 848 Deposits with banks - - 3 820 747 496 383 828 938 584 371 5 730 439 Promissory notes and originated loans - - - - - 15 137 15 137 Available-for-sale financial instruments - - 5 220 745 2 165 655 28 733 249 338 7 664 471 Receivables 573 767 - 207 312 477 155 68 920 3 161 511 4 488 665 Reinsurers' share of loss provision 2 499 931 938 759 6 771 24 085 - 209 600 3 679 146

Total 3 073 698 938 890 13 330 589 3 187 687 963 026 4 236 816 25 730 706

The following table details the credit ratings of financial assets held by the Group as at 31 December 2013:

AA A BBB BB Below BB Not rated Total

Cash and cash equivalents - correspondent accounts with banks

- - 658 486 68 539 58 405 19 438 804 868

Deposits with banks - - 4 642 971 981 231 977 725 4 036 6 605 963 Promissory notes and originated loans - - - - - 34 492 34 492 Available-for-sale financial instruments

- - 8 382 412 3 477 725 21 071 821 534 12 702 742

Receivables 523 424 224 905 446 637 210 301 27 959 4 984 117 6 417 343 Reinsurers' share of loss provision 885 071 89 167 82 194 59 881 - 737 568 1 853 881

Total 1 408 495 314 072 14 212 700 4 797 677 1 085 160 6 601 185 28 419 289

Liquidity risk. The Group is exposed to liquidity risk, which is the risk that the Group will encounter difficulty in meeting its commitments when they fall due. The Group’s policy is to ensure, as far as possible, that it has sufficient liquidity to meet its liabilities when due, without risking damage to reputation or incurring unacceptable losses (e.g. investment losses due to urgent withdrawal of assets from investment portfolio).

Liquidity risk management is the function of the Treasury Department. In order to ensure availability of sufficient funds for timely settlement of payables, the Treasury Department performs cash flow planning with a 2 week horizon. To ensure maximum predictability of cash outflows, payments require cash reservation in advance. Also, the Group mitigates liquidity risk by fixing a statistically determined optimal share of cash in the investment portfolio as well as by diversifying deposits by maturity dates. Liquidity analysis as at 31 December 2014 and 2013 is presented within analysis of interest rate risk further.

Market risk. Market risk is the risk that the value or future cash flows of financial instruments will fluctuate because of changes in market factors. Market risk comprises three types of risks: currency risk, interest rate risk and other price risk.


38

Currency risk. Currency risk is the risk that the value or future cash flows of financial instruments will fluctuate due to changes in foreign exchange rates. The Group takes on exposure to the effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows.

Asset Liability Matching methodology is used by the Group and provides appropriate currency structure to mitigate currency risk. This methodology allows the Group to calculate and manage the currency structure of the investment portfolio to minimize currency risk. The Group manages this currency risk by investing into US dollar and EURO instruments and maintaining US dollar cash balances to the extent allowed under Russian insurance regulations.

The Group’s exposure to currency risk as at 31 December 2014 is presented below.

RUB USD EUR Other Total

Assets

Cash and cash equivalents 3 517 574 152 174 469 281 17 327 4 156 356

Deposits with banks 5 295 255 - - 435 184 5 730 439

Promissory notes and originated loans 15 137 - - - 15 137

Available-for-sale financial instruments 6 889 709 488 543 286 183 36 7 664 471

Receivables 2 986 895 881 108 522 260 98 402 4 488 665

Prepayments 5 406 354 6 427 507 16 726 5 430 014

Reinsurers' share of provision for unearned premiums 295 100 420 463 482 684 34 882 1 233 129

Reinsurers' share of loss provision 1 392 728 447 715 1 024 020 814 683 3 679 146

Deferred acquisition costs 3 875 465 176 303 16 601 74 022 4 142 391

Goodwill 213 819 - - - 213 819

Deferred tax asset 402 581 - - - 402 581

Other assets 5 876 - - - 5 876

Investments in associated undertakings 1 374 - - - 1 374

Property, equipment and intangible assets 1 769 945 - - 20 549 1 790 494

Total assets 32 067 812 2 572 733 2 801 536 1 511 811 38 953 892

Liabilities Provision for unearned premiums 11 116 853 677 016 273 395 269 389 12 336 653

Loss provision 10 508 218 980 963 1 195 204 950 760 13 635 145

Payables 1 695 520 970 692 1 282 538 121 064 4 069 814

Obligatory medical insurance liability 7 667 834 - - - 7 667 834

Other liabilities 336 671 - - - 336 671

Total liabilities 31 325 096 2 628 671 2 751 137 1 341 213 38 046 117

Net position 742 716 (55 938) 50 399 170 598 907 775


39

The Group’s exposure to currency risk as at 31 December 2013 is presented below.

RUB USD EUR Other Total

Assets

Cash and cash equivalents 578 462 29 581 207 718 5 687 821 448

Deposits with banks 5 962 833 - 146 898 496 232 6 605 963

Promissory notes and originated loans 34 492 - - - 34 492

Available-for-sale financial instruments 12 003 591 333 770 323 772 41 609 12 702 742

Receivables 4 729 482 1 215 136 344 318 128 407 6 417 343

Prepayments 6 991 750 6 876 - 9 437 7 008 063

Reinsurers' share of provision for unearned premiums 177 009 607 754 521 502 3 913 1 310 178

Reinsurers' share of loss provision 923 552 433 056 345 591 151 682 1 853 881

Deferred acquisition costs 4 483 134 210 681 27 109 74 994 4 795 918

Goodwill 230 943 - - - 230 943

Deferred tax asset 499 263 - - - 499 263

Other assets 46 033 - - - 46 033

Investments in associated undertakings 11 277 - - - 11 277

Investment property 80 436 - - - 80 436

Property, equipment and intangible assets 1 903 592 - - 18 335 1 921 927

Total assets 38 655 849 2 836 854 1 916 908 930 296 44 339 907

Liabilities Provision for unearned premiums 16 322 123 889 717 294 482 310 120 17 816 442

Loss provision 7 053 834 774 751 489 772 261 388 8 579 745

Payables 2 002 832 1 139 347 749 396 119 267 4 010 842

Obligatory medical insurance liability 6 864 307 - - - 6 864 307

Other liabilities 102 095 204 - - 102 299

Total liabilities 32 345 191 2 804 019 1 533 650 690 775 37 373 635

Net position 6 310 658 32 835 383 258 239 521 6 966 272

The following tables detail the Group’s sensitivity to a 20% increase in the USD and EUR against the RUB. The sensitivity analysis includes only outstanding foreign currency denominated items and adjusts their translation at the end of the period for a 20% change in foreign currency rates. 20% is the sensitivity rate that represents management’s assessment of reasonably possible change in foreign currency exchange rates.

2014 2013

Impact on profit or loss before

tax

Impact on

equity


before tax

Impact on

equity

20% appreciation of USD against RUB (11 188) (8 950) 6 568 5 254

20% appreciation of EUR against RUB 10 080 8 064 76 652 61 322

A strengthening of the RUB against the above currencies at 31 December 2014 and 2013 would have had the equal but opposite effect on the above currencies to the amounts shown above, on the basis that all other variables remain constant.

The above sensitivity analysis does not take into consideration that the Group’s assets and liabilities are actively managed, so that Group’s exposure to market fluctuations is minimal. Management action could include selling investments, changing investment portfolio allocation and other protective actions.

Also, the analysis demonstrates the effect of change in one of the key factors (foreign exchange rate), while other factors remain unchanged. In reality there is correlation between key economic factors. It should also be noted that the sensitivities shown above are non-linear, larger or smaller impacts should not be extrapolated or interpolated from these results.


40

Interest rate risk. Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Group is exposed to interest rate risk through its interest-bearing assets and interest-bearing liabilities. Other assets and liabilities of the Group are mostly not interest-bearing. Interest rate risk is managed in the Group by means of volatility analysis of interest rates by instruments. Conclusions based on this analysis determine investment policy.

The following tables show assets and liabilities as at 31 December 2014 by separating interest-bearing and non-interest-bearing assets and liabilities and disclose their remaining contractual maturity. The undiscounted cash flows on the Group’s financial liabilities on the basis of their earliest possible contractual maturity do not vary materially from this analysis.

Up to 1 month

1 month to 1 year

1 year to 5 years Over 5 years

Maturity undefined Total

Assets

Interest-bearing assets

Cash and cash equivalents 4 156 356 - - - - 4 156 356

Deposits with banks 3 707 735 1 604 818 417 886 - - 5 730 439

Promissory notes and originated loans - 416 14 721 - - 15 137

Available-for-sale financial instruments 405 1 914 778 4 204 268 1 295 717 - 7 415 168

Total interest bearing assets 7 864 496 3 520 012 4 636 875 1 295 717 - 17 317 100

Non-interest bearing assets

Available-for-sale financial instruments - - - - 249 303 249 303

Receivables 390 785 4 097 880 - - - 4 488 665

Prepayments - 5 430 014 - - - 5 430 014

Reinsurers' share of provision for unearned premiums - 771 802 458 590 2 737 - 1 233 129

Reinsurers' share of loss provision - 3 679 146 - - - 3 679 146

Deferred acquisition costs 12 951 1 151 016 2 961 897 16 527 - 4 142 391

Goodwill - - - - 213 819 213 819

Deferred tax asset - - - - 402 581 402 581

Other assets - 5 876 - - - 5 876

Investments in associated undertakings - - - - 1 374 1 374

Property, equipment and intangible assets - - - - 1 790 494 1 790 494

Total non-interest bearing assets 403 736 15 135 734 3 420 487 19 264 2 657 571 21 636 792

Total assets 8 268 232 18 655 746 8 057 362 1 314 981 2 657 571 38 953 892

Non-interest bearing liabilities

Provision for unearned premiums 58 121 6 978 153 5 233 029 67 350 - 12 336 653

Loss provision - 13 635 145 - - - 13 635 145

Payables 373 299 3 696 515 - - - 4 069 814

Obligatory medical insurance liability - 7 667 834 - - - 7 667 834

Other liabilities - 336 671 - - - 336 671

Total non-interest bearing liabilities

431 420 32 314 318 5 233 029 67 350 - 38 046 117

Total liabilities 431 420 32 314 318 5 233 029 67 350 - 38 046 117

Net liquidity gap 7 836 812 (13 658 572) 2 824 333 1 247 631 2 657 571 907 775

Cumulative liquidity gap 7 836 812 (5 821 760) (2 997 427) (1 749 796) 907 775


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The following tables show assets and liabilities as at 31 December 2013 by separating interest-bearing and non-interest-bearing assets and liabilities and disclose their remaining contractual maturity. The undiscounted cash flows on the Group’s financial liabilities on the basis of their earliest possible contractual maturity do not vary materially from this analysis.

Up to 1 month

1 month to 1 year

1 year to 5 years

Over 5 years

Maturity undefined Total

Assets

Interest-bearing assets

Cash and cash equivalents 821 448 - - - 821 448

Deposits with banks 2 910 288 3 275 315 420 360 - - 6 605 963

Promissory notes and originated loans - 2 327 27 597 4 568 - 34 492

Available-for-sale financial instruments

41 609 1 596 187 8 625 057 1 618 355 - 11 881 208

Total interest bearing assets 3 773 345 4 873 829 9 073 014 1 622 923 - 19 343 111

Non-interest bearing assets

Available-for-sale financial instruments - - - - 821 534 821 534

Receivables 872 077 5 545 266 - - - 6 417 343

Prepayments - 7 008 063 - - - 7 008 063 Reinsurers' share of provision for unearned premiums 1 251 882 955 350 583 75 389 - 1 310 178

Reinsurers' share of loss provision - 1 853 881 - - - 1 853 881

Deferred acquisition costs 16 494 2 058 219 2 695 757 25 448 - 4 795 918

Goodwill - - - - 230 943 230 943

Deferred tax asset - - - - 499 263 499 263

Other assets - 46 033 - - - 46 033

Investments in associated undertakings - - - - 11 277 11 277

Investment property - - - - 80 436 80 436 Property, equipment and intangible assets - - - - 1 921 927 1 921 927

Total non-interest bearing assets 889 822 17 394 417 3 046 340 100 837 3 565 380 24 996 796

Total assets 4 663 167 22 268 246 12 119 354 1 723 760 3 565 380 44 339 907

Non-interest bearing liabilities

Provision for unearned premiums 65 714 12 464 029 5 189 408 97 291 - 17 816 442

Loss provision - 8 579 745 - - - 8 579 745

Payables 344 705 3 666 137 - - - 4 010 842

Obligatory medical insurance liability - 6 864 307 - - - 6 864 307

Other liabilities - 102 299 - - - 102 299

Total non-interest bearing liabilities 410 419 31 676 517 5 189 408 97 291 - 37 373 635

Total liabilities 410 419 31 676 517 5 189 408 97 291 - 37 373 635

Net liquidity gap 4 252 748 (9 408 271) 6 929 946 1 626 469 3 565 380 6 966 272

Cumulative liquidity gap 4 252 748 (5 155 523) 1 774 423 3 400 892 6 966 272

The following tables present the sensitivity of the Group profit before tax and equity to fair value interest rate risk, which has been determined based on reasonably possible changes in the risk variable. The level of these changes is determined by Management.

As at 31 December 2014 -1.0% 1.0% Available-for-sale financial instruments 182 421 (182 421) Net impact on equity 145 937 (145 937)

As at 31 December 2013 -1.0% 1.0% Available-for-sale financial instruments 325 882 (325 882) Net impact on equity 260 706 (260 706)


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The following table presents the sensitivity of the Group’s profit after tax and equity to repricing risk of interest rates of deposits and promissory notes.

2014 2013

Parallel shift by 1% towards interest rates growth 34 312 34 330 Parallel shift by 1% towards interest rates decline (34 312) (34 330)

Equity price risk. Price risk is the risk that the value of an equity financial instrument will fluctuate as a result of changes in market prices, whether those changes are caused by factors specific to the individual instrument or factors affecting all instruments traded in the market. Price risk arises when the Group takes a long or short position in an equity financial instrument.

The following tables detail the Group’s sensitivity to a 10% increase and decrease in market price.

2014 2013

-10% 10% -10% 10%

Available-for-sale financial instruments (24 930) 24 930 (82 154) 82 154

Net impact on equity (19 944) 19 944 (65 722) 65 722

The above table demonstrates the effect of a change in a key assumption while other assumptions remain unchanged. In reality, there is a correlation between the assumptions and other factors. It should also be noted that these sensitivities are non-linear, and larger or smaller impacts should not be interpolated or extrapolated from these results.

The sensitivity analyses do not take into consideration that the Group’s assets and liabilities are actively managed. Additionally, the financial position of the Group may vary at the time that any actual market movement occurs. For example, the Group’s financial risk management strategy aims to manage the exposure to market fluctuations. As investment markets move past various trigger levels, management actions could include selling investments, changing investment portfolio allocation and taking other protective action. Consequently, the actual impact of a change in the assumptions may not have any impact on the liabilities, whereas assets are held at market value on the statement of financial position. In these circumstances, the different measurement bases for liabilities and assets may lead to volatility in shareholder equity.

Other limitations in the above sensitivity analyses include the use of hypothetical market movements to demonstrate potential risk that only represent the Group’s view of possible near-term market changes that cannot be predicted with any certainty; and the assumption that all interest rates, exchange rates or market prices move in an identical fashion.

Corporate governance framework. The Company is established as an open joint stock company in accordance with Russian law. The supreme governing body of the Company is the general shareholders’ meeting that is called for annual or extraordinary meetings. The general shareholders’ meeting makes strategic decisions on the Company’s operations.

The general shareholders’ meeting elects the Board of Directors. The Board of Directors is responsible for overall governance of the Company's activities.

Russian legislation and the charter of the Company establish lists of decisions that are exclusively approved by the general shareholders’ meeting and that are approved by the Board of Directors.

General activities of the Company are managed by the sole executive body of the Company - General Director and collective executive body of the Company – Board of Management. The Board of Directors elects the General director and members of Management Board. The executive bodies of the Company are responsible for implementation of decisions of the general shareholders’ meeting and the Board of Directors of the Company. Executive bodies of the Company report to the Board of Directors of the Company and to the general shareholders’ meeting.

Internal control policies and procedures. The Board of Directors and the Management Board have responsibility for the development, implementation and maintaining of internal controls in the Group that are commensurate with the scale and nature of operations.

The purpose of internal controls is to ensure:

proper and comprehensive risk assessment and management;

proper business and accounting and financial reporting functions, including proper authorization, processing and recording of transactions;

completeness, accuracy and timeliness of accounting records, managerial information, regulatory reports, etc.;


43

reliability of IT-systems, data and systems integrity and protection;

prevention of fraudulent or illegal activities, including misappropriation of assets;

compliance with laws and regulations.

Management is responsible for identifying and assessing risks, designing controls and monitoring their effectiveness. Management monitors the effectiveness of the Group’s internal controls and periodically implements additional controls or modifies existing controls as considered necessary.

The Group developed a system of standards, policies and procedures to ensure effective operations and compliance with relevant legal and regulatory requirements, including the following areas:

requirements for appropriate segregation of duties, including the independent authorization of transactions;

requirements for the recording, reconciliation and monitoring of transactions;

compliance with regulatory and other legal requirements;

documentation of controls and procedures;

requirements for the periodic assessment of operational risks faced, and the adequacy of controls andprocedures to address the risks identified;

requirements for the reporting of operational losses and proposed remedial action;

development of contingency plans;

training and professional development;

ethical and business standards and

risk mitigation, including reinsurance where this is effective.

There is an hierarchy of requirements for authorization of transactions depending on their size and complexity. A significant portion of operations are automated and the Group put in place a system of automated controls.

Compliance with Group’s standards is supported by a program of periodic reviews undertaken by Internal Audit. The Internal Audit function is independent from management and reports directly to the Board of Directors. The results of Internal Audit reviews are discussed with relevant business process managers, with summaries submitted to the Audit Committee and Board of Directors and senior management of the Company.

The internal control system in the Company comprises:

the Board of Directors and its committees, including the Audit committee;

the Chief Executive officer and the Board of Management;

the Chief Accountant;

the Chief Actuary;

the Supervisory Board;

the risk management function;

the security function, including IT-security;

the human resource function;

the internal audit function;

other employees, division and functions that are responsible for compliance with the established standards,policies and procedures, including:

heads of branches and heads of business units;

business processes managers;

the internal controls division responsible for compliance with anti-money laundering requirements;

professional securities market participant controller – an executive office responsible for compliancewith the requirements for securities market participants;

the legal officer – an employee responsible for compliance with the legal and regulatory requirements;

the internal controls and coordination of corporate and regulatory procedures division responsible forthe compliance with internal controls rules and realization of programs of such rules implementation,developed in accordance with anti-money laundering legislation of the Russian Federation;

other employees/divisions with control responsibilities.


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Russian legislation, including the Law dated 27 November 1992 No 4015-1 On organization of insurance activity in the Russian Federation, establishes the professional qualifications, business reputation and other requirements for members of the Board of Directors, Management Board, Head of internal audit function and other key management personnel. All members of the Company’s governing and management bodies meet with these requirements.

Management believes that the Group complies with the regulatory requirements related to internal control systems, including requirements related to the internal audit function, and that Group’s internal control systems are appropriate for the scale, nature and complexity of operations.

27. Capital Management

The Insurance Regulatory Bodies of the Russian Federation set and monitor capital requirements for the Company.

The Company recognizes as Capital, items which are defined in accordance with legislation of the Russian Federation as capital.

The main objective of the Company's capital management is to comply with the regulatory requirements of the Russian Federation legislation in respect of financial stability and solvency of the Company and its ability to continue carrying out its financial and economic activity in accordance with going concern principle.

The regulatory requirement for fully paid minimum share capital of the Company which provides any type of reinsurance coverage is RUB 480 000 thousand.

The actual fully paid share capital of the Company as at 31 December 2014 and 2013 is RUB 5 861 220 thousand which complies with the minimum statutory limit.

In order to comply with regulatory requirements in respect of capital and insurance reserves allocation the Company implements an investment policy which imposes certain restrictions on the structure of investment assets. The Company monitors application of investment policy on a daily basis. The Company assesses capital adequacy level on a regular basis to comply with the minimum paid share capital requirements and regulatory solvency margin level. The Company monitors compliance with the stated above requirements on a monthly basis. Regular monitoring of capital adequacy level enables the Company to forecast the need for additional capital investment.

As at 31 December 2014 and 2013 the Company complied with the requirements set by the Insurance Regulatory Bodies of the Russian Federation in respect of solvency margin level, placements of insurance reserves funds and structure of assets used for coverage of equity.

28. Contingencies and Commitments

Legal proceedings. From time to time and in the normal course of business, claims against the Group are received. On the basis of own estimates and internal and external professional advice, Management is of the opinion that no material losses will be incurred, which are not already recorded as a provision in these consolidated financial statements.

Tax legislation. The taxation system in the Russian Federation continues to evolve and is characterized by frequent changes in legislation, official pronouncements and court decisions, which are sometimes contradictory and subject to varying interpretation by different tax authorities. Taxes are subject to review and investigation by a number of authorities who have the authority to impose severe fines, penalties and interest charges. A tax year remains open for review by the tax authorities during the three subsequent calendar years; however, under certain circumstances a tax year may remain open longer. Recent events within the Russian Federation suggest that the tax authorities are taking a more assertive position in their interpretation and enforcement of tax legislation.

These circumstances may create tax risks in the Russian Federation that are substantially more significant than in other countries. Management believes that it has provided adequately for tax liabilities based on its interpretations of applicable Russian tax legislation, official pronouncements and court decisions. However, the interpretations of the relevant authorities could differ and the effect on the financial position, if the authorities were successful in enforcing their interpretations, could be significant.

Transfer pricing legislation enacted in the Russian Federation starting from 1 January 2012 provides for major modifications making local transfer pricing rules closer to OECD guidelines, but creating additional uncertainty in practical application of tax legislation in certain circumstances.

These transfer pricing rules introduce an obligation for the taxpayers to prepare transfer pricing documentation with respect to controlled transactions and prescribe new basis and mechanisms for accruing additional taxes and interest in case prices in the controlled transactions differ from the market level.


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The transfer pricing rules primarily apply to cross-border transactions between related parties, as well as to certain cross-border transactions between independent parties, as determined under the Russian Tax Code. In addition, the rules apply to in-country transactions between related parties if the accumulated annual volume of the transactions between the same parties exceeds a particular threshold (RUB 3 billion in 2012, RUB 2 billion in 2013, and RUB 1 billion in 2014 and thereon).

Since there is no practice of applying the new transfer pricing rules by the tax authorities and courts as transfer pricing tax audits under new rules started recently, however, it is anticipated that transfer pricing arrangements will be subject to very close scrutiny potentially having effect on these consolidated financial statements.

The Management believes that their interpretation of the relevant legislation is appropriate and the Group’s tax, currency and customs positions will be sustained. Accordingly, as at 31 December 2014 and 2013 no provision for potential tax liabilities is recognized.

Operating lease commitments. Where the Group is the lessee, the future minimum lease payments under non-cancellable operating leases are as follows:

2014 2013

Less than 1 year 416 865 486 057

Between 1 and 5 years 268 131 261 696

More than 5 years 103 58 905

Total operating lease commitments 685 099 806 658

Pensions and retirement plans. As at 31 December 2014 and 2013, the Group was not liable for any supplementary pensions, post-retirement health care, insurance benefits, or retirement indemnities to its current or former employees.

Fiduciary assets. In 2014 and 2013 the Group provided trustee services to its customers through its asset management subsidiary – Allianz Investments. As at 31 December 2013 total amount of assets managed by Allianz Investments was equal to RUB 13 080 903 thousand and included federal loan bonds, corporate bonds and shares and government bonds. Allianz Investments was disposed of in 2014 (note 23). The Group no longer carries out asset management activity.

29. Fair Value of Financial Instruments

Accounting classifications and fair values The following table shows the carrying amounts and fair values of financial assets as at 31 December 2014:

Carrying amount

Loans and receivables

Available-for-sale financial instruments Total

Financial assets measured at fair value

Debt securities (note 6) - 7 664 471 7 664 471

- 7 664 471 7 664 471

Financial assets not measured at fair value

Cash and cash equivalents 4 156 356 - 4 156 356

Deposits with banks 5 730 439 - 5 730 439

Promissory noted and originated loans 15 137 - 15 137

Trade and other receivables (note 7) 4 488 665 - 4 488 665

14 390 597 - 14 390 597


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The following table shows the carrying amounts and fair values of financial assets as at 31 December 2013:

Carrying amount

Loans and receivables

Available-for-sale financial instruments Total

Financial assets measured at fair value

Debt securities (note 6) - 12 702 742 12 702 742

- 12 702 742 12 702 742

Financial assets not measured at fair value

Cash and cash equivalents 821 448 - 821 448

Deposits with banks 6 605 963 - 6 605 963

Promissory noted and originated loans 34 492 - 34 492

Trade and other receivables (note 7) 6 417 343 - 6 417 343

13 879 246 - 13 879 246

The estimates of fair value are intended to approximate the price that would be received to sell an asset, or paid to transfer a liability in an orderly transaction between market participants at the measurement date. However, given the uncertainties and the use of subjective judgment, the fair value should not be interpreted as being realisable in an immediate sale of the assets or transfer of liabilities.

Fair values of available-for-sale financial instruments that are traded in active markets are based on quoted market prices or dealer price quotations. For all other financial instruments the Group determines fair values using other valuation techniques.

The objective of valuation techniques is to arrive at a fair value determination that reflects the price that would be received to sell the asset in an orderly transaction between market participants at the measurement date.

The Group measures fair values using the following fair value hierarchy that reflects the significance of the inputs used in making the measurements:

Level 1: quoted market price (unadjusted) in an active market for an identical instrument.

Level 2: inputs other than quoted prices included within Level 1 that are observable either directly (i.e. as prices) orindirectly (i.e. derived from prices). This category includes instruments valued using: quoted market prices in activemarkets for similar instruments; quoted prices for similar instruments in markets that are considered less than active; orother valuation techniques where all significant inputs are directly or indirectly observable from market data.

Level 3: inputs that are unobservable. This category includes all instruments where the valuation technique includesinputs not based on observable data and the unobservable inputs have a significant effect on the instrument’s valuation.This category includes instruments that are valued based on quoted prices for similar instruments where significantunobservable adjustments or assumptions are required to reflect differences between the instruments.

The table below analyses financial instruments measured at fair value as at 31 December 2014 and 2013, by the level in the fair value hierarchy into which the fair value measurement is categorized. The amounts are based on the values recognized in the consolidated condensed statement of financial position:

Level 1 Level 2 Level 3 Total

Financial assets - available-for-sale financial instruments Carrying amount as at 31 December 2014 7 415 168 - 249 303 7 664 471 Carrying amount as at 31 December 2013 12 079 819 622 923 - 12 702 742

The estimated fair values of all financial assets and liabilities approximate their carrying values.

The following table shows a reconciliation for the year ended 31 December 2014 for fair value measurements in Level 3 of the fair value hierarchy:

Total As at 1 January 2014 -Transfers into level 3 249 303

As at 31 December 2014 249 303


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Available-for-sale financial instruments categorized into Level 3 as at 31 December 2014 comprise investments in mutual funds, whose estimates are based on a combination of independent third-party evidence and internally developed models, which use both observable and non-observable data. The non-observable inputs to the models include assumptions regarding the future financial performance of the investees of mutual funds, their risk profiles, and economic assumptions regarding the industry in which the investees operate.

The valuation requires management to make certain assumptions about unobservable inputs to the model. Significant unobservable inputs are developed as follows:

- probabilities of default and loss severities are derived from historical default and recovery information and adjusted for current conditions (range of estimates for input of 10%);

- correlation between and volatilities of the underlying are derived from extrapolation of observable volatilities, recent transaction prices and historical data adjusted for current conditions (range of estimates for input of 15%);

The management assesses a range of reasonably possible alternatives for those significant unobservable inputs and determines their impact on the total fair value. Significant increases in any of these inputs in isolation would result in lower fair value. A significant reduction would result in higher fair value. Generally, a change in assumption used for the probability of default is accompanied by a unilateral change in assumptions used for the loss severity.

Although the Group believes that its estimates of fair value are appropriate, the use of different methodologies or assumptions could lead to different measurements of fair value. For fair value measurements in Level 3, changing one or more of the assumptions used to reasonably possible alternative assumptions would have the following effects as at 31 December 2014:

Effect on

other comprehensive income

Favourable Unfavourable

Available-for-sale financial assets - Debt and other fixed-income instruments 11 951 (11 951)

Total 11 951 (11 951)

30. Related Party Transactions

For the purposes of these consolidated financial statements, parties are considered to be related as defined by IAS 24 Related Party Disclosures. In considering each possible related party relationship, attention is directed to the substance, not merely the legal form.

The outstanding balances as at 31 December 2014 and 2013, as well as income and expenses for 2014 and 2013 with related parties are as follows:

2014 2013

Parent company

Other subsidiaries of

the Parent company Parent company

Other subsidiaries of

the Parent company

Assets and liabilities Receivables 10 196 241 499 153 727 285 084Reinsurers' share of loss provision 211 906 1 855 851 393 948 894 390Payables (21 309) (1 195 936) (152 470) (877 728)Income and expenses Gross premiums written 1 995 1 704 4 991 -Premiums ceded (227 430) (2 677 313) (292 600) (2 548 762)Change in reinsurer’s share of loss provision 182 042 (961 461) 61 442 651 943Gross claims paid (3 223) - (9 095) -Claims ceded 360 358 676 735 276 092 394 680Acquisition costs (956) - (1 127) -Commission income on reinsurance outwards 2 657 520 749 43 730 375 263Insurance operating expenses (104 198) (154 787) - (156 440)

In 2014 the total remuneration of the key management and discretionary compensation amounts to RUB 319 648 thousand (2013: RUB 141 901 thousand). As at 31 December 2014 loans issued to employees of the Group amount to RUB 15 137 thousand (2013: RUB 34 492 thousand).

ojsc ic allianz consolidated financial statements for the ...group... · allianz notes to the...

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