SAVA RE GROUP AND FINANCIAL

SOLVENCY CONDITION REPORT 2017

Management Board of Sava Re, d.d.

Marko Jazbec, Chairman of the Management Board

Jošt Dolničar, Member of the Management Board

Srečko Čebron, Member of the Management Board

Polona Pirš Zupančič, Member of the Management Board

C.2.2 Measurement and concentration of market risks 86
C.2.3 Risk management 88
C.3 Credit risk 91
C.3.1 Credit risk 91
C.3.2 Risk measurement and concentration 91
C.3.3 Risk management 93
C.4 Liquidity risk 94
C.4.1 Risk exposure 94
C.4.2 Risk measurement and concentration 94
C.4.3 Risk management 94
C.5 Operational risk 96
C.5.1 Risk exposure 96
C.5.2 Risk measurement and concentration 96
C.5.3 Risk management 96
C.6 Other material risks 97
C.6.1 Strategic risks 97
C.6.2 Investment contract risks 99
C.7 Any other information 99

D. VALUATION FOR SOLVENCY PURPOSES 103

D.1 Assets 108
D.1.1 Goodwill 108
D.1.2 Deferred acquisition costs 108
D.1.3 Intangible assets 108
D.1.4 Deferred tax assets and liabilities 108
D.1.5 Property, plant and equipment held for own use 109
D.1.6 Investments 109
D.1.7 Loans and mortgages 111
D.1.8 Reinsurance recoverables 111
D.1.9 Deposits to cedants 112
D.1.10 Insurance and intermediaries receivables 112
D.1.11 Reinsurance receivables 112
D.1.12 Receivables (trade, not insurance) 112
D.1.13 Own shares 113
D.1.14 Cash and cash equivalents 113
D.1.15 Any other assets, not elsewhere shown 113
D.2 Technical provisions 114
D.2.1 Value of SII technical provisions 120
D.2.2 Comparison of IFRS technical provisions to Solvency II technical provisions 124
D.2.3 Description of the level of uncertainty 125

SUMMARY 10

A. BUSINESS AND PERFORMANCE 18

A.1 Business 18
A.2 Underwriting performance4 ²⁶
A.3 Investment performance 34
A.4 Performance of other activities 38
A.5 Any other information 39

B. SYSTEM OF GOVERNANCE 42

B.1 General information on the system of governance 42
B.1.1 Governance of the Sava Re Group 42
B.1.2 Selection of management system and the proportionality principle 43
B.1.3 Governing bodies 43
B.1.4 Risk management 49
B.1.5 Key functions of the risk management system 49
B.1.6 Committees of the governance system 51
B.1.7 Information about the remuneration policy 51
B.1.8 Related-party transactions 53
B.2 Fit and proper requirements 54
B.2.1 Fitness requirements for relevant personnel 54
B.2.2 Suitability requirements for relevant personnel 55
B.2.3 Procedure for fit and proper assessment 56
B.3 Risk management system including the own risk and solvency assessment 56
B.3.1 Risk management organisation 57
B.3.2 Components of the risk management system 59
B.4 Internal control system 63
B.4.1 Internal control system 63
B.4.2 Compliance function 63
B.5 Internal audit function 65
B.7 Outsourcing 68
B.8 Any other information 69

C. GROUP RISK PROFILE 72

C.1 Underwriting risk 73
C.1.1 Non-life underwriting risk 74
C.1.2 Life underwriting risk 80
C.1.3 Health underwriting risk 83
C.2 Market risk 84
C.2.1 Risk exposure 85

D.3 Any other liabilities, not elsewhere shown: 126
D.3.1 Provisions other than technical provisions 126
D.3.2 Insurance and intermediaries payables 126
D.3.3 Reinsurance payables 127
D.3.4 Other payables (trade, not insurance) 127
D.3.5 Subordinated liabilities 127
D.3.6 Any other liabilities, not elsewhere shown 127
D.4 Alternative methods for valuation 128
D.5 Any other information 129

E. CAPITAL MANAGEMENT 132

E.1 Own funds 133
E.2 Solvency capital requirement and minimum capital requirement 138
E.2.1 Group solvency capital requirement (Group SCR) 138
E.2.2 Minimum capital requirement (MCR) 141
E.3 Use of the duration-based equity risk sub-module in the calculation of the solvency capital requirement (SCR) 142
E.4 Difference between the standard formula and any internal model used 142
E.5 Non-compliance with the minimum capital requirement (MCR) and non-compliance with the solvency capital requirement (SCR) 142
E.6 Any other information 142

Appendix A - Glossary of selected terms and calculation methodologies for indicators 146

Appendix B - Quantitative reporting templates 152

General information

All figures included in this report are consistent with those reported as part of the quantitative reporting procedure for the Slovenian Insurance Supervision Agency. Figures in this report are stated in thousands of euro. The report has been reviewed and approved by the controlling company's management and supervisory boards.

The Group's Solvency and financial condition report has been reviewed by the auditing firm Ernst & Young, who have issued an independent auditor's assurance report.

The audited Sava Re Group annual report 2017 is available online, at https://www.sava-re.si/en/investors/financial-information/financial-reports/.

SUMMARY

The purpose of this report is to provide information on the solvency position of the Sava Re Group as at 31 December 2017, as well as on its business and performance, system of governance, risk profile and valuation methods used for assets and liabilities. The report also includes key quantitative data, which is appended hereto. Such a report is prepared by the Sava Re Group on an annual basis. This document has been prepared in accordance with the Slovenian Insurance Act (ZZavar-1) and other legislative acts.

Profile of the Sava Re Group

The Sava Re Group (hereinafter: the 'Group' or the 'Sava Re Group') is one of the largest insurance groups in south-eastern Europe. As at 31 December 2017, it comprised seven insurance companies, one pension company and one reinsurance company, which functions as the Group's controlling company.

The Group employs over 2,600 people. We provide insurance and reinsurance coverage for all lines of business, offering:

• a respectful, honest and sincere partnership,
• proficiency,
• integrity and transparency,
• accessibility and responsiveness,
• accountability,
• creativity.

Sava Re has been operating in the international reinsurance markets for over 40 years, and on the Slovenian insurance market, via the former Zavarovalnica Tilia, since 1998. The Group expanded to some other markets of the former Yugoslavia through the acquisition of six insurance companies between 2006 and 2009, and through greenfield investments in two life insurance companies in 2008.

In 2017, the Group's consolidated gross premiums written totalled EUR 517.2 million.

The Group's core strengths lie in its regional knowledge, reliability, responsiveness, flexibility and financial strength. We exceed client expectations with an ongoing effort to improve relationships; we grow relationships with our colleagues in a responsible, frank and respectful manner, and play an active role in our environment.

Our guiding principle is to build long-term relationships with our clients and partners that will allow us to achieve our common goals throughout all economic cycles.

Business and performance1

The performance of the Group was marked by premium growth in all markets where it is present. Profits are within the planned range although impacted by some large claims. These impacts were offset by better cost efficiency and synergy gains following the merger of the Group's insurance companies based in Slovenia and Croatia.

In 2017, the Group wrote EUR 517.2 million in gross premiums, a 5.5% increase over 2016 and 4.7% more than planned. In Slovenia, gross non-life insurance premiums grew by 5.7%, while gross life insurance premiums rose by 3.7%. The Group achieved high, nearly 10% premium growth in international markets, both in non-life and life insurance business. Gross premiums written relating to the reinsurance segment grew by 3.8%.

The Group closed 2017 with a net profit of EUR 31.1 million and a 10.1% return on equity. Net profit for the year declined by 5.5% compared to the previous year, largely as a result of a number of weather-related claims that impacted both insurance and reinsurance operations, with gross claims paid increasing by 14.9% and net claims incurred by 10.3%. The profit of Zavarovalnica Sava was heavily impacted by storm losses (of about EUR 11.9 million), while the reinsurance portfolio performed somewhat poorer than in 2016 due to large international claims. Most notable were the claims relating to hurricane losses in the Caribbean and the USA of EUR 4 million, and a large loss event in Russia totalling EUR 3.8 million.

The Group succeeded in delivering a net profit within the set target range despite increased claims, mainly thanks to better cost control and by realising synergy gains following the successful merger of the Group's EU-based insurers in the first full post-merger year. The net expense ratio for the year declined by 1.3 percentage points from 34.0 to 32.7%. In 2017, the Group's combined ratio, excluding the effect of exchange differences, stood at 95.5%, up by 0.9 percentage points from 2016 as a result of higher claims.

The return on the investment portfolio was better than planned, despite the rather unfavourable conditions in financial markets. In asset management activities, the Group gives priority to security and liquidity to ensure that obligations arising out of insurance contracts can be met in an appropriate manner. Backed by the Group's financial stability, Sava Re repaid a significant part of its subordinated debt of EUR 24 million in 2017. The loan was taken out in 2006 and 2007 to finance the Group's expansion abroad.

Also last year, two rating agencies affirmed the financial strength and capital adequacy of the Sava Re Group. In July 2017, after its regular annual rating review, the rating agency Standard & Poor's affirmed Sava Re's existing 'A–' issuer credit and financial strength ratings but upgraded the outlook from 'stable' to 'positive'. Following its regular annual rating review, the rating agency A.M. Best affirmed the financial strength rating on Sava Re of 'A–' with a stable outlook.

In 2017, the Group members put greater emphasis on developing new products and new sales channels in line with the adopted medium-term strategy – Group members focused on digitising their operations and placing the client at the centre of services and ways of working. The Group's medium-term focus also includes the growth and development of health insurance products that Zavarovalnica Sava launched in December 2017. In line with its strategy, the Group entered the assistance market in 2017, which gives its members further room to unlock synergy benefits related to organising assistance in conjunction with its motor, health and home owners insurance business. With a view to expanding its pension insurance activities, Sava Re signed a deal to acquire 100% of the Macedonia-based NLB Nov penziski fond in 2017, thus gaining a foothold in the Macedonian pension insurance market. Expansion and growth remain a key part of Sava Re's strategic focus.

System of governance

The Group companies have in place a system of governance that is well defined and includes:

• an adequate organisation, including management bodies, key functions and committees,
• an integrated risk management system,
• an internal control system.

The following four key functions operate on the Group level: the actuarial function, compliance function, risk management function, and internal audit function. Also, a risk committee and actuarial committee have been set up.

To ensure efficient risk management, the Group has in place a three-lines-of-defence model with a clearly defined division of responsibilities and tasks:

• The first line of defence constitutes all organisational units with operational responsibilities (e.g. (re)insurance underwriting, claims management, asset management, accounting, controlling).
• The second line of defence consists of the risk management function, actuarial function, compliance function and the risk management committee.
• The third line of defence is provided by the internal audit function.

In 2017, there were changes in the composition of the controlling company's management and supervisory boards. Details are provided in section B.1.1.

¹ This section provides information on the performance of the Sava Re Group based on IFRS accounts; therefore, figures do not equal Solvency II calculations, which do not include data of Sava pokojninska.

Risk profile

The Group calculates its capital requirement in accordance with the Solvency II standard formula as defined in Delegated Regulation (EU) 2015/35 (hereinafter: 'Solvency II standard formula' or 'standard formula'). The Group's risk profile is dominated by non-life underwriting risk and is exposed to a significant level of market risk. The Group has a smaller exposure to other types of risk: life underwriting risk, health underwriting risk, counterparty default risk and operational risk. Apart from the above risks, which are captured by the standard formula, the Group is also exposed to liquidity risk, managed primarily by following a strategy for ensuring sufficient liquidity. Because of the complex internal and external environment in which it operates, the Group is exposed to various strategic risks.

The table below shows the Group's solvency capital requirement in accordance with the Solvency II standard formula (hereinafter: Group SCR) by risk module.

Sava Re Group strategy highlights

The Sava Re Group defines its strategy in terms of four pillars (see figure below): insurance operations, reinsurance operations, asset management, capital growth and use.

The key guidelines set out in the Group's strategy are:

• digitalisation and technological modernisation of operations to place the client at the centre,
• growth through acquisitions,
• seeking opportunities in environmentally/sustainability-oriented investment projects,
• closing the gap between intrinsic value and market price of shares.

Solvency capital requirement by module

(EUR thousand)	31/12/2017	31/12/2016
Group SCR	205,015	207,113
Capital requirements of other financial sectors	5,300	4,943
Consolidated SCR at the Group level	199,716	202,169
Adjustments for TP and DT	-218	-292
Operational risk	15,407	14,827
Basic solvency capital requirement (BSCR)	184,526	187,634
Sum of risk components	272,615	272,604
Diversification effect	-88,089	-84,970
Market risk	51,671	63,861
Counterparty default risk	14,364	19,611
Life underwriting risk	40,210	26,098
Health underwriting risk	23,934	24,178

(EUR thousand)	31/12/2017	31/12/2016
Group SCR	205,015	207,113
Capital requirements of other financial sectors	5,300	4,943
Consolidated SCR at the Group level	199,716	202,169
Adjustments for TP and DT	-218	-292
Operational risk	15,407	14,827
Basic solvency capital requirement (BSCR)	184,526	187,634
Sum of risk components	272,615	272,604
Diversification effect	-88,089	-84,970
Market risk	51,671	63,861
Counterparty default risk	14,364	19,611
Life underwriting risk	40,210	26,098
Health underwriting risk	23,934	24,178
Non-life underwriting risk	142,437	138,857

As at 31 December 2017, all eligible own funds to cover the Group SCR were tier one funds. As at 31 December 2017, the Group complied with the regulatory requirements on the level and quality of capital to cover the SCR and MCR, as its solvency ratio exceeded the regulatory requirement of 100% and stood at 220%, while the MCR ratio was 418%.

The Group also tested the adequacy of eligible own funds to cover the MCR several times during the year and established compliance throughout the year.

According to the Group's risk strategy, a solvency ratio of 140% is still considered adequate, albeit suboptimal, while the optimal level of capitalisation starts at 170%. This demonstrates that the Group is well capitalised, also in terms of its own criteria.

Valuation for solvency purposes

In accordance with article 174 of the Slovenian Insurance Act, assets are valued at amounts for which they could be exchanged between knowledgeable and willing parties in arm's length transactions. Similarly, the Group values liabilities at amounts by which they could be transferred or settled, between knowledgeable and willing parties in arm's length transactions.

For the preparation of the consolidated financial statements in accordance with International Financial Reporting Standards (hereinafter: IFRS), the full consolidation method is used for all Group companies. For the purposes of valuation of the Solvency II balance sheet, all Group (re)insurance undertakings and all ancillary services undertakings are consolidated in accordance with article 335 (a) of the Commission Delegated Regulation (EU) (2015/35), while the Sava pokojninska pension company is included in the consolidation in accordance with article 335 (e) of the above regulation by including 100% of the company's own funds calculated according to the relevant sectoral rules.

The following table shows adjustments to the IFRS balance sheet items that have been made for Solvency II purposes. The table below shows IFRS equity and Solvency II eligible own funds.

Adjustments to IFRS equity for the SII valuation of the balance sheet

(EUR thousand)	31/12/2017	31/12/2016
IFRS equity	315,020	296,318
Difference in the valuation of assets	-133,926	-120,592
Difference in the valuation of technical provisions	299,674	285,731
Difference in the valuation of other liabilities, not elsewhere shown	-16,766	-25,081
Foreseeable dividends, distributions and charges	-12,398	-12,398
Adjustment for minority interests	-206	-585
Deduction for participations in other financial undertakings	-8,353	-8,008
Basic own funds after deductions	443,045	415,385
Basic own funds in other financial sectors	8,353	8,008
Group's available own funds	451,398	423,393

Capital adequacy of the Group

(EUR thousand)	31/12/2017	31/12/2016
(1) Group SCR	205,015	207,113
Capital requirements for other financial sectors	5,300	4,943
(3) Consolidated SCR at the Group level	199,716	202,169
(4) Eligible own funds of the Group (excluding other financial sectors)	443,045	415,385
(5) Own funds in other financial sectors	8,353	8,008
(6) Eligible own funds to cover the Group SCR	451,398	423,393
Of which tier 1	451,398	423,393
Of which tier 2	0	0
Of which tier 3	0	0
(7) Group solvency ratio ((7)=(6)/(1))	220%	204%
Minimum capital requirement (MCR) of Group	106,009	103,337
Eligible own funds to meet the Group MCR	443,045	415,386
Of which tier 1	443,045	415,386
Of which tier 2	0	0
Of which tier 3	-	-
Group MCR	418%	402%

Capital management

The Group manages its capital to ensure that it has available, on an ongoing basis, sufficient funds to meet its obligations and regulatory capital requirements. The composition of eligible own funds held to ensure capital adequacy must comply with regulatory requirements and ensure an optimal balance between debt and equity capital. The level of own funds must also be sufficient to achieve other goals of the Group.

The Group prepares its business and strategic plans based on its risk strategy, which determines its risk appetite. During its drafting , it makes sure that the plans are in line with the risk appetite, making adjustments if necessary. On the whole, it seeks to achieve an optimal allocation of capital.

A

BUSINESS AND PERFORMANCE

A.1 Business

A.2 Underwriting performance A.3 Investment performance A.4 Performance of other activities

-

A.5 Any other information

A.1 Business

Name and legal form of the controlling company

Sava Re, d.d. Dunajska cesta 56 1000 Ljubljana Slovenia

Sava Re, the controlling company of the Group, transacts reinsurance business. Slovenia-based Zavarovalnica Sava is the Group's only composite insurer. The insurers Sava neživotno osiguranje (SRB), Sava osiguruvanje (MKD), Illyria and Sava osiguranje (MNE) are non-life insurance companies, while Sava životno osiguranje (SRB) and Illyria Life are life insurance companies. In addition to the above (re)insurers, as at 31 December 2017, the Group consisted of:

• Illyria Hospital: a Kosovo-based company, which owns some property but currently does not transact any business. The company is wholly-owned by Sava Re.
• Sava Car: a vehicle inspection company. The company is wholly-owned by the insurer Sava osiguranje (MNE).
• Sava Agent: an insurance agency. The company is wholly-owned by the insurer Sava osiguranje (MNE).
• Sava Station: a vehicle inspection company. The company is wholly-owned by the insurer Sava osiguruvanje (MKD).
• ZM Svetovanje: agency specialised in marketing life products of Zavarovalnica Sava. The company is wholly-owned by the insurer Zavarovalnica Sava.
• Sava pokojninska: a Slovenian-based pension company. The company is wholly-owned by Sava Re.

The figure below shows the composition of the Save Re Group as at 31 December 2017.

Composition of the Sava Re Group

Composition of the Sava Re Group as at 31 December 2017

A. BUSINESS AND PERFORMANCE

Subsidiaries as at 31 December 2017

	Sava Re	Zavarovalnica Sava	Sava pokojninska	Sava neživotno osiguranje (SRB)	Sava životno osiguranje (SRB)
Registered office	Dunajska cesta 56, 1001 Ljubljana, Slovenia	Cankarjeva 3, 2507 Maribor, Slovenia	Ulica Vita Kraigherja 5, 2103 Maribor, Slovenia	Bulevar vojvode Mišića 51, 11040 Beograd, Serbia	Bulevar vojvode Mišića 51, 11040 Beograd, Serbia
Business activity	reinsurer	composite insurer	pension company non-life insurer		life insurer
Share capital	EUR 71,856,376	EUR 68,417,377	EUR 6,301,109	EUR 6,665,393	EUR 5,336,373
Book value of equity interest		EUR 68,417,377	EUR 6,301,109	EUR 6,665,393	EUR 5,336,373
% capital share (voting rights) held by Group members		Sava Re: 100.0%	Sava Re: 100.0%	Sava Re: 100.0%	Sava Re: 100.0%
Profit or loss for 2017	EUR 32,974,192	EUR 25,080,999	EUR 420,256	EUR 435,559	-EUR 818,333
Position in the Group	parent & reinsurer	subsidiary insurance company	subsidiary pension company	subsidiary insurance company	subsidiary insurance company
	Illyria	Illyria Life	Sava osiguruvanje	Sava osiguranje	Illyria Hospital
			(MKD)	(MNE)
Registered office	Sheshi Nëna Terezë 33, 10000 Priština, Kosovo	Sheshi Nëna Terezë 33, 10000 Priština, Kosovo	Zagrebska br. 28 A, 1000 Skopje, Macedonia	PC Kruševac, Rimski trg 70, 81000 Podgorica, Montenegro	Sheshi Nëna Terezë 33, 10000 Priština, Kosovo
Business activity	non-life insurer	life insurer	non-life insurer	non-life insurer	does not currently perform any activities
Share capital	EUR 5,428,040	EUR 3,285,893	EUR 3,820,077	EUR 4,033,303	EUR 1,800,000
Book value of equity interest	EUR 5,428,040	EUR 3,285,893	EUR 3,536,245	EUR 4,033,303	EUR 1,800,000
% capital share (voting rights) held by Group members	Sava Re: 100.0%	Sava Re: 100.0%	Sava Re: 92.57%	Sava Re: 100.0%	Sava Re: 100.0%
Profit or loss for 2017	EUR 223,576	EUR 230,850	EUR 358,257	EUR 1,232,772	-EUR 114

List of Group companies

The tables below provide details of all Group companies in which Sava Re holds direct equity participations.

Following are details of the controlling company Sava Re, as its supervisory board also oversees the operations of the Sava Re Group.

Name and contact details of the supervisory authority responsible for the prudential control of the controlling company

Insurance Supervision Agency Trg republike 3 1000 Ljubljana, Slovenia E-mail: [email protected]

Name and contact details of the controlling company's external auditor

ERNST & YOUNG Revizija, poslovno svetovanje, d. o. o. Dunajska cesta 111 1000 Ljubljana, Slovenia Telephone: +386 1 583 17 00 Telefax: +386 1 583 17 10 E-mail: [email protected]

The financial statements of the controlling company have been audited by Ernst & Young d.o.o., who were tasked with the auditing of the financial statements of the Sava Re Group and Sava Re in 2017 for the fifth year in a row. In 2017, most of the Group's subsidiary companies were audited by the local auditing staff of the same auditing firm, while the Montenegrin subsidiary was audited by Deloitte Podgorica. In 2016, a contract for the auditing of the financial statements was signed with Ernst & Young for the 2016–2018 period.

Holders of qualifying shares in the controlling company as at 31 December 2017

Shareholder	No. of shares	Holding	% voting rights
SDH, d. d.	3,043,883	17.7%	19.6%
Zagrebačka banka d. d. – fiduciary account	2,439,852	14.2%	15.7%

Source: Central securities register KDD, d.d. and own sources.
Sava Re holds 1,721,966 own shares with no voting rights attached.
On 2 June 2016, Sava Re received a notice from Adris groupa, d.d., Vladimira Nazora 1, 52210 Rovinj, Croatia (hereinafter: Adris grupa), advising Sava Re of a change in major holdings in Sava Re. Adris grupa, including its subsidiaries with fiduciary accounts, held 3,278,049 POSR shares, representing 19.04% of issued and 21.15% of outstanding shares.

Major lines of business transacted and the Group's main markets2

The Group operates in the market of the Republic of Slovenia and globally. Below we present the major lines of business transacted and major countries in which it operates.

In 2017, business was dominated by the following lines: motor vehicle liability insurance and proportional reinsurance, fire and other damage to property insurance and proportional reinsurance, and other motor insurance and proportional reinsurance. These lines of business accounted for 59.0% of the total gross premiums written.

Premiums by line of business

(EUR thousand)	Gross premiums written in 2017	Gross premiums written in 2016	Index
Motor vehicle liability insurance and proportional reinsurance	106,377	100,612	105.7
Fire and other damage to property insurance and proportional reinsurance	103,509	106,355	97.3
Other motor insurance and proportional reinsurance	94,151	84,820	111.0
Non-proportional property reinsurance	28,862	25,927	111.3
Income protection insurance and proportional reinsurance	45,189	44,298	102.0
Life insurance	70,100	69,503	100.9
Other lines of business	66,927	57,581	116.2
Total	515,115	489,095	105.3

Major countries in which the Group operates

(EUR thousand)	Gross premiums written in 20173	Gross premiums written in 2016	Index
Slovenia	366,500	347,977	105.3
Serbia	19,602	17,450	112.3
South Korea	15,569	18,767	83.0
Macedonia	12,753	12,299	103.7
Montenegro	12,459	11,761	105.9
Kosovo	10,018	8,861	113.1

The following table shows the most important markets of the Group in terms of premiums written in 2017. Listed are countries where it wrote over EUR 9.5 million in gross premiums. The Sava Re Group wrote most of its business in Slovenia, other countries of the Adria region and South Korea.

Significant events in 2017

• On 7 March 2017, the 32nd general meeting of shareholders took place. The general meeting elected new supervisory board members for the next four-year term of office: Ivan Davor Gjivoje (beginning on 07/03/2017) and Mateja Lovšin Herič, Keith William Morris and Andrej Kren (beginning on 16/07/2017). Since 7 March 2017, the supervisory board of Sava Re has operated with all of its six members.
• In 2006 and 2007, Sava Re raised subordinated debt in the nominal amount of EUR 32 million maturing in 2027. These funds were raised to expand the Sava Re Group to the markets of the former Yugoslavia and to improve its capital adequacy position in accordance with the then applicable insurance law and the Standard & Poor's model. In January 2014, Sava Re prepaid EUR 8 million of the nominal amount of its subordinated debt. After receiving approval from the Slovenian Insurance Supervision Agency, Sava Re repaid the first tranche of the subordinated debt in the nominal amount of EUR 12 million on 15 March 2017. The remaining part of the subordinated debt in the nominal amount of EUR 12 million was repaid in June 2017. Following the repayment of the subordinated debt, Sava Re and the Sava Re Group continue to maintain a high solvency ratio under the applicable law.
• On 19 April 2017, Sava Re jointly with other expropriated shareholders presented its comments and proposals relating to the draft Law on Judicial Protection of Holders of Qualifying Liabilities of Banks in connection with the cancellation of subordinated financial instruments. They emphasised that the draft law did not eliminate the unconstitutionality of such, nor did it fully comply with the requirements of the Constitutional Court. It was reiterated that the cancellation of subordinated bonds was unjustified, wrong, and the most draconian of measures taken in Europe, as demonstrated by new facts and figures. At the time this report was finalised, the law had not been passed.
• On 12 May 2017, Marko Jazbec took up the role of chairman of the management board of Sava Re, after obtaining the ISA licence for performing the function.
• On 19 May 2017, the 33rd general meeting was held to consider regular topics. The general meeting approved the proposed dividend of EUR 0.80 gross per share, in total EUR 12,398,156.8 (taking into account the number of own shares), or 37.7% of the net profit of the Sava Re Group. The ordinary dividend increased by 23% and was on the same level as the sum of last year's ordinary and special dividends.
• In June 2017, a court settlement was concluded in the labour dispute between Sava Re and Zvonko Ivanušič (plaintiff), finally resolving all disputed relations between the parties concerning the termination of the plaintiff's employment contract with the defendant. Following this, a court settlement was concluded in the commercial dispute between Sava Re and Zvonko Ivanušič, finally resolving all disputed relations between the parties relating to the recall of the plaintiff from the position of chairman of the management board of Sava Re.
• In the first half of 2017, the document Solvency and financial condition report of Sava Re, d.d. 2016 was published, followed by the release of the Sava Re Group solvency and financial condition report 2016 in July 2017. The documents demonstrated the level of the solvency ratio of the Group and Sava Re to be 264% and 204%, respectively.
• On 16 July 2017, the following members of the supervisory board began their four-year terms of office based on a general meeting resolution: Andrej Kren, Keith William Morris and Mateja Lovšin Herič. The members of the supervisory board serving new terms of office are Andrej Kren, Davor Ivan Gjivoje, Keith William Morris, Mateja Lovšin Herič, Mateja Živec and Gorazd Kunstek. In its constitutive meeting, on 16 August 2017, the supervisory board members elected from among the members Mateja Lovšin Herič as chair of the supervisory board and Keith William Morris as deputy chair.

² This subsection presents consolidated data based on SII calculations that do not include Sava pokojninska; therefore, figures do not equal IFRS calculations.

³ Premiums include premium estimates.

Significant events after the reporting date

• In January 2018, Polona Pirš Zupančič began her five-year term of office as a member of the management board. After this change, the Sava Re management board continued to operate as a four-member body. This is because in its session on 20 December 2017, the supervisory board of Sava Re took note of the notice of Mateja Treven on her early termination of her term as Sava Re management board member and accepted Mateja Treven's proposal for a consensual termination of her employment contract as management board member. Mateja Treven concluded her role as management board member on 13 January 2018 and will continue her career within the Sava Re Group. The two management board members Srečko Čebron and Jošt Dolničar started their new terms of office on 1 June 2018.
• On 31 January 2018, Sava Re satisfied all suspensive conditions, thus becoming the owner of 75% of TBS Team 24.
• In accordance with article 171(7) of the Insurance Act (ZZavar-1; Uradni list RS/Official Gazette of the Republic of Slovenia, No. 93/15) Sava Re entered into outsourcing agreements with Zavarovalnica Sava and Sava pokojninska, based on which the key function of internal audit of the companies Zavarovalnica Sava and Sava pokojninska was transferred to Sava Re for an indefinite duration, starting as at 1 February 2018.
• On 13 March 2018, Sava Re satisfied all suspensive conditions, thus becoming the owner of 100% of NLB Nov penziski fond AD Skopje.
• In March 2018, Sava Re obtained approval from Serbia's central bank and other regulators to purchase a 92.94% stake in the Serbian-based company Energoprojekt Garant. Following the acquisition of this majority stake and subsequent steps towards attaining sole ownership, Sava Re intends to merge the target with its existing subsidiary, the Serbian non-life insurer Sava neživotno osiguranje (SRB), and then optimise the subsidiary's capital structure.
• In April 2018, the notice for the 34th general meeting of shareholders scheduled for Tuesday, 29 May was published.
• In April 2018, Zavarovalnica Sava as the buyer signed a contract with the sellers Ergo Austria International AG and Ergo Versicherung Aktiengesellschaft for 100% of the Croatianbased companies ERGO osiguranje d.d. and ERGO životno osiguranje d.d.
• In May 2018, Sava Re published the Solvency and financial condition report of Sava Re, d.d. 2017. The Company's solvency ratio was 283% as at 31 December 2017. Zavarovalnica Sava published its solvency and financial condition report in April 2018.

The Group uses the full consolidation method for all of its companies in the preparation of the IFRS consolidated financial statements. For the purposes of valuation of the Solvency II balance sheet, all Group (re)insurance undertakings and all ancillary services undertakings are consolidated in accordance with article 335 (a) of the Commission Delegated Regulation (EU) (2015/35), while the Sava pokojninska pension company is included in the consolidation in accordance with article 335 (e) of the above regulation by including 100% of the company's own funds calculated according to the relevant sectoral rules.

• On 26 July 2017, after its regular annual rating review, the rating agency Standard & Poor's affirmed Sava Re's existing 'A–' issuer credit and financial strength ratings and upgraded the outlook from 'stable' to 'positive'.
• On 8 August 2017, the general meeting of shareholders of Zavarovalnica Sava, d.d. was held, in which the shareholders adopted the resolution to transfer all of the shares of minority shareholders to the majority shareholder Sava Re (main shareholder). On the publication day of the Zavarovalnica Sava general meeting notice, Sava Re held 15,332,411 ordinary, registered no-parvalue shares of Zavarovalnica Sava, accounting for 99.74% of the company's share capital. After the resolution on the share transfer was entered into the register of companies on 10 October 2017, Sava Re became the sole owner of Zavarovalnica Sava.
• In October 2017, following its regular annual rating review, the rating agency A.M. Best affirmed the financial strength rating on Sava Re of 'A–' with a stable outlook.
• On 2 November 2017, Sava Re signed a contract for the acquisition of 75% of the company TBS Team 24. TBS Team 24 provides assistance services relating to motor, health and homeowners insurance.
• In its session of 9 November 2017, the supervisory board voted unanimously in support of the proposal of Marko Jazbec, chairman of the management board, and appointed a new Sava Re management board team. Srečko Čebron and Jošt Dolničar were re-elected to serve on the management board for a third consecutive term of office. Polona Pirš Zupančič was appointed as the fourth member of the management board.
• On 8 November 2017, Standard & Poor's assigned Zavarovalnica Sava, d.d. 'A–' issuer credit and financial strength ratings with a positive outlook.
• In December 2017, NLB d.d. Ljubljana and NLB banka AD Skopje, as the seller, and Sava Re, as the purchaser, signed a purchase contract for all the shares of NLB Nov penziski fond AD Skopje.
• In December Zavarovalnica Sava started marketing health insurance products, expanding into the health insurance market. This is a significant step towards broadening its product range and is consistent with its strategy of placing the client at the centre of its services and ways of working.
• The reduction in the stake of Slovenian Sovereign Holding from 25% (plus one share) to 17.7% was the result of a government decision to transfer, for no consideration, part of its holding to the Republic of Slovenia. After the transaction, SSH held 3,043,883 shares, representing 17.7% and 19.6% of Sava Re's issued and outstanding shares, respectively. After the transaction, the Republic of Slovenia held 1,737,436 shares, representing 10.1% and 11.2% of Sava Re's issued and outstanding shares, respectively.
• In 2017, the subsidiary Zavarovalnica Sava suffered a number of weather-related loss events (larger frequency of on average small losses). At the time this report was written, the aggregate loss of these events amounted to EUR 11.9 million. One catastrophic event of EUR 5 million had been included in the 2017 Group plan.

Below we set out the movements in gross premiums written by operating segment as analysed by the Group. Commercial life insurance business includes the company Sava pokojninska, which, however, is not included in the above table.

Gross premiums written in the reinsurance segment in 2017 were up 3.8%. Premium growth is driven by the growth in XL business of Sava Re, with the highest absolute growth achieved in marine reinsurance business.

Gross non-life premiums grew by 6.4% in 2017 as companies across the Group achieved growth in this segment. In Slovenia they rose by 5.7%, mainly due to higher premium volumes in motor, assistance and property business. Motor premium growth achieved with private customers was driven both by a higher number of policies written and the growth in average premiums, as well as by a larger number of policies sold with broader coverages. Motor premium growth in the commercial sector, on the other hand, was the result of higher premiums for certain policyholders and higher volumes in business with leasing providers. Growth in property insurance was the result of the acquisition of certain new policyholders and higher premiums for existing policyholders on account of a larger number of insured items. Gross non-life premiums written outside Slovenia increased by 9.9% in all non-Slovenian non-life insurance companies, with the Croatian branch of Zavarovalnica Sava recording the highest growth. This branch exceeded its 2016 gross premiums in most classes of business, which was due to good positioning in Internet sales and the resulting enhanced brand recognition, improved premium collection, and the increased efficiency of the own sales network and growth in external sales channels. The highest increase was recorded in motor liability insurance. The branch saw total non-life premium growth of 20.8%, whereas the Croatian non-life insurance market grew by 6.0%. In terms of gross non-life premium growth, the Croatian non-life insurer is followed by the Kosovan and Serbian non-life insurers. The Kosovan non-life insurer achieved the highest absolute growth in gross premiums in health insurance owing to increased sales activity, and in assistance business due to price increases and the launch of a new product. The Serbian non-life insurer achieved the highest absolute premium growth in motor liability insurance and medical assistance abroad owing to intensified sales of these products, a loyal and stable sales network and increased demand among policyholders. The Montenegrin non-life insurer achieved the highest premium growth in other damage to property business through a major new client. Premiums at the Macedonian insurer increased through the acquisition of large new clients in motor vehicle liability insurance, higher production in individual and commercial motor casco business, and the acquisition of major new clients in accident insurance business with natural persons.

Gross premiums written by the Group's life insurers grew both in Slovenia and abroad year on year. Following the liquidation of its DWS FlexPension funds by the DWS fund administrator, Zavarovalnica Sava made a special offer to policyholders who held savings relating to these funds to take out similar policies, for which a new internal fund was established. This pushed gross premiums written up by EUR 2.2 million. A large number of unit-linked insurance policies that matured in January 2017, on the other hand, had a negative effect on the growth in gross premiums in Slovenia, but were largely replaced as many policyholders took out a new policy. Gross premiums written increased in other countries as well, especially in Serbia, where Sava životno osiguranje (SRB) secured a 26% increase in premiums through its efforts to expand the sales network and boost productivity. High growth was generated also by the Croatian branch of Zavarovalnica Sava, which grew premiums by 6.2% in 2017, while the Croatian life insurance market recorded growth of 1.5%. This was largely due to more term life insurance policies sold. All Sava Re Group companies have been implementing measures to improve their own sales networks through regular education and training events for sales personnel, while also seeking growth opportunities through other sales channels.

A.2 Underwriting performance4

The Group classifies supplementary accident insurance as part of the life insurance operating segment; in Solvency II reporting, this business is shown under income protection insurance and proportional reinsurance.

Premiums

Consolidated gross premiums written and net premiums earned

(EUR thousand)	2017	2016	Index
Gross premiums written	515,115	489,095	105.3
Net premiums earned	468,747	456,991	102.6

Consolidated gross premiums written by region

(EUR thousand)	2017	2016	Index
Slovenia	366,500	347,977	105.3
International	148,615	141,118	105.3
Total	515,115	489,095	105.3

Consolidated gross premiums written by material line of business

(EUR thousand)	2017	2016	Index
Motor vehicle liability insurance and proportional reinsurance	106,377	100,612	105.7
Fire and other damage to property insurance and proportional reinsurance	103,509	106,355	97.3
Other motor insurance and proportional reinsurance	94,151	84,820	111.0
Life insurance	70,100	69,503	100.9
Income protection insurance and proportional reinsurance	45,189	44,298	102.0
Non-proportional property reinsurance	28,862	25,927	111.3
Other lines of business	66,927	57,581	116.2
Total	515,115	489,095	105.3

Gross premiums written grew by 5.3% in 2017, with a largely unchanged breakdown by line of business compared to 2016. Non-life premiums accounted for 86.4% of total premiums, life premiums for 13.6%. Gross premiums written are dominated by the lines of business: motor vehicle liability insurance and proportional reinsurance, and fire and other damage to property insurance and proportional reinsurance. These two lines of business represent 41% of gross premiums written.

⁴ This section presents consolidated data based on SII calculations that do not include Sava pokojninska; therefore, figures do not equal IFRS calculations.

Consolidated gross claims paid and net claims incurred rose in 2017 compared to 2016. Below we set out the movements in gross claims paid by operating segment as analysed by the Sava Re Group. The life insurance operating segment includes the company Sava pokojninska, which, however, is not included in the above table.

Gross claims paid relating to the reinsurance segment decreased by 6.6% compared to 2016, because large claims were paid in 2016 for previous underwriting years. Net claims incurred fell by 7.5% compared to 2016. The change in the net provision for outstanding claims (increase) was lower than in 2016, mainly due to the effect of exchange differences that drove claims provisions down by EUR 6.2 million in 2017 and up by EUR 1.4 million in 2016. Excluding exchange differences, the change (increase) in 2017 was higher than in 2016 on account of additional provisions set aside for new reported claims (mine loss in Russia, collision of two ships near Shanghai, fire loss in Russia).

Gross non-life claims paid for Slovenian business in 2017 were higher due to a larger volume of gross claims paid for private sector motor business and partly for assistance business. The main reason for the excess in claims relative to the previous year was the settlement of claims in 2017 relating to hail events in 2016 (three large loss events). Large claims in 2017 were the result of several weather-related loss events (in June, July, August and December) and an increase in the number of motor and assistance insurance policies sold to individuals. In terms of commercial sector motor insurance, the excess of claims for 2016 was mainly due to one large and several minor motor vehicle liability insurance claims and more insurance policies sold, which given the same loss frequency resulted in more reported claims. Higher payments for property business were also the result of weatherrelated loss events in 2016 and 2017. Claims provisions for a part of these claims were made in 2016 and their settlement therefore had no significant impact on profit or loss. Gross claims paid relating to non-Slovenian business rose by 25.9%. Growth was primarily driven by the settlement of large liability claims of the Macedonian non-life insurer, which did not affect profit or loss as provisions for these claims had been set aside in previous years. Furthermore, the Macedonian insurer incurred some large motor casco and other damage to property claims as the result of a storm event in the Skopje region in June 2017. A large claim relating to other damage to property was settled in the last quarter of 2017. An increase in gross claims of the Kosovan non-life insurer was the result of a large claim in fire and natural forces insurance and an increased volume of health insurance written compared to 2016. An increase in gross claims paid by Zavarovalnica Sava in Croatia was due to the increased frequency of small claims and one large motor liability claim from 2013. The Montenegrin insurer recorded a slight growth in claims due to several large losses in fire and other property insurance, motor liability and accident insurance.

Gross life insurance claims paid relating to Slovenia grew by 62.7% as the result of a large number of unitlinked policies maturing in January 2017. The movement in claims needs to be considered in conjunction with the change in technical provisions. Gross claims also increased in international business as a result of the increase in claims at Illyria Life, with more claims recorded due to maturities and accidental deaths, coupled with a significant number of surrenders, as a large number of policies became eligible for this option.

Consolidated net earned premiums by material line of business

(EUR thousand)	2017	2016	Index
Motor vehicle liability insurance and proportional reinsurance	101,539	98,686	102.9
Fire and other damage to property insurance and proportional reinsurance	91,329	95,133	96.0
Other motor insurance and proportional reinsurance	86,672	82,568	105.0
Life insurance	68,976	69,521	99.2
Income protection insurance and proportional reinsurance	45,607	45,209	100.9
Other lines of business	74,624	65,874	113.3
Total	468,747	456,991	102.6

Consolidated gross claims paid and net claims incurred

(EUR thousand)	2017	2016	Index
Gross claims paid	314,432	275,480	114.1
Net claims incurred	290,344	271,855	106.8

Consolidated gross claims paid by region

(EUR thousand)	2017	2016	Index
Slovenia	232,248	192,864	120.4
International	82,184	82,616	99.5
Total	314,432	275,480	114.1

Consolidated net earned premiums by operating segment

Claims

In the above graph, the life insurance segment includes supplementary accident business.

The Company of Children of Children and Charles of the Children and Charles of the Children and Charles of the Children and Charles of the Children and Charles of the Childre

2017	2016	Index
232,248	192,864	120.4
82,184	82,616	995
314,432	275,480	114.1

Consolidated acquisition costs relating to the nonlife segment rose by 1.6% due to the growth in consolidated non-life premiums and the related increase in commissions for agents and agencies. The overall growth in these costs would have been even higher given the growth in these costs in Slovenia, but the costs of the Zavarovalnica Sava branch were reallocated in order to adjust them to the Slovenian part. Prior to the merger, the branch reported agents' salaries as a whole under acquisition costs, whereas after the merger they are disclosed under other operating expenses (personnel costs). Hence there was a negative change in deferred acquisition costs in 2017. Consolidated other operating expenses remained at last year's level due to rationalisation measures. These costs were down by 4.7% in the Slovenian part of non-life insurers as the result of the merger and its synergistic effects, and up by 13.7% in non-Slovenian insurers. The rise in other operating expenses in non-Slovenian insurers was driven mainly by the increase in the level of expenses of the Serbian nonlife insurer, namely personnel costs and one-off costs incurred as the result of the change of its corporate identity. Expenses of the Croatian branch of Zavarovalnica Sava increased mainly on account of higher personnel costs in the above-mentioned adjustment and reallocation of costs for agents' salaries. Increased expenses of the Macedonian insurer are associated with the renovation of business premises and costs incurred due to the change in its corporate identity. The consolidated gross operating expenses (net of changes in deferred acquisition costs) of nonlife business increased by 0.4% and gross consolidated premiums written by 6.4%, as a result of which the gross expense ratio decreased by 2 p.p.

The increase in acquisition costs relating to the life segment is primarily due to increased acquisition costs of the Slovenian part of Zavarovalnica Sava due to its expanded operations and altered dynamics of expenses included in products. This is also the reason for the negative change in deferred acquisition costs in 2017. Higher other operating expenses were driven by higher costs in all companies, especially the Croatian part of Zavarovalnica Sava and Sava životno osiguranje (SRB). In the former, this increase is due to reclassification of costs of adjusting to the Slovenian part – prior to the merger, the branch reported agents' salaries under acquisition costs, whereas after the merger on 2 November 2016 they are disclosed under other operating expenses. In total, these costs remained at the same level as in the previous year. In 2017, Sava životno osiguranje (SRB) saw higher personnel costs related to sales, which was driven by intensified sales efforts resulting in greater sales of new insurance policies; at the same time, the costs of services incurred due to investments in IT support upgrades and costs associated with the corporate identity redesign also increased.

Expences

Consolidated net claims incurred by material line of business

(EUR thousand)	2017	2016	Index
Other motor insurance and proportional reinsurance	66,047	62,687	105.4
Fire and other damage to property insurance and proportional reinsurance	55,518	44,609	124.5
Motor vehicle liability insurance and proportional reinsurance	50,000	61,684	81.1
Life insurance	66,694	38,890	171.5
Income protection insurance and proportional reinsurance	17,809	22,136	80.5
Other lines of business	34,277	41,849	81.9
Total	290,344	271,855	106.8

Net operating expenses by material line of business

(EUR thousand)	2017	2016	Index
Fire and other damage to property insurance and proportional reinsurance	36,373	40,479	89.9
Motor vehicle liability insurance and proportional reinsurance	31,401	31,146	100.8
Other motor insurance and proportional reinsurance	23,071	24,371	94.7
Life insurance	16,329	21,645	75.4
Other lines of business	45,844	38,190	120.0
Total	153,018	155,831	98.2

Net operating expenses dropped by 1.8% in 2017. In absolute terms, the largest drop was in expenses relating to life insurance, fire and other damage to property insurance, and proportional reinsurance (gross premiums also declined). The largest increase was in expenses relating to proportional general liability reinsurance. The gross premiums written relating to this line of business grew by 10.2%. The 2017 split of net operating expenses by line of business did not change significantly compared to 2016. In the following, we set out the movements in operating expenses by operating segment as analysed by the Group. Commentaries include all elements used in the calculation of net operating expenses (acquisition costs, change in deferred acquisition costs, other operating expenses). Commercial life insurance business includes the company Sava pokojninska, which, however, is not included in the above table.

The acquisition costs relating to the reinsurance segment dropped, despite a growth in gross premiums written. Acquisition costs accounted for 22.0% of gross premiums written in 2017, an improvement of 1.6 percentage points over 2016. Deferred acquisition costs increased in 2017 in line with the growth in gross premiums written and unearned premiums, which is why their change results in lower operating expenses. In 2016, deferred acquisition costs declined in line with the decline in gross premiums written and unearned premiums. The growth in other operating expenses was driven by higher personnel costs and by amortisation due to higher software costs.

The Group's gross profit for 2017 (excluding Sava pokojninska) dropped by 1.6% year on year. The reinsurance segment generated a lower profit than in 2016. The result of reinsurance operations was also impacted by exchange differences: underwriting categories were impacted by exchange gains of EUR 4.7 million (2016: EUR 1.8 million losses) and investment activities by losses of EUR 5.5 million (2016: EUR 1.4 million gains). The underwriting result, excluding exchange differences, was weaker due to large international claims (hurricane losses in the Caribbean and the USA, and a large loss event in Russia), while the investment result, excluding exchange differences, improved, especially thanks to capital gains. The non-life insurance segment produced a poorer result compared to 2016, largely because of the result of Zavarovalnica Sava, which was strongly affected by weather-related losses (EUR 11.9 million), and because of the large loss events reported by the Kosovan and Macedonian non-life insurers. The investment result of non-life insurers deteriorated as a result of lower interest income (low interest rates in capital markets) and other investment income (lower gains on the disposal of investments). A positive development for the 2017 result was the absence of goodwill impairment losses, compared to 2016 when goodwill of the Kosovan insurer was impaired after the company failed to meet its performance targets. The life insurance segment performed better in 2017 than in 2016 as all the Group companies succeeded in writing more premiums. The Group companies have been implementing measures to improve their own sales networks through regular education and training events for sales personnel, while also seeking growth opportunities through other sales channels. Net investment income relating to the investment portfolio of life insurance business declined by EUR 1.1 million year on year due to lower interest income.

EUR

thousand

EUR thousand

Consolidated gross profit or loss

Composition of the consolidated gross income statement

Composition of the consolidated gross income statement by operating segment Composition of the consolidated gross result, excluding exchange differences

* The 'other' item includes gross profit or loss of the 'other' segment (non-insurance companies). The chart does not include the gross consolidated profit of Sava pokojninska, as the company is not included in SII calculations.

* The 'other' item includes the gross profit or loss of the 'other' segment (non-insurance companies) and impairment losses on goodwill, which were not reported in 2017 (2016: EUR 1.7 million).

The chart does not include the gross consolidated profit of Sava pokojninska, as the company is not included in SII calculations.

* The 'other' item includes the gross profit or loss of the 'other' segment (non-insurance companies) and impairment losses on goodwill, which were not reported in 2017 (2016: EUR 1.7 million). The chart does not include the gross consolidated profit of Sava pokojninska, as the company is not included in SII calculations.

In 2017, investment income totalled EUR 28.0 million, down EUR 5.6 million year on year; excluding exchange differences, investment income declined by EUR 2.4 million. The largest part of income is interest income of EUR 18.6 million in the period 1–12/2017 (accounting for 66.5% of total financial income), down EUR 2.6 million year on year.

In 2017, expenses relating to the investment portfolio increased by EUR 3.3 million, but were down EUR 1.0 million, when exchange differences are excluded. Apart from exchange losses, expenses consisted largely of interest on loans and losses on disposal of investments.

However, the effect of exchange differences does not fully impact profit or loss since liabilities denominated in a foreign currency move in line with investments in that currency. Exchange differences mainly relate to the assets and liabilities of Sava Re.

A.3 Investment performance

The Group monitors its investment performance by operating segment. Net investment income and investment return are monitored by class of investment as well as by type of income and expense. The following tables show income, expenses and net investment income by class of investment and type of income and expense.

Consolidated net inv. income of the investment portfolio

(EUR thousand)	2017	2016	Absolute change
Net investment income relating to financial investments	15,555	24,580	-9,025
Net investment income relating to the investment property	176	32	144
Net inv. income of the investment portfolio	15,732	24,613	-8,881
Net inv. income of the investment portfolio, excluding exchange differences	21,663	23,122	-1,459

Investment income and expenses by type

Type of income (EUR thousand)		1/1–31/12
	2017	2016
Interest income	18,607	21,234
Change in fair value and gains on disposal of FVPL assets	229	738
Gains on disposal of other IFRS asset categories	3,122	2,315
Income from dividends and shares from other investments	1,141	1,284
Exchange gains	4,203	7,325
Other income	658	622
Income relating to the investment portfolio	27,961	33,518
Net unrealised gains on investments of life insurance	16,849	17,959

Net unrealised gains on investments of life insurance policyholders who bear the investment risk

Type of expense (EUR thousand)	1/1–31/12
	2017	2016
Interest expenses	719	842
Change in fair value and losses on disposal of FVPL assets	80	632
Losses on disposal of other IFRS asset categories	585	499
Impairment losses on investments	320	595
Exchange losses	10,134	5,835
Other	392	504
Expenses relating to the investment portfolio	12,229	8,906
Net unrealised losses on investments of life insurance	8,256	11,256

Net unrealised losses on investments of life insurance policyholders who bear the investment risk

Net investment income of the Group portfolio amounted to EUR 15.7 million in 2017 and EUR 21.7 million, excluding exchange differences.

Group net investment income totalled EUR 15.6 million in 2017. The most important elements of Group net investment income are interest income of EUR 17.9 million and exchange losses of EUR 5.9 million, which account for a 27.6% lower net investment income figure, excluding exchange differences. The large share of interest income is consistent with the Group's investment portfolio composition, which is dominated by debt instruments.

The Group discloses unrealised gains and losses on investments designated as available for sale in the fair value reserve line of the balance sheet. The following table shows the movement in the fair value reserve in 2017.

Net investment income by class of asset

(EUR thousand)	Interest income/ expenses	Change in fair value and gains/losses on disposal of FVPL assets	Gains or losses on disposal of other IFRS asset categories	Income from dividends and shares of other investments	Impairment losses on investments	Foreign exchange gains/ losses	Other income or expenses	Total	Net unrealised gains/ losses on investments of life policyholders
Held to maturity	5,146	0	0	0	0	-60	0	5,087	348
Debt instruments	5,146	0	0	0	0	-60	0	5,087	348
At fair value through P/L	120	150	0	26	0	-103	68	261	7,768
Debt instruments	120	113	0	0	0	-99	-7	127	589
Equity instruments	0	37	0	26	0	-4	0	59	7,180
Other investments	0	0	0	0	0	0	75	75	0
Available for sale	12,673	0	2,537	1,115	-320	-5,635	12	10,382	450
Debt instruments	12,673	0	2,065	0	0	-5,635	9	9,113	434
Equity instruments	0	0	424	1,115	-320	0	3	1,222	16
Other investments	0	0	47	0	0	0	0	47	0
Loans and receivables	623	0	1	0	0	-134	10	499	26
Debt instruments	593	0	1	0	0	37	10	640	26
Other investments	30	0	0	0	0	-171	0	-141	0
Financial investments of reinsurers i.r.o. reinsurance contracts with cedants	44	0	0	0	0	0	0	44	0
Subordinated liabilities	-718	0	0	0	0	0	0	-718	0
Total	17,888	150	2,537	1,141	-320	-5,931	90	15,555	8,593

Fair value reserve – movement

(EUR)	2017	2016
As at 1 January	17,459	12,722
Change in fair value	2,804	5,246
Transfer of the negative fair value reserve to the IS due to impairment	-320	-594
Transfer from fair value reserve to the IS due to disposal	-1,633	1,564
Net gains or losses attributable to the Group recognised in the fair value reserve and retained profit or loss relating to investments in equity-accounted associate companies	0	0
Other net profits/losses	0	0
Deferred tax	22	-1,479

(EUR)	2017	2016
As at 1 January	17,459	12,722
Change in fair value	2,804	5,246
Transfer of the negative fair value reserve to the IS due to impairment	-320	-594
Transfer from fair value reserve to the IS due to disposal	-1,633	1,564
Net gains or losses attributable to the Group recognised in the fair value reserve and retained profit or loss relating to investments in equity-accounted associate companies	0	0
Other net profits/losses	0	0
Deferred tax	22	-1,479
Total fair value reserve	18,332	17,459

SAVA RE GROUP					SOLVENCY AND FINANCIAL CONDITION REPORT 2017
Net investment income by class of asset
(EUR thousand)	Interest income/ expenses	Change in fair value and gains/losses on disposal of FVPL assets	Gains or losses on disposal of other IFRS asset categories	Income from dividends and shares of other investments	Impairment losses on investments	Foreign exchange gains/ losses	Other income or expenses	Total	Net unrealised gains/ losses on investments of life policyholders
Held to maturity	5,146	0	0	0	0	-60	0	5,087	348
Debt instruments	5,146	0	0	0	0	-60	0	5,087	348
At fair value through P/L	120	150	0	26	0	-103	68	261	7,768

A.5 Any other information

The Group produces a small part of its income from lease contracts. It has an operating lease arrangement for its real estate, which is classified as investment property in the Group's balance sheet, while rental income is recognised evenly over the lease term.

Lease contracts The Group has no other material information relating to its operations. Material intra-group business

In 2017, the Group generated income of EUR 514,115 by leasing out its investment property (2016: EUR 315,320). Maintenance costs associated with investment property are either included in the rent or charged to the lessee, in 2017 a total of EUR 166,161 (2016: EUR 145,877).

The tables below show material intra-group transactions; these include reinsurance business between the controlling company and its subsidiaries and dividend payments to the controlling company. Payables to group companies are mainly short-term and not overdue at the balance sheet date.

A.4 Performance of other activities

Income and expenses relating to Group companies

(EUR thousand)	2017	2016
Gross premiums written	56,999	54,743
Gross claims payments	-30,532	-28,364
Dividend income	26,137	26,309
Acquisition costs	-12,010	-11,142
Total	40,594	41,546

Investments in and amounts due from Group companies

(EUR thousand)	31/12/2017	31/12/2016
Debt securities and loans granted to Group companies	4,610	2,835
Receivables for premiums arising from accepted reinsurance	13,394	12,892
Total	18,004	15,727

Payables to Group companies

(EUR thousand)	31/12/2017	31/12/2016
Payables for shares in reinsurance claims due to Group companies	8,249	7,434
Other payables from co-insurance and reinsurance	3,040	2,648
Total (excl. provisions)	11,289	10,083

B SYSTEM OF

GOVERNANCE

SYSTEM OF GOVERNANCE

B.1 General information on the system of governance B.3 Risk management system including the own risk and solvency assessment

B.2	Fit and proper requirements

	and solvency assessment
	B.4 Internal control system
B.5	Internal audit function
B.6	Actuarial function
B.7	Outsourcing
	B.8 Any other information

B. SYSTEM OF GOVERNANCE

B.1 General information on the system of governance

Planning and reporting of Sava Re Group subsidiaries

The planning process and content of the annual and five-year strategic planning documents of the controlling and subsidiary companies are described in detail in the Sava Re Group financial control rules.

The process and content of reporting by Sava Re Group subsidiaries is set out in detail in the Sava Re Group financial control rules and the Sava Re Group governance rules.

The Sava Re Group companies have also adopted a unified system of accounting, financial and riskmanagement policies and are gradually assuming the guiding principles set out in the risk management policy.

B.1.2 Selection of management system and the proportionality principle

The management system selected by any Group member is proportionate to the nature, scale and complexity of its business operations.

Each Sava Re Group company selects for itself a management system that is optimal both for the company and the Sava Re Group. As a rule, Group members adopt a one-tier management system, provided this complies with local legislation and is appropriate to the nature, scale and complexity of each company's operations.

The controlling company of the Sava Re Group and Zavarovalnica Sava operate on a two-tier management system.

B.1.3 Governing bodies

Apart from the general meeting, the governance bodies of individual Sava Re Group members include a management body (management board, managing director or CEO) and a supervisory body (supervisory board, supervisory committee or board of directors) – depending on the legislation and the selection of a one- or two-tier management system.

The governance bodies carry out their duties in accordance with the legislation of each country, company internal rules and in accordance with the general guidelines established by the governance policy, other framework policies of the Sava Re Group, the Sava Re Group governance rules and the Sava Re Group financial control rules.

General meeting of shareholders

The general meeting of shareholders is the supreme body of a company through which its shareholders exercise their rights in company matters.

The terms of reference of the general meeting of each company are determined in line with the legislation of each country and the company's articles of association. The terms of reference of the general meeting relate to three areas:

• personnel decisions (appointment and removal of members of the supervisory board, board of directors, supervisory board, granting of discharge to members of the management and supervisory bodies, vote of no confidence, appointment of the external auditor);
• business decisions (adoption of the annual report unless approved by the management or supervisory bodies, appropriation of the distributable profit, consenting business decisions if specifically required by the management);

B.1.1 Governance of the Sava Re Group

The management and supervisory bodies of the controlling company are the Group bodies responsible for the proper management and supervision of the entire Group and for setting up a governance framework appropriate to the structure, business and risks of the Sava Re Group as a whole and of its companies.

The controlling company fully exercises its governance function by setting business strategy from the top down, taking into account both the Group as a whole as well as its individual members. For optimal capital allocation and resilience of the Group against unforeseen events, capital allocation and capital adequacy are managed on the Group level following the top down principle. The risk strategy sets the risk appetite both at the Group level as well as at the level of its members.

The Group has set up systematic risk management, including risk management at the level of individual companies, appropriate monitoring of the risks of individual companies by the controlling company as well as risk management at the Group level. The latter takes into account any interaction between the risks of individual companies, in particular risk concentration and other material risks associated with the operation of the Group.

Management and supervisory bodies of Sava Re Group subsidiaries individually pursue the same values and corporate governance policies as the controlling company, unless otherwise required by law, the local regulator or based on the proportionality principle. Therefore, the management or supervisory bodies of each Sava Re Group company, as part of their responsibility for the governance of their company with regard to the implementation of Group policies, ensure that all required adjustments to local legislation are made as well as any other necessary adjustments. The companies determine which adjustments need to be made to Group policies in accordance with the procedures set out therein, ensuring compliance with applicable laws and regulations as well as with rules of sound and prudent operation.

Supervision of individual Sava Re Group members

In order to ensure transparent and effective governance of Sava Re Group subsidiaries, the controlling company's subsidiary supervision is divided into the following three parts:

• governance supervision (through company bodies: general meeting, supervisory board),
• business function supervision (through heads of business functions),
• additional supervision (through key function holders).

Communication between Sava Re Group members

Twice yearly, Sava Re organises a Sava Re Group strategic conference to discuss the strategic directions to be applied in the planning of operations of Group companies, enhancements of individual business functions, and the current performance of each company. Thus strategic conferences are aimed at improving communication on strategies and policies of the Sava Re Group at the top management level.

The Sava Re Group organises professional training relating to various business areas several times a year to unify business processes, transfer knowledge, and promote corporate culture and best practices.

The rules of procedure of the supervisory board are set out in internal acts of individual companies.

The chief tasks of the Sava Re supervisory board are:

• to monitor and oversee the business conduct and operations of the Company, and, in the case of weaknesses or irregularities, propose remedial action to the management board;
• to give consent to the business policy and financial plan of the Sava Re Group and Sava Re as prepared by the management board;
• to give consent to the development strategy of the Sava Re Group and Sava Re as prepared by the management board;
• to give consent to the written rules of the system of governance, risk management, compliance, internal audit, actuarial function, internal controls and outsourced business as prepared by the management board;
• to give consent to the management board's granting and withdrawing of authority relating to key function holders;
• to give consent to the solvency and financial condition report of Sava Re and the Group as prepared by the management board;
• to give consent to the risk strategy of Sava Re and the Group as prepared by the management board;
• to consider the own risk and solvency report and quarterly risk reports of Sava Re and the Group;
• to consider compliance function reports;
• to consider actuarial function reports;
• to give consent to the framework annual and the long-term work plan of the internal audit plan as prepared by the management board;
• to oversee the adequacy of the procedures used by and the effectiveness of the internal audit function and to consider internal audit function reports;
• to issue an opinion for the general meeting to be attached to the annual report on internal auditing;
• to give consent to the appointment, removal and remuneration of the head of internal audit;
• to review the annual and interim financial reports of the Sava Re Group and Sava Re;
• to review the annual report submitted by the management board, adopt an opinion on the auditor's report, and prepare either a qualified or confirmatory report for the general meeting;
• to review the proposal regarding the appropriation of the distributable profit submitted by the management board, and prepare a written report for the general meeting;
• to appoint and remove the chair and the members of the management board,
• to decide on the criteria for determining the remuneration and reward system of the chair and the members of the management board;
• to adopt the rules of procedure of its operation;
• to draft general meeting resolutions within the supervisory board's terms of reference, and to perform tasks directed by the general meeting;
• to consider the findings of the Insurance Supervision Agency and other supervisory bodies made when exercising their supervisory function over the Company.

The supervisory board prepares, annually, a meeting schedule for its own use and for its committees, including those meetings in particular that are obligatory due to the required publication of business results or are standard procedure with regard to past practices.

The following table shows the composition of the Sava Re supervisory board in 2017.

• fundamental decisions concerning the company (adoption and amendment of the articles of association, increase and reduction of share capital, winding up, and transformation in terms of status).

The most important responsibilities of the general meeting of Sava Re include:

• adoption of the annual report, unless approved by the supervisory board, or if the management and supervisory boards leave the decision on its adoption to the general meeting of shareholders;
• appropriation of distributable profit, at the proposal of the management board and based on a report by the supervisory board;
• appointment and removal of supervisory board members;
• granting of discharge to the management and supervisory board members;
• adoption of amendments to the articles of association;
• measures for the increase and reduction of capital;
• dissolution of the company and its transformation in terms of status;
• appointment of the auditor, at the proposal of the supervisory board;
• other matters in accordance with the law and articles of association.

General meetings of shareholders of Sava Re Group members are generally convened at least once a year, at the latest within the time limit provided by local law. The general meeting may also be convened in other cases, as provided by local law, the Group member's articles of association and whenever this is in the Group member's interest. As a rule, the general meeting is convened by the company's chief executive body. Local law stipulates the circumstances in which the general meeting may also be convened by other bodies of the company or the shareholders themselves.

Details on the convening of the general meeting of Group members, shareholder rights regarding the general meeting, conditions for participation in the general meeting and the exercise of voting rights are set out in each country's local law and the Group member's articles of association and rules of procedure of the general meeting. Guidelines for preparing the general meeting of a Group subsidiary are provided in the Sava Re Group control and supervision rules.

Supervisory body (e.g. supervisory board, board of directors, supervisory committee).

In this section, the term supervisory board is used as a generic term for any supervisory body.

The rules applicable to a supervisory board in a twotier system also apply to a board of directors or supervisory committee in a one-tier system, unless otherwise specified.

The supervisory board oversees the company's conduct of business during the financial year, in line with the company's business strategy and financial plan. In addition, it must comply with local law and the company's articles of association and other acts.

It meets at least five times a year, generally after the end of each quarter to review the annual and interim financial reports, while one session is devoted to the approval of planning documents. The board of directors and supervisory committee in companies with a one-tier system generally meet more frequently.

The number of supervisory board members must meet the minimum requirements stipulated by local law. This number must be proportionate to the nature, scale and complexity of the business of each company. The supervisory board is composed so as to ensure responsible oversight and decision-making in the best interest of the company.

When designing the supervisory board, each Group company seeks to take account of diversity in terms of technical knowledge, experience and skills, and the way candidates complement each other so as to form a homogenous team and ensure sound and prudent oversight of the company's affairs.

Supervisory board committees

In accordance with the law, the supervisory board of any Group company may appoint one or more committees or commissions, and task them with specific areas, the analysis of specific questions, with the preparation of draft resolutions of the supervisory board, and the implementation of resolutions of the supervisory board, whereby such committees provide professional support. Notwithstanding the appointment of any committee, decision-making remains the responsibility of the supervisory board.

Sava Re has established the following supervisory board committees:

• the audit committee,
• the risk committee,
• the nominations and remuneration committee,
• the fit and proper committee.

The areas of responsibility and the composition of the supervisory board committees are determined by a special resolution in compliance with applicable regulations, the recommendations of the Corporate Governance Code for Listed Companies and the Company's internal acts.

Each committee may adopt its own rules of procedure. Unless it has adopted its own rules of procedure, the rules of procedure of the supervisory board apply together with any necessary conforming changes, for any questions regarding the quorum, decision-making and other points of procedure.

Management body (management board, managing director, executive director)

In this section, the term management board is used as a generic term for any management body.

The rules established for the management board in a two-tier system also apply to the managing directors and executive director in a one-tier system, unless otherwise specified.

The management board runs the business and represents the company in its legal transactions.

Through its efforts and using its knowledge and experience, the management board pursues the longterm success of the company, ensuring optimal guidance and risk management. The management board defines the company's goals, values, mission, vision, and business strategy. Business operations are optimised through an adequate composition of human resources and prudent use of financial resources. This is done in compliance with local law and the company's articles of association and other acts.

As a rule, the management boards of individual Sava Re Group companies consist of several members in order to ensure that decisions taken are for the benefit of the company and that board members work towards the company's goals in a prudent and responsible manner. The number of members is proportionate to the nature, scale and complexity of each company's business , while there must be clearly determined terms of reference of board members as well as an adequate delimitation of responsibilities. Where local legislation permits a single-member management board, the company must observe the four-eye principle in decision-making.

When designing the management board, each company seeks to take account of diversity in terms of technical knowledge, experience and skills, and the way candidates complement each other so as to form a homogenous team and ensure sound and prudent conduct of the company's business.

The management board is committed to high ethical standards and considers the interests of all stakeholder groups.

The terms of reference of individual management board members and the operation of multi-member bodies are governed by internal acts of individual companies (act on the management board / rules of procedure of the management board).

The management board of each Group company reports periodically (at least quarterly) to the company's supervisory board in a comprehensive and accurate manner on:

• the implementation of business policies and other principles relating to business,
• the profitability of the company, particularly return on equity,
• business performance, especially on business volumes, the financial situation and solvency,
• transactions that may have a significant impact on the profitability and solvency of the company, and
• all material risks that have, or could have, a significant impact on the company's capital adequacy.

The main duties of the controlling company's (Sava Re's) management board are:

• to provide leadership and conduct the business of the Company;
• to represent the Company;
• to be responsible for the legality of the Company's operations;
• to adopt the development strategy of the Company and the Group, which is to be presented to the supervisory board for consent;
• to adopt the business policy and financial plan of Sava Re and the Group, which is presented to the supervisory board for consent;
• to adopt internal acts of the Company and the Group;
• to approve and periodically review strategies and written rules on risk management, the internal control system, internal audit, the actuarial function, compliance function, and regarding outsourcing, and to ensure their implementation;

Composition of the supervisory board in 2017 (since 16/07/2017)

Member	Title	Beginning of term of office	Duration of term of office
Mateja Lovšin Herič	chair	16/07/2017	16/07/2021
Keith William Morris	deputy chair	16/07/2017	16/07/2021
Davor Ivan Gjivoje	member	07/03/2017	07/03/2021
Andrej Kren	member	16/07/2017	16/07/2021
Andrej Gorazd Kunstek	member (employee representative)	11/06/2015	11/06/2019
Mateja Živec	member (employee representative)	01/04/2016	11/06/2019

Composition of the supervisory board in 2017 (until 15/07/2017)

Member	Title	Beginning of term of office	Duration of term of office
Mateja Lovšin Herič	chair	15/07/2013	15/07/2017
Slaven Mićković	deputy chair	15/07/2013	15/07/2017
Keith William Morris	member	15/07/2013	15/07/2017
Davor Ivan Gjivoje	member	07/03/2017	07/03/2021
Andrej Gorazd Kunstek	member (employee representative)	11/06/2015	11/06/2019
Mateja Živec	member (employee representative)	01/04/2016	11/06/2019

Areas of responsibility of the management board members in much of 2017:

• Marko Jazbec, chairman of the management board: coordinating the activities of the management board, controlling, general affairs, human resource and organisation, legal affairs, public relations, compliance and integration processes.
• Jošt Dolničar, member of the management board: management of strategic investments in direct insurance subsidiaries, modelling, IT, technology and innovation.
• Srečko Čebron, member of the management board: reinsurance operations and actuarial affairs.
• Mateja Treven, member of the management board: finance, corporate finance, investor relations, accounting, internal audit, risk management and pension insurance.

Events after the reporting date

On 9 November 2017, the supervisory board voted unanimously in support of the proposal of Marko Jazbec, chairman of the management board, and appointed a new Sava Re management board team. Srečko Čebron and Jošt Dolničar were re-elected to serve on the management board for a third consecutive term of office. Polona Pirš Zupančič was appointed as the fourth member of the management board. Two board members who were re-elected are to start their new terms of office on 1 June 2018; the new management board member was to take up her office on the day after the licence to perform the function of management board member is issued by the Insurance Supervision Agency. Polona Pirš Zupančič started her term of office on 14 January 2018, after Mateja Treven concluded her term of office on 13 January 2018.

Marko Jazbec as chairman of the management board is, following the mentioned changes, responsible for the coordination of the work of the management board, finance, general affairs, human resources, organisation and legal affairs, public relations, compliance, and internal audit. Srečko Čebron is – also in the new term of office – responsible for reinsurance operations, facultative reinsurance underwriting and actuarial affairs. Jošt Dolničar is – in the new term of office – responsible for the management of strategic investments in primary insurance subsidiaries, modelling, IT, technologies and innovation, and pension insurance. Polona Pirš Zupančič is responsible for corporate finance and controlling, accounting, shareholder relations and risk management.

B.1.4 Risk management

The risk management system is one of the key building blocks of the system of governance.

The management of the Group's controlling company as well as those of each Group member must ensure that both the Group as a whole and each individual company have in place an effective risk management system. This takes into account the scope, nature and complexity of the risks to which the Group or individual companies are exposed.

The basis for an effective risk management system is an appropriate organisational structure, both at Group level as well as at the level of individual Group companies.

More about these risks is contained in section B.3.

B.1.5 Key functions of the risk management system

At the Group level, the controlling company has established four functions defined by applicable law as key functions of the risk management system (hereinafter: key functions): the actuarial function, risk management function, compliance function, and internal audit function. Key functions are integrated in the Group's system of governance and generally also perform the role of the controlling company's key function, in addition to their role on the Group level.

The controlling company has organised these key functions as services of the risk management system, which report directly to the management board and are involved in decision-making processes.

The chief tasks of a key function holder at the Sava Re Group level are:

• coordinating the development of a uniform methodology for all key functions in all the Group's insurers;
• seeking to develop appropriate framework policies for the key function, and professional guidelines for the adoption of area-specific operational rules for the controlling company and its subsidiaries;
• striving for strict application of uniform standards by all key functions in the Group;
• coordinating and implementing joint tasks;
• providing guidance and overseeing the operations of key functions in all Group companies (coordinating planning activities and reviewing reports of Group companies);
• professional development and exchange of good practices relating to the key functions of the Group.

With due regard for the proportionality principle, the risk management system of each Group insurer has key functions integrated into the organisational structure and decision-making processes. The key functions perform their tasks independently from each other and from other organisational units of the company. The key functions directly report to the management board. Where any key function is carried out by an independent organisational unit, it must be ensured that the key function holder has direct access to the management board.

The key functions are integrated into the organisational structure and decision-making processes to strengthen the three-lines-of-defence framework in the Sava Re Group's risk management system. All four key functions cooperate closely with each other, regularly exchanging information they need for their functioning.

As a rule, key function holders must not both perform and oversee the same tasks. Processes must be organised so as to allow separate operation of the lines of defence. Key function holders must not be members of the supervisory board or of any of its

• to adopt the report on the solvency and financial condition of Sava Re and the Group and submit it to the supervisory board for consent;
• to grant authorisation to key function holders of the Company subject to the consent of the supervisory board;
• to report to the supervisory board on operations of the Company and the Group;
• to prepare a draft annual report, including a business report, and to submit it to the supervisory board together with the auditor's report and a proposal regarding appropriation of distributable profit for approval;
• to convene the general meeting of shareholders;
• to implement the resolutions adopted by the supervisory board.

Composition of the Sava Re management board in 2017

Member	Title	Beginning of term of office	Duration of term of office
Marko Jazbec	chair (since 12/05/2017)	12/05/2017	12/05/2022
Jošt Dolničar	member (since 12/05/2017)	01/06/2013	01/06/2018
	chair (until 11/05/2017)
Srečko Čebron	member	01/06/2013	01/06/2018
Mateja Treven	member	01/06/2013	13/01/2018

• assisting the company in achieving its goals based on systematic, methodical assessment and improvement of the effectiveness and efficiency of governance, risk management and control procedures,
• reporting to the management and the supervisory boards on the purpose, terms of reference and duties of internal audit and the implementation of its plan, the conclusions of the audit reviews carried out, and proposing recommendations for their improvement.

Details on duties, terms of reference, responsibilities and powers of the internal audit function holder, procedures, obligations, time limits and reporting distribution lists are set out in the Group's internal audit policy.

Reporting by key function holders

Key function holders of each Group subsidiary report in two directions, namely:

• to management or supervisory bodies of the company and also, if so provided, to the audit committee or supervisory board and, in some cases, taking into account country-specific regulatory arrangements and internal regulations of individual companies, to certain sectoral committees;
• to the holder of the relevant key function at the Sava Re Group level.

Detailed provisions on the scope, manner, and reporting period of any key function are set out in internal regulations governing a relevant key function.

B.1.6 Committees of the governance system

The management board of the controlling company may, by its decision, set up committees that cover the Group level and the controlling company. In addition, the management board of any Group subsidiary may, if necessary, establish a committee by passing a resolution. Committees have an advisory role. They consider issues from specific areas, draft management board resolutions and oversee their implementation, and perform other tasks requiring specific expertise, thus providing professional support to the management board.

Committees are an integral part of the system of governance of the Group and individual companies, dealing with issues from various areas, such as risk management, asset and liability management, actuarial affairs, internal audit, remuneration.

The terms of reference, powers and composition of committees are set out in internal regulations adopted by the management board of the company that established the committee.

Sava Re has set up the following committees at the Group level:

• risk management committee and
• actuarial committee.

B.1.7 Information about the remuneration policy

The Sava Re Group remuneration policy lays down the framework for the planning, implementation and monitoring of remuneration systems and schemes that support the Group's long-term strategy and risk management policy.

This remuneration policy is applied by Sava Re and – as guidance – in other companies of the Group. It applies to all organisational levels and all employees. It includes:

• the management body,
• senior and lower management,
• key function holders, and
• other employees.

The remuneration policy aims at building a remuneration system that is competitive and efficient as well as transparent and internally fair. The key principles of the policy incorporate the main principles of ethical and sustainable practices and operations.

committees of any Sava Re Group company in order to minimise potential conflicts of interest. Key function holders must immediately report any potential conflict of interest to the management board.

If, in accordance with the proportionality principle, key functions are assigned additional activities and tasks, there must be in place appropriate internal measures and mechanisms for managing any potential conflicts of interest arising from such activities of a key function. Measures and mechanisms for avoiding situations potentially leading to conflicts of interest are detailed in the internal regulations governing the operation of individual key functions.

Notwithstanding the organisational position of any key function within a company, these must be directly integrated in the Group's framework of key functions. This establishes a direct link between the key function of a subsidiary and the Group, providing for direct information flow between the second and third lines of defence, ensuring comprehensive and consistent compliance risk management across the Sava Re Group.

Role of individual key functions

The key functions perform duties as stipulated by insurance law, including regulations based thereon.

The risk management function is primarily responsible for:

• operating the risk management system,
• identifying and assessing assumed risks,
• organising risks in a joint risk profile, indicating interdependencies,
• periodic monitoring of the risk profile,
• reporting on potential hazards.

Details on duties, terms of reference, responsibilities and powers of the risk management function holder, procedures, obligations, time limits and reporting distribution lists are set out in the risk management policy of the Group and Sava Re.

The actuarial function is primarily responsible for:

• coordinating and overseeing the establishment of technical provisions, ensuring the appropriateness and quality of methodologies, assumptions and underlying data,
• issuing an opinion on the underwriting risk policy,
• issuing an opinion on the adequacy of reinsurance arrangements,
• contributing to an effective risk management system, especially in risk modelling.

Details on duties, terms of reference, responsibilities and powers of the actuarial function holder, procedures, obligations, time limits and reporting distribution lists are set out in the Group's actuarial function policy.

The compliance function is primarily responsible for:

• ensuring the compliance of the company's operations with regulations and other commitments,
• advising the management board on compliance with the laws, implementing regulations, and internal regulations,
• assessing the impact of potential changes in the legal environment on the company's operations,
• identifying and assessing compliance risks, and assisting in their management.

Details on duties, terms of reference, responsibilities and powers of the compliance function holder, procedures, obligations, time limits and reporting distribution lists are set out in the Group's compliance policy.

The internal audit function is primarily responsible for:

• providing objective and relevant assurance and advice to the management board in order to add value and improve the efficiency and effectiveness of operations,

B.1.8 Related-party transactions

All transactions among Sava Re Group companies are carried out at arm's length, to a limited extent by reimbursing expenses incurred in rendering services. Sava Re Group companies take turns in taking the role of service provider and service user within the Sava Re Group in order to enhance the effectiveness of the Group as a whole.

As part of the annual functional analysis, risks identified and resources expended are used to determine risks assumed by individual functions implemented for the sake of subsidiary governance. Functions implemented by the controlling company mainly include strategy setting, coordination, monitoring or controlling, and analysis.

Governance and business functions relating to the governance and supervision of the Group and its related companies are not invoiced.

Operational transactions that are considered in terms of related-party transactions are charged using the comparable uncontrolled price method based on internal or external comparisons, however, to a very small extent by reimbursing expenses incurred in rendering services.

The system of related party transactions is set out in detail in the transfer pricing report (general documentation) and the transfer pricing report (special documentation) prepared annually.

Material related-party transactions

Below are set out material transactions with relatedparties, consisting of:

• owners and related enterprises;
• the management board, the supervisory board, including its committees, and employees not subject to the tariff section of the collective bargaining agreement;
• subsidiary companies.

In 2017, large transactions included:

• total remuneration of the members of the management board and the supervisory board, including its committees, and employees not subject to the tariff part of the collective agreement of EUR 3.3 million (2016: EUR 3.4 million),
• loans granted to subsidiaries of EUR 4.6 million as at 31 December 2017, and
• dividend payouts of EUR 12.4 million.

All third-party transactions are set out in detail in the Group's annual report in section 17.12 'Related party disclosures'.

The chief principles of the remuneration policy are:

• clear and transparent management,
• reliable and efficient risk management,
• compliance with regulatory requirements and principles of sound management,
• monitoring of and adapting to market trends and practices,
• sustainable pay for sustainable performance,
• employee motivation and retention.

Sava Re Group companies follow the following guidelines in the designing of remuneration systems and schemes:

• designing of a balanced remuneration structure,
• establishing a direct link between pay and performance,
• adopting a multi-annual approach to performance evaluation and establishing a link between the variable part of remuneration and sustainable business performance,
• ensuring that the incentive system remains compliant with its mechanisms, organisational processes and with the rewarded activities and behaviour.

It is recommended that Sava Re Group companies design a remuneration structure encompassing:

• a basic salary,
• a variable part of the salary,
• other benefits and incentives,
• remuneration upon termination of the employment contract.

The basic salary is laid down based on the employee's role and position, taking into account professional experience, responsibilities, complexity of the job and the situation on the local labour market. The range of the basic salaries for individual positions is laid down in the internal regulations of individual companies.

The variable part of the salary depends on the company's business performance and the employee's individual performance or, in the case of managers, also the performance of the unit they head. The aim of this variable part of the salary is to motivate and reward the most successful employees who significantly contribute to the achievement of sustainable performance, meet or exceed the agreed objectives, strengthen long-term relationships with clients and generate income. The variable part of the salary relating to an employee's individual performance depends on the attainment of predefined individual goals and other tasks in a manner consistent with expected behaviours and competencies. The variable part of the salary relating to business performance depends on a performance indicator, or a combination of performance indicators of the company and/or the Group. The total variable part of the salary generally may range from 0% to 30% of the total annual remuneration.

The system and scheme for the variable part of the remuneration for the management board is considered and approved by the supervisory board. Variable remuneration for the management board is based on the achievement of the goals and performance of the company as a whole or the group of which it is a part.

The composition and level of the variable part of salary for all position levels is laid down in each Group company's internal regulations.

The types and level of potential additional benefits and incentives are laid down in the company's internal regulations. Employees may join collective supplementary pension saving schemes.

Additional remuneration upon termination of an employment contract (other than prescribed by law and the employment contract – termination benefits) is based on the achievement of long-term goals. Provision has been made that no additional remuneration is paid out if goals have not been achieved.

As a rule, Group companies grant loans neither to their employees nor members of the management or supervisory boards; accordingly, there were no such transactions in 2017.

The Group companies run no share option schemes.

The Group companies run no additional pension schemes.

The management body

In assessing the fitness of the members of a company's management body, it is necessary to consider the knowledge acquired through education and work experience. Based on this, the fitness assessment is made with consideration of the member's assigned responsibilities, taking into account the following requirements:

• qualifications,
• sufficient professional experience,
• expertise and experience in the following areas: market knowledge, knowledge of the business strategy and business model, knowledge of the governance system for insurance companies, understanding financial and actuarial analysis, understanding regulatory frameworks and requirements.

The management body, viewed as a whole, must have sufficient expertise. Its members must have relevant experience and knowledge of the above-mentioned areas, depending on their specific area of responsibility. Individual members of the management body with distinct special expertise may, in particular based on the assignment of responsibilities for a certain area, compensate for any less profound expertise of other members in those areas.

Key function holders of the risk management system

In assessing the fitness of the key function holders of the risk management system, it is necessary to consider the knowledge acquired through education and work experience. The assessment is then made based on assigned responsibilities for each key function. These three requirements are considered in fitness assessments:

• qualifications, including additional training, obtained required licenses or specialist examinations,
• sufficient professional experience relevant to a particular key function,

• general knowledge and experience.

B.2.2 Suitability requirements for relevant personnel

Personal reliability and reputation

To ensure the sound and prudent management of a company, relevant personnel must have the appropriate qualifications (fit), be of good repute and demonstrate through their actions high standards of integrity (proper). A relevant person is deemed to be proper, as long as there are no reasons to think otherwise. Circumstances which give rise to reasonable doubt as to suitability are harmful to the reputation of both the relevant person and consequently the company and the Group.

Personal reliability and good repute is assessed based on information compiled by collecting documents for carrying out the fit and proper assessment procedure.

Independence of relevant personnel

Relevant persons may experience conflicts of interest due to the nature of the business relations. Any relevant person who experiences a conflict of interest in their work must disclose such conflict of interest and continue acting in the interests of the company. Unless possible, such person must inform the company's management or the supervisory body, if a conflict of interest is experienced by a member of either the management or supervisory body.

Time input

The members of the supervisory body and its committees must – in addition to business knowledge, relevant personal integrity, business ethics and independence – confirm that they have available time resources in the period when performing the function.

In accordance with the law, the Sava Re Group companies ensure that persons who effectively run and oversee operations are properly qualified (fit) and suitable (proper) for running and overseeing operations in a professional manner.

To this end, the companies conduct fit and proper assessments of their personnel: management board members, supervisory board members, members of the supervisory board committees, key managers, key function holders of the risk management system and personnel overseeing individual outsourced activities prior to their appointment and after their appointment whenever circumstances arise that require a reassessment of whether such persons are still fit and proper.

In addition to the appropriate qualifications, experience and expertise (fitness) they must have, relevant personnel is required to demonstrate they enjoy good repute and demonstrate high standards of integrity (propriety) as exemplified by their actions.

The assessment of a person's suitability (propriety) comprises an assessment of their integrity and financial soundness on the basis of relevant evidence about their character, personal behaviour and business conduct, including any criminal, financial and supervision aspects, irrespective of the jurisdiction.

Relevant personnel is subject to the reporting duty regarding any new facts or circumstances, or changes to information submitted in the initial suitability assessment. The body responsible for fit and proper assessment (fit and proper committee of relevant composition) assesses whether the new facts and changed circumstances or information are of such a nature as to require a fit and proper reassessment.

The HR function requires relevant personnel to sign personal statements at least once a year. Such statements confirm compliance with current fit and proper standards of relevant personnel and their commitment to notify the human resources function immediately of any circumstances that may affect their fit and proper assessment.

In 2017, the EU-based Group companies carried out full fit and proper assessment procedures for their new relevant personnel as well as an annual review based on annual statements for persons already assessed.

B.2.1 Fitness requirements for relevant personnel

Supervisory body and its committees

The knowledge acquired through education and experience is to be considered in assessing the fitness of members of a company's supervisory body and its committees. These three requirements are considered in fitness assessments:

• qualifications,
• sufficient professional experience,
• general knowledge and experience.

The supervisory body is composed so as to ensure responsible oversight and decision-making in the best interest of the company or the Group. Members are selected so that their professional expertise, experience and skills are complementary to other members of the supervisory body. The supervisory body, viewed as a whole, must have sufficient expertise. Individual members of the supervisory body with distinct special expertise may, in particular based on the assignment of responsibilities for a certain area, compensate for any less profound expertise of other members of the supervisory body in those areas.

B.2 Fit and proper requirements

The Sava Re Group management is aware that risk management is key to achieving operational and strategic objectives and to ensuring the long-term solvency of the Group. Therefore, the Sava Re Group is continuously upgrading the risk management system both in all Group companies and at the Group level.

The Group companies' strong risk culture and awareness of the risks to which they are exposed is essential to the security and financial soundness of the companies and the Group as a whole. In order to establish good risk management practices, the Group promotes a risk management culture with appropriately defined remuneration for employees, employee training, and relevant internal information flow, both at the individual company and Group level.

The Sava Re Group has implemented a risk strategy that defines the Group's risk appetite and policies that cover the entire framework of risk management, own risk and solvency assessments, and risk management for each risk category. Based on the Group's risk strategy and policies, individual Group companies set up their own risk strategies and policies, taking into account their specificities and the local legislation. The adequacy of the risk strategy and the policy is regularly reviewed.

The risk management system both in individual Group companies and at the Group level is subject to continuous improvements. Particular attention is paid to:

• clearly-expressed risk appetite in the framework of the risk strategy and on this basis also operational limits,
• development of own risk assessment models and upgrading of the own risk and solvency assessment (hereinafter: ORSA),
• integration of the ORSA and risk strategy in the framework of business planning and shaping of the business strategy,
• integration of risk management processes into business processes,
• setting up appropriate risk management standards in all Group companies, taking into consideration the scale, nature and complexity of operations and related risks.

B.3.1 Risk management organisation

An appropriate organisational structure and a clear segregation of responsibilities are key to systematic risk management.

The efficient functioning of the risk management system is primarily the responsibility of the Sava Re management board and the management board of the individual subsidiary. To ensure efficient risk management, the Group uses a three-lines-of-defence model, which clearly segregates responsibilities and tasks among the following lines:

• The first line of defence consists of all organisational units with operational responsibilities (e.g. product development; policy sales, marketing and claims handling; financial operations, accounting, controlling; human resources and such like).
• The second line of defence consists of three key functions (the risk management function, actuarial function, compliance function) and the risk management committee, if set up in the company.
• The third line of defence is provided by the internal audit function.

The Group's risk management system has been set up based on the top down principle, taking into account the specificities of each individual company.

The management board of each company plays a key role and bears ultimate responsibility for the effectiveness of established risk management processes and their alignment with the Group's standards and the applicable legislation. In this regard, the management board is primarily responsible for:

• the establishment of the risk strategy and approval of risk tolerance limits and operational limits,
• the adoption of policies relating to the risk management system,
• risk management processes,
• monitoring of operations in terms of risk and ensuring that risks are considered in decision-making.

The supervisory board of each individual company approves the risk strategy, risk management policies and the appointment of key function holders of the risk management system. In addition, the supervisory board reviews periodic risk management reports. A risk committee has been set up within the controlling company's supervisory board to provide expertise in particular with regard to risk management in the company and the Sava Re Group.

The first line of defence of each individual Group company involves all company employees responsible for ensuring that operational tasks are performed in such a way as to reduce or eliminate risks. Additionally, risk owners are responsible for individual risks listed in the risk register. Departmental executive directors, line and service directors are tasked with ensuring that the operational performance of the processes for which they are responsible is conducted in such a way as to reduce or eliminate risks, while taking into account the frameworks laid down in the risk strategy. The first line of defence is also responsible for monitoring and measuring risks, the preparation of data for periodic risk reports for individual areas of risk and the identification of new risks.

The Group's and each individual company's second line of defence comprises three key functions: the actuarial function, risk management function, and compliance function. In addition, the Group's large members have in place a risk management committee. The members of the risk management committee and key function holders are appointed by the management board; key function holder appointments also require the consent of the supervisory board. Each individual company ensures the independence of the key functions, which are organised as management support services and report directly to the management board. Their roles and responsibilities are defined in the policy of each key function or in the risk management policy that defines the risk management function. The responsibilities of the risk management function are summarised below; those of the other key functions constituting the risk management system are set out in sections B.4.2, B.5 and B.6 of this report.

B.2.3 Procedure for fit and proper assessment

The fit & proper assessment procedure is conducted by a special committee set up according to an internal framework document. During the assessment of relevant personnel, the company's human resources function assists with the performance of operational tasks, such as the obtaining, sending, processing and storing of documents, and issuing of the assessment results.

The committees conduct fit and proper assessments and issue relevant results based on compiled documents and statements. Based on assessments so obtained, they may take the necessary actions to ensure adequate qualifications of relevant personnel. The committees also conduct overall fit and proper assessments of the management and supervisory bodies as collective bodies.

B.3 Risk management system including the own risk and solvency assessment

	Risk strategy

First line of defence
Pricing	Second line of defence
Underwriting process	Risk management function
Underwriting limits	Risk management committee
Investment policy and limits	Risk reports
Information and risk reports	Risk register
Third line of defence
	Internal audit

B.3.2Components of the risk management system

Risk management is integrated into all stages of business management and is composed of the following key elements: • risk strategy,

• risk management processes within the first and second lines of defence, and
• the ORSA process.

The components of the Sava Re Group risk management system are shown in the figure below.

The risk management function of each individual company is mainly responsible for setting up effective risk management processes and for the coordination of risk management processes already in place. It is involved in all stages of identification, assessment, monitoring, management, and reporting of risks. It is also involved in the preparation of the risk strategy and the setting of risk tolerance limits. The risk management function of each company periodically reports to the risk management committee (if set up in the company), the management and supervisory boards, the risk committee (at Sava Re) and to the Group's risk management key function holder. It works in cooperation with the latter on an ongoing basis. Furthermore, it offers support to the management board in decision-making (including in relation to strategic decisions, such as corporate strategy, mergers and acquisitions, and major projects and investments).

Apart from the key functions, the second line of defence at Sava Re and Zavarovalnica Sava also consists of a risk management committee. The Sava Re risk management committee is also responsible for the Group level. The committee includes the key representatives of the first line of defence with regard to the company's risk profile. The holders of other key functions of the risk management system are also invited to attend meetings of the committee. The committee is primarily responsible for monitoring the risk profiles of the Group and individual companies, analysing risk reports and issuing recommendations to the management board.

The third line of defence consists of the internal audit function. The function operates at the individual company and Group levels, and is completely independent from the business operations and other functions. In the risk management system, the internal audit function is responsible for the independent analysis and verification of the effectiveness of risk management processes and internal controls in place.

Good practices from Sava Re's risk management model and the organisation of risk management are also transferred to other Group companies.

Risk strategy

In order to establish a solid risk management framework, in 2017 the management board – with the consent of the Sava Re supervisory board – approved the Sava Re Group risk strategy for 2017–2019, which, based on its risk bearing capacity, defines the Group's strategy of assuming risk. The individual Group companies draft their own risk strategy by taking into account the framework of the Group's risk strategy. The Group document sets:

• the risk appetite,
• permissible levels of certain performance indicators and risks,
• risk tolerance limits.

The basic principle of the Group is to pursue its business strategy and meet its key strategic objectives while maintaining an adequate capital level.

The key areas that risk appetite is based on are:

• capital,
• liquidity,
• product profitability, and
• reputation of each Group company and the Group.

Each individual Group company sets its own risk strategy, risk tolerance limits and operational limits based on the Group's risk appetite. Risk tolerance limits are limits set for individual risk categories included in individual companies' risk profiles, determining approved deviations from planned values. These limits are set based on the results of sensitivity analyses, stress tests and scenarios, and professional judgment.

Based on the risk appetite and risk tolerance limits, individual Group companies set operational limits, such as (re)insurance underwriting limits and investment limits in order to ensure that the activities of the first line of defence are carried out taking into account the set risk appetite. In addition, each Group company ensures that it has in place well-defined and established escalation paths and management actions in the case of any breach of operational limits.

For periodic monitoring of compliance with the risk strategy, individual Group companies defined a minimum set of risk measure for each risk category to allow a simplified monitoring of the Group's and each Group company's current risk profile and capital position without having to carry out a complete calculation of the solvency capital requirement. These risk measures are regularly monitored on the Group and individual company levels.

Risk management processes

Risk management processes are inherently connected with and incorporated into the basic processes conducted at the individual company and Group level. All organisational units are involved in risk management processes.

The main risk management processes are:

• risk identification,
• risk assessment (measuring),
• risk monitoring,
• determining appropriate risk control measures (risk management), and
• risk reporting.

Risk management processes are incorporated into all three lines of defence. The roles of individual lines of defence are defined in the risk management policy. Risk management processes are also integrated into the decision-making system; all important and strategic business decisions are also evaluated in terms of risk.

Risk identification

In the process of risk identification, each individual Group company identifies the risks to which it is exposed. The key risks compiled in each company's risk register, constituting the company's risk profile, are reviewed on a quarterly basis and amended with consideration of new risks as required. Risk identification at the Group level is conducted in the same way.

Risk identification in individual companies is both a top-down and a bottom-up process. The top-down risk identification process is conducted by the risk management function, the risk management committee and the management board of each Group company. Such identification of new and emerging risks is based on monitoring of the legal and business environment, market developments and trends, and expert knowledge; this process is mainly used with strategic risks, such as reputational risk and legal risk.

Bottom-up risk identification takes place in individual organisational units and with risk owners (first line of defence). A Group company's risk thus identified is categorised and incorporated into the relevant monitoring, measuring and reporting processes.

Risk identification is performed on an ongoing basis, especially as part of the business planning process and any major projects and business initiatives, such as the launch of a new product, investment in a new class of assets or an acquisition.

Risk assessment

The Group has in place regular risk assessment (measurement) processes for all the risks to which individual companies or the Group are exposed. Both qualitative and quantitative methods are used to measure risk. A modelling department has been set up on the Group level for the development of quantitative models for Group-wide risk assessment.

Hence the Group measures risks:

• using the Solvency II standard formula,
• by calculating the overall solvency needs within the Own Risk and Solvency Assessment (ORSA),
• by carrying out stress tests and scenario analyses,
• through qualitative risk assessment in the risk register,
• using various risk measures that enable simplified measuring and monitoring of the indicative current risk profile.

Risk management

The management board of each Group company is responsible for risk management and the use of various risk management techniques and actions. In its decisions, the management board takes into account the cost benefit aspect of actions as well as recommendations, if any, issued by the risk management committee or key functions.

Whenever the need arises to adopt a new risk control measure, the relevant company conducts an analysis of the measure in terms of economic and financial viability. Elimination or mitigation of individual risks must be more cost effective than mitigation of the potential impact should the risk materialise, taking into full account the probability of such an event and all of its implications.

In practice, it is already in the business planning process that a Group company examines the impact of the business strategy on its capital position, both with regard to the regulator as well as with regard to the ORSA. If, during a financial year, decisions are taken that have a significant impact on the risk profile but have not been assessed in terms of risk during the business planning process, the company assesses the impact of such decisions on its risk profile and capital adequacy, and verifies compliance with the risk appetite. If a business decision could have a significant impact also on the Group's risk profile, such impact on the Group's risk profile and capital adequacy is also assessed. If any business decision fails to comply with the risk appetite or any risk tolerance limit is exceeded, the company is required to document such deviation and take relevant action to resolve the situation.

Risk monitoring

Risk monitoring is conducted at several levels: at the level of individual organisational units and risk owners, at the risk management service level, at the level of the risk management committee, and at the management and supervisory board levels. In addition, each Group company's risk profile is monitored at the Group level in terms of impact on the Group's risk profile. A standard set of risk measures is defined for risk monitoring, and Group companies follow it on a regular basis. Both risks and risk management measures are subject to monitoring and control.

Risk reporting

A risk reporting scheme has been set up in the large Group companies and on the Group level. Risk owners report on each category of risk to the risk management function, including a predetermined set of significant risk measures and qualitative information. Based on this, the risk management function in cooperation with risk managers prepares a risk report covering each individual company's entire risk profile. The report is first considered by the risk management committee (if set up in the company), and then by the company's management and supervisory boards. The company's risk management function also sends the report to the Group's risk management function.

Throughout the ORSA, the management board is actively involved in the process: it confirms the set of stress tests and scenarios, reviews the ORSA, and challenges it before giving its formal approval.

Based on the conducted ORSA, the Group prepares a report that is considered on several levels: it is first discussed by the risk management committee, followed by the management board, risk committee and supervisory board. After the results are approved on all levels, they are distributed to all the heads of business units. The report is also submitted to the ISA.

The ORSA process is embedded in the decisionmaking process, which allows for key decisions to be adopted with consideration of the risks involved and for the business strategy to be determined with awareness of the risks and associated capital requirements. The ORSA results are taken into account by the management in its decision-making, capital management and insurance product development.

B.4 Internal control system

B.4.1 Internal control system

The purpose of the Group's internal control system is to identify, measure, monitor and manage risks at all levels of operations and includes reporting on risks that the Group or any individual Group company is or may be exposed to in its operations. In addition, the system ensures compliance with the internal rules and meets the requirements of other risk management laws and regulations.

It is vital that employees understand the importance of internal controls and are actively involved in the implementation of internal control procedures. Procedures for reporting to the appropriate level of management with regard to potential problems, deviations, non-compliance with the code of conduct or other policy violations or illegal actions are presented to all employees in plain language and are clearly stated in documents available to all employees.

The Group's internal control system is defined in the internal control policy aimed at setting up an effective and reliable system of internal controls. The policy sets out the basic principles, framework of and roles for the Group's system of internal controls as part of the Group's system of corporate governance.

B.4.2 Compliance function

The compliance function at the Group and individual company level is one of the four key functions constituting the risk management system. As a rule, it is an independent organisational unit, functionally and organisationally separate from other business functions of the company and reports directly to the management board. The compliance function of the controlling company and at the Group level operates as a risk management system service. A key function holder is authorised by the management board subject to consent by the individual company's supervisory board.

Own Risk and Solvency Assessment (ORSA)

In addition to the mentioned risk management processes, the company also conducts ORSA as defined in its own risk and solvency assessment policy. ORSA is a process which includes the identification of the differences between the Group's risk profile and the assumptions of the standard formula, the own assessment of solvency needs, capital adequacy projections, stress tests and scenarios, and the link between the risk profile and capital management. In ORSA, all material risks are assessed, whether quantifiable or not, that may have an impact on the operations of the Group from either an economic or a regulatory perspective.

The ORSA process is conducted on the individual Group company and the Group levels, and both are strongly interconnected. The EU-based Group companies and the Group are required to report to the regulator on their ORSA. Following is a presentation of the Group ORSA.

The ORSA is conducted primarily in order to understand the own risk profile, the standard formula and to analyse the impact of the changes in the risk profile in the business planning period on capital adequacy. ORSA is an integral part of the decisionmaking process and contributes to the Group's key decisions and business strategy being adopted with consideration of risks and associated capital requirements. Based on the Group ORSA results, we also check the compliance of the business strategy with the risk strategy. This establishes the links between the business strategy, the risks taken in the short, medium and longer term, the capital requirements arising from those risks, and capital management.

The Group generally conducts the full ORSA on an annual basis. However, in case of a major change in the risk profile or eligible own funds that has not been anticipated in the business plan, an ad hoc ORSA is conducted. The management and supervisory boards review and confirm the ORSA report (at least) on an annual basis. The Group reports (at least) annually to the regulator on the ORSA.

In 2017, we made improvements to the Group ORSA:

• We strengthened the link between the ORSA and other processes, primarily planning, and risk and capital management.
• The risk management committee and the management board were actively involved in individual phases of the ORSA process.
• We involved employees from various departments in the ORSA process to provide a broad and up-todate picture of the risk profile.
• Employees took part in the selection of stress tests and scenarios.
• We improved our own models for ORSA calculations and projections.
• We included more qualitative risk analyses that are unquantifiable.

The ORSA process is extensive and spans a large part of the year. Based on input from the business and strategic plans and the risk strategy, the Group calculates the SCR and makes Solvency II valuations for items of the balance sheet and eligible own funds for the entire term of the business and strategic plans. This is how it ensures that the business and strategic plans comply with the legislation and are aligned with the risk strategy. Based on projections, it reviews continuous compliance with the regulatory requirements regarding capital and technical provisions.

Based on the results of the suitability analysis of the standard formula for the Group's risk profile, the Group then uses its own solvency model to conduct an own risk and solvency assessment for a further three-year period, and makes a qualitative or quantitative assessment of the risks that are not captures by the standard formula. In the ORSA process, the Group also carries out (reverse) stress tests and scenario analyses as relevant with regard to its current and planned risk profile.

B.5 Internal audit function

Internal auditing in the Group companies is carried out by independent organisational units, which report to the management board and are functionally and organisationally separate from other organisational units. Their organisational position ensures autonomy and independence of operation. The internal audit is part of the internal control system of the company that ensures independent, regular and comprehensive review and assessment of the adequacy of the company's governance, risk management, and control procedures.

The internal audit function, being an internal control function, is part of the third line of defence of the risk management system.

Internal audit conducts internal audit reviews in accordance with the hierarchy of rules of internal auditing adopted by the Slovenian Institute of Auditors on the basis of the law governing auditing, and written rules of the internal audit function. The internal audit function operates in accordance with the adopted internal audit policy, which defines the purpose, powers, responsibilities, and tasks of the internal audit function.

The internal audit function holder of the company Sava Re and the Sava Re Group is appointed by the Sava Re management board with the consent of the supervisory board upon the prior opinion of the audit committee, and also serves as the director of the internal audit department.

The director of the internal audit service must hold the title of Certified Internal Auditor. More detailed conditions for the performance of the function are set out in each individual company's fit and proper policy.

Internal audit performs control activities. This, however, does not relieve supervisory and management bodies of their responsibility for establishing and observing efficient and effective corporate governance, risk management and control procedures (optimum management of business risk and compliance of business operations with laws, regulatory provisions and internal rules).

The internal audit function annually submits – to the management and supervisory boards, including its audit committee – its annual work plan and annual report on its activities. The annual report includes a note on the compliance with the code of ethics and a declaration on the disclosure and avoidance of conflicts of interest for the reporting year. The internal audit function must confirm to the supervisory body, at least annually, the organisational independence of the internal audit as part of its annual reporting on the activities of the internal audit.

The chief tasks of the internal audit of individual Group companies are:

• to set up a risk-based, permanent and comprehensive supervision of the company's operations aimed at verifying and assessing of whether the processes of risk management, control procedures and corporate governance are appropriate and function in such a way as to ensure the achievement of the major goals of the company:
• effective and efficient operation of the company;
• business and financial efficiency, including the safeguarding of assets against loss;
• reliable, timely and transparent internal and external accounting and non-financial reporting;
• compliance with laws, other regulations, and internal rules;
• to assess whether the company's information technology supports and furthers the company's strategies and goals;
• to assess fraud risk and the procedures for their management in the company (while the expertise of a person whose primary task is to identify and investigate cases of fraud is not expected nor required of the internal auditor);

The compliance function, being an internal control function, is part of the second line of defence in the risk management system consisting of three lines of defence. Its main duty is to manage the risks arising from non-compliance with the law.

The chief duties of the compliance function are:

• to monitor and periodically assess the adequacy and effectiveness of regular procedures and measures to address any deficiencies in compliance with regulations and other commitments;
• to advise and assist in the coordination of the company's operations with the obligations imposed by regulations and other commitments;
• to assess potential impacts of changes in the legal environment on the operations of the company in terms of compliance with its regulations and other commitments;
• to identify risks to the company's compliance with regulations and other commitments;
• to inform the management and supervisory boards of the company's compliance status regarding regulations and other commitments and risk assessment relating to compliance with regulations and other commitments;
• to coordinate with top management regarding compliance matters and offer consulting services to them;
• to prepare an annual compliance plan to identify and assess the main compliance risks to which the company is exposed;
• to cooperate in exchanging compliance-related questions, best practices and experiences at the controlling company level with other control functions;
• to coordinate the preparation and adoption of policies and rules on the controlling company level and between the controlling company and Group subsidiaries;
• to coordinate the preparation of comments on draft insurance-related legislation;
• to participate in setting up and updating compliance programmes for certain autonomous areas, including internal controls for compliance of operations, taking into account the requirements and capacities of processes and resources available, according to the requirements of specific legislation or regulations, and factors of the broader business and professional environment (e.g. commitments assumed through contracts, declarations and other collective activities aimed at raising the standards of fair business in the broader environment).
• to assess the sufficiency and quality of the data used in the calculation of technical provisions and to provide recommendations on how to adapt processes in order to improve data quality;
• to compare best estimates of SII provisions against experience and in the event of any deviation, suggest changes to the assumptions and valuation models used;
• to oversee the use of approximations in the calculation of best estimates of SII provisions;
• to examine the appropriateness of the underwriting policy and express an opinion on the adequacy of insurance premiums, taking into account all underlying risks and effects of changes in the portfolio, options and guarantees, anti-selection, inflation and legal risks;
• to verify the adequacy of reinsurance arrangements;
• to participate in the introduction and implementation of the risk-management system, in particular with respect to the development, use and monitoring of adequacy of the models underlying the calculation of capital requirements and the performance of own risk and solvency assessment;
• to prepare, at least annually, a written report to be submitted to the management and supervisory bodies, and the local supervisory authority; the report documents the implementation of the above tasks and their results, clearly identifying any weaknesses along with recommendations as to how to eliminate these weaknesses.

The chief tasks of the Group's actuarial function are:

• to carry out the above tasks as appropriate at the Group level, summarising and coordinating the findings of individual companies' actuarial functions;
• to express an opinion on the adequacy of the reinsurance arrangements of the Group as a whole;
• to prepare and submit, at least annually, a written report for the management and supervisory boards of the controlling company; the report documents the implementation of the above tasks and their results, clearly identifying any weaknesses and providing recommendations for their elimination;
• to coordinate the activities of individual companies' actuarial functions in order to enable the overall functioning of the Group's actuarial function;
• to provide support to individual Group companies' actuarial functions;
• to harmonise the underwriting and reserving risk guidelines laid down in the Group's underwriting and reserving risk policy;
• to organise meetings of the Group's actuarial committee;
• to serve on the Group's risk management committee.

In accordance with the risk management policy, the actuarial function actively cooperates in setting up and implementing the risk management system as part of the second line of defence.

• to provide consulting services;

• to carry out other tasks subject to the law.

The internal audit of the controlling company defines a common methodology for internal audit services in Group companies, and ensures the coordinated operation and development of a common methodology in the Group. Internal auditing is carried out according to a uniform procedure as laid down by the standards and specified in the internal audit manual.

In accordance with the Group's corporate governance policy, the internal audit of the controlling company also ensures the inclusion of subsidiary companies in the scope of operations in order to ensure the coverage of key risks at the Group level (also if internal auditing is set up in the subsidiary).

Internal auditors of the controlling company may perform independent audits in Group subsidiaries or extraordinary audits on the basis of risks as assessed by the controlling company at the Group level, or participate in certain more complex audit engagements in subsidiaries. The annual plan of the controlling company includes proposals of audit engagements based on key risks on the Group level to be performed by the internal audit in any subsidiary.

Group companies may cooperate in the following way:

• performance of internal audits in subsidiary companies on the basis of an assessment of key risks of the Group;
• cooperation in complex audits in subsidiary companies;
• joint training events;
• implementation of quality assessments of internal audit of a subsidiary.

The internal audit annual report of the controlling company provides an overview of the findings of the internal audit functions of each individual company.

B.6 Actuarial function

The actuarial function is an administrative concept comprising all the persons performing actuarial tasks of the second line of defence as detailed below. Actuarial function performers are employed in the areas of the actuarial function in actuarial departments of Group companies. They also perform first-line-ofdefence actuarial tasks. As the actuarial function is part of the second line of defence of the risk management system, it is organised in a way that prevents any one person from both performing (first line) and controlling (second line) the same tasks.

The company's actuarial function holder is responsible for carrying out the actuarial function. Composite insurers and the Group may appoint separate actuarial function holders for non-life, life and health insurance business. The Group's actuarial function coordinates the activities of the Sava Re Group's actuarial function and is responsible for the development of a uniform methodology. The controlling company's actuarial function holder also performs the role of the Groups' actuarial function holder for non-life business.

The actuarial function holders of Sava Re Group companies serve on the Group's actuarial committee. Among other things, this committee adopts decisions in the form of proposals and recommendations for the management board of Sava Re, other key functions of the Group and the Group's risk management committee, which are implemented in line with the rules of procedures appended to the Group's actuarial function policy. The members of the actuarial committee are tasked with communicating information about relevant arrangements to relevant parts of the company.

The chief tasks of the actuarial function of individual Group companies are:

• to coordinate the calculation of technical provisions and ensure their consistency with applicable regulations;
• to ensure the appropriateness of the methodologies, underlying models and assumptions made in the calculation of technical provisions so that they reflect key risks and are sufficiently stable;

B.8 Any other information

The Sava Re Group has in place a transparent and appropriate risk-based governance system.

The Sava Re Group governance policy sets out the main guidelines for the governance of individual Group companies as well as the control and supervision of Sava Re Group companies, taking into account the Group's goals, mission, vision and values. The purpose of the policy is to define the foundation of the Group's system of governance, the basic management rules, rules of corporate governance and a transparent organisational structure with transparent and clear allocation and segregation of roles and responsibilities. Corporate governance is a combination of processes and frameworks used by the management and supervisory boards, and supervisory board committees for communicating, directing, controlling and monitoring a company's operations in order to achieve the company's goals. The policy was last reviewed and amended in December 2017.

The rules of the Group governance system are subject to regular annual review. This review is the responsibility of the Group's compliance function, which – in cooperation with the Group's internal audit function – verifies the consistency of the governance policy with other policies within the governance system and with other internal acts, legislation and regulations. When verifying and assessing the effectiveness of the corporate governance framework, the reviewer focuses on the changes in internal and external factors affecting the Group.

The report of the internal audit department on the audit review of corporate governance carried out in December 2017 and January 2018 also supports the position that the Group has in place an adequate system of governance. Based on its review of implemented recommendations issued following the auditing of corporate governance in 2016, the internal audit department assessed the adjustment of the corporate governance system as good as in its followup audit, it found that the corporate governance system, to the extent carried out, was largely compliant with the Companies Act ZGD-1, the Insurance Act ZZavar-1, including implementing acts, and other Solvency II requirements. The system clearly provides for segregation of duties in all areas of governance of the Group and its individual companies.

B.7 Outsourcing

The outsourcing of business or functions is a contracting out of work related to the business of insurance or to an important or key business function or activity of any Sava Re Group company otherwise carried out by the company as part of its licensed activities.

In accordance with the provisions of the applicable Insurance Act, the controlling company adopted an outsourcing policy that governs the outsourcing of the Group's critical or important operational functions or activities. The policy defines the framework for the outsourcing of critical or important operational functions – contracts on outsourcing in general, when they might be entered into, how they should be maintained and documented, and how to ensure compliance with the applicable outsourcing guidelines. The policy outlines the steps and responsibilities in the process of outsourcing of functions or activities, defining the standards of management and control of such a process. The policy further defines the registering of outsourced operations comprising all contracts considered as outsourced and defines how to document the whole decision-making process, collect the necessary documents, and the signing of such contracts. The policy states that each outsourced operation must have an administrator, whose main responsibility is to oversee the outsourced function or activity. By signing the contract, all providers of outsourced services undertake to act in accordance with the applicable law and cooperate with the local supervisor. The company must notify the local regulator of its intention to outsource an operation before entering into the relevant contract.

Each individual Group company is fully responsible for its outsourced functions or activities since its liability to third parties is not transferable to service providers or other contractors. Before deciding on the assignment or outsourcing of any task or function, each Group company must assess and document the impact that such outsourcing of tasks or functions will have, ensuring regular conduct of this process in the future. Each Group company may make contracts for the outsourcing of business or functions in accordance with statutory regulations.

There were no outsourcing arrangements at the Group level in 2017; nor did any of its members outsource any operations to contractors outside the Group.

GROUP RISK

C PROFILE

GROUP RISK PROFILE

C.1 Underwriting risk C.2 Market risk
C.3 Credit risk
C.4 Liquidity risk
C.5 Operational risk
C.7 Any other information

C.6 Risk measurement and concentration

Underwriting risk arises from the Group's (re)insurance activities, i.e. the underwriting of (re)insurance contracts, and execution of insurance contracts and transactions directly related to insurance activities. It relates to the risks covered under (re)insurance contracts and associated processes, and arises from the uncertainty related to the occurrence, scope and timing of obligations.

Underwriting risk is generally divided into:

• non-life underwriting risk,
• life underwriting risk, and
• health underwriting risk.

The Group markets all three types of (re)insurance and is consequently exposed to all three risk categories.

The chart below shows the structure of gross premiums written by line of business, separately for EUbased and non-EU based Group companies. The structure of gross premiums did not change significantly in 2017.

The Group risk profile did not change significantly in 2017. The risk structure pursuant to the standard formula slightly changed in 2017, i.e. the solvency capital requirement for market risk decreased due to the application of the look-through approach, while the solvency capital requirement for life underwriting risk increased as a result of a more detailed calculation of lapse risk.

Undiversified SCR by risk module5

Split of Group gross premiums written

⁵ Percentages in the chart relate to the sum total of all risks (including operational risk), while percentages in the text below relate to the sum total of all risks, excluding operational risk (i.e. the sum total of the undiversified basic solvency capital requirement).

C. GROUP RISK PROFILE

During its operations, the Group is exposed to various types of risks, especially to non-life underwriting risk and market risk. The chart below shows the Group's risk profile in accordance with the standard formula.

C.1 Underwriting risk

Direct life insurance business – EU Direct life insurance business – non-EU

Risk exposure

Non-life underwriting risk is divided into:

• Premium risk the risk that premiums written are insufficient to meet the obligations arising from (re)insurance contracts. This risk depends on many factors, such as inadequate assessment of market developments, poor assessment of claims development, use of inadequate statistics, intentionally insufficient premiums for certain lines of business expected to be offset by other lines of business, or inadequate assessment of external macroeconomic factors that may change significantly during the term of a contract. These include:
• underwriting process risk,
• product design risk, and
• risk of unexpected increase in claims.

• Given the Group's portfolio composition, motor vehicle and property insurance, as well as proportional and non-proportional property reinsurance contribute the most to premium risk.

• • Reserve risk – the risk that either technical provisions are insufficient to meet the obligations arising from (re)insurance contracts due to inadequate methods, inappropriate, incomplete and inaccurate data, inefficient procedures and controls or inadequate expert judgement, or misreporting, resulting in unreliable information about a company's financial position. These include:
• the risk of data availability and accuracy,
• the risk of adequacy of methods and assumptions used,
• the risk of a calculation error,

• the risk of complex tools used in processes yielding misleading results.

• Similar to premium risk, the bulk of reserve risk arises from motor and property business for which the best estimates of provisions are also structurally the most important owing to the Group's traditional focus on such business.

•

• Catastrophe risk is the risk of an occurrence of a catastrophic event; such events are rare but their financial impact is too high to be covered merely by otherwise adequate premiums and provisions. Catastrophe risk may materialise in the case of extreme events or a large number of catastrophic events in a short period. The risk also includes an excessive geographical accumulation of risks. The Group's portfolio is geographically relatively well diversified, with risks being slightly more concentrated in Slovenia, which is further addressed by means of the retrocession programme. The capital requirement is relatively high because of the aggregation of a large number of such requirements for various smaller natural perils and regions and various man-made catastrophic events.
• Lapse risk the risk of loss or adverse change in the value of insurance liabilities resulting from changes in the level or volatility of lapse rates. The Group is not materially exposed to this type of risk.

Other risks, such as economic environment risk and policyholder behaviour risk, may be relevant, but their effect is already indirectly accounted for in the above non-life underwriting risk.

Risk measurement

For the quantitative assessment of non-life underwriting risk, the Group uses the Solvency II standard formula. It does not apply Group-specific parameters. According to this formula, the Group was exposed to non-life underwriting risk in the amount of EUR 142.4 million as at 31 December 2017 (31/12/2016: EUR 138.9 million). The capital requirement for non-life underwriting risk represented 52.2% of the undiversified basic solvency capital requirement of the Group (31/12/2016: 50.9%). Premium and reserve risks, followed by catastrophe risk, represented the largest portion of the undiversified non-life underwriting risk. Lapse risk for non-life business was relatively low.

C.1.1 Non-life underwriting risk

The chart below shows net non-life premiums earned by material line of business. The breakdown of the Group's net non-life premiums earned in 2017 did not change significantly.

Net premiums earned by material line of business

Other motor insurance and proportional reinsurance

Fire and other damage to property insurance and proportional reinsurance

General liability insurance and proportional reinsurance

Non-proportional property reinsurance

Other

In terms of exposure in Slovenia, the highest portfolio concentration is in the Štajerska and Dolenjska regions.