Solvency and financial condition report of Sava Re d.d. 2018

Ljubljana, April 2019

Management Board of Sava Re d.d.

Marko Jazbec, Chairman of the Management Board

Srečko Čebron, Member of the Management Board

Jošt Dolničar, Member of the Management Board

Polona Pirš Zupančič, Member of the Management Board

Summary			7
A.		Business and performance	12
A.1		Business 12
A.2		Underwriting performance 18
A.3		Investment performance 21
A.4		Performance of other activities 24
A.5		Any other information 25
B.		System of governance	26
B.1		General information on the system of governance 26
	B.1.1	Governing bodies 26
	B.1.2	Risk management 32
	B.1.3	Key functions of the risk management system 32
	B.1.4	Committees of the governance system 35
	B.1.5	Information about the remuneration policy 35
	B.1.6	Material related-party transactions 37
B.2		Fit and proper requirements 38
	B.2.1	General 38
	B.2.2	Fitness requirements for relevant personnel 38
	B.2.3	Suitability requirements for relevant personnel 40
	B.2.4	Assessment procedure 40
B.3		Risk management system including the own risk and solvency assessment 41
	B.3.1	Risk management organisation 41
	B.3.2	Components of the risk management system 42
B.4		Internal control system 48
	B.4.1	Internal control system 48
	B.4.2	Compliance function 48
B.5		Internal audit function 50
B.6		Actuarial function 52
B.7		Outsourcing 53
B.8		Any other information 54
C.		Risk profile	55
C.1		Underwriting risk 56
	C.1.1	Risk exposure 58
	C.1.2	Risk measurement 59
	C.1.3	Risk concentration 60
	C.1.4	Risk management 60
C.2		Market risk 65
	C.2.1	Risk exposure 65
	C.2.2	Measurement and concentration of market risk 66
	C.2.3	Risk management 69
C.3		Credit risk 72
	C.3.1	Risk exposure 72
	C.3.2	Risk measurement 72
	C.3.3	Risk management 73
C.4	C.4.1	Liquidity risk 75 Risk exposure 75
	C.4.2	Risk measurement 75
	C.4.3	Risk concentration 75
	C.4.4	Risk management 75
C.5		Operational risk 76

C.5.1	Risk exposure 76
C.5.2	Risk measurement 77
C.5.3	Risk concentration 77
C.5.4	Risk management 77
C.6	Other material risks 78
C.6.1	Risk exposure 78
C.6.2	Risk measurement 78
C.6.3	Risk concentration 78
C.6.4	Risk management 78
C.7	Any other information 80
D.	Valuation for solvency purposes	81
D.1	Assets 85
D.1.1	Deferred acquisition costs 85
D.1.2	Intangible assets 85
D.1.3	Deferred tax assets and liabilities 85
D.1.4	Property, plant and equipment held for own use 86
D.1.5	Investments 86
D.1.6	Loans and mortgages 88
D.1.7	Reinsurance recoverables 88
D.1.8	Deposits to cedants 88
D.1.9	Insurance and intermediaries receivables 89
D.1.10	Reinsurance and co-insurance receivables 89
D.1.11	Other receivables 89
D.1.12	Own shares 89
D.1.13	Cash and cash equivalents 89
D.1.14	Any other assets, not elsewhere shown 90
D.2	Technical provisions 91
D.2.1	Values of SII technical provisions 92
D.2.2	Description of the level of uncertainty associated with the value of SII technical
	provisions 95
D.3	Other liabilities 96
D.3.1	Provisions other than technical provisions 96
D.3.2	Insurance and intermediaries payables 96
D.3.3	Reinsurance and co-insurance payables 96
D.3.4	Other payables 96
D.3.5	Any other liabilities, not elsewhere shown 97
D.4	Alternative methods for valuation 98
D.5	Any other information 99
E.	Capital management	100
E.1	Own funds 101
E.2	Solvency capital requirement and minimum capital requirement 104
E.2.1	Solvency capital requirement (SCR) 104
E.2.2	Minimum capital requirement 106

E.3	Use of the duration-based equity risk sub-module in the calculation of the solvency capital
	requirement (SCR) 108
E.4	Difference between the standard formula and internal model used 109
E.5	Non-compliance with the minimum capital requirement (MCR) and non-compliance with the
	solvency capital requirement (SCR) 110 Any other information 111
E.6	Appendix – 112
	Glossary of selected terms
	Quantitative Reporting Templates	114

S.02.01.02 Balance sheet 114
S.05.01.02 Premiums, claims and expenses by line of business 116
S.05.02.01 Premiums, claims and expenses by country 119
S.12.01.02 Life and Health SLT Technical Provisions 120
S.17.01.02 Non-life Technical Provisions 122
S.19.01.21 Non-life Insurance Claims Information 125
S.23.01.01 Own funds 127
S.25.01.21 Solvency Capital Requirement – for undertakings on Standard Formula 129
S.28.01.01 Minimum Capital Requirement – Only life or only non-life insurance or reinsurance
activity 130

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. The figures in this report are stated in thousands of euros. The report has been reviewed and approved by the Company's management and supervisory boards.

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

Summary

Company profile

Sava Re is the largest reinsurance company domiciled in Central and Eastern Europe. The Company is also the controlling company of the Sava Re Group. The insurance part of the Group is composed of seven insurers based in Slovenia and in the countries of the Adria region: the composite insurer Zavarovalnica Sava, the non-life insurers Sava Neživotno Osiguranje (SRB), Sava Osiguruvanje (MKD), Illyria and Sava Osiguranje (MNE), and the two life insurers Sava Životno Osiguranje (SRB) and Illyria Life. In addition to these (re)insurers, the Group consists of:

Sava Pokojninska: a Slovenia-based pension company wholly-owned by Sava Re;
Illyria Hospital: a wholly-owned subsidiary based in Kosovo, which owns some property but currently does not transact any business;
TBS Team 24: a Slovenia-based company providing assistance services relating to motor, health and homeowners insurance; 75% owned by Sava Re;
Sava Penzisko Društvo: pension fund manager based in North Macedonia managing second- and third-pillar pension funds; wholly owned by Sava Re;
ZTSR: an associate company offering market research services;
G2I: an associate company marketing on-line motor polices;
Sava Terra: a subsidiary company renting out property and managing its own and leased property.

Sava Re is a public limited company, 17.7% owned by Slovenian Sovereign Holding.

We are a medium-sized company but with a global reach. With a team of about one hundred people, Sava Re is headquartered in Ljubljana. We aim to lead and support all lines of treaty reinsurance business, both proportional and non-proportional reinsurance contracts with good capacity in order to provide our clients with:

capacity,
capital substitute,
catastrophe covers.

Sava Re is rated "A" by the rating agencies Standard & Poor's and AM Best. Our core strengths lie in our regional knowledge, reliability, responsiveness, flexibility and our financial strength.

With over forty years of experience in international reinsurance, Sava Re provides a full range of reinsurance coverages. Our guiding principle is to build long-term relationships with our partners that will allow us to achieve our common goals throughout all economic cycles.

Assumed risks are diversified globally because we underwrite business on all continents. We currently have over three hundred clients in more than one hundred countries, and we seek to focus on regions and insurers that share our vision of a long-term partnership in order to achieve growth. Our preferred classes of business are property, engineering, marine hull & cargo, and energy.

Business and performance

Sava Re wrote 1.0% less in premiums in 2018 compared to 2017, which was due to strict underwriting discipline and the related selective underwriting. In 2018, the Company wrote the most premiums in Asian markets, and the main classes of business remained proportional and non-proportional property reinsurance. The combined ratio, excluding exchange differences, improved by 5.6 percentage points as the result of a smaller incidence of large events compared to the previous year. Another positive

impact on the result was a one-off effect from the positive resolution of a legal case in the amount of EUR 1.5 million. In 2018, net investment income relating to the investment portfolio, excluding the effect of exchange differences, totalled EUR 32.5 million, up EUR 1.7 million from 2017. Net investment income strengthened largely due to higher income relating to the investment portfolio. The Company recognised impairment losses of EUR 4.0 million on its subsidiaries and EUR 1.9 million on its financial investments in 2018. The Company's net result for the year rose by 27.0%.

System of governance

The Company has in place a well-defined system of governance that includes:

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

The Company has four key functions as part of its risk management system: the actuarial function, compliance function, risk management function, and internal audit function. Furthermore, the Company has a risk management committee and actuarial committee.

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

The first line of defence constitutes all organisational units with operational responsibilities (development, sales and reinsurance management, provision of reinsurance services, financial operations, accounting, controlling, human resources and others).
The second line of defence consists of the risk management function, actuarial function, compliance function and risk management committee.
The third line of defence is provided by the internal audit function.

The composition of the Company's management and supervisory boards changed in 2018. Details are provided in section B.1.1.

Sava Re Group strategy highlights

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

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

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

Risk profile

The Company calculates its capital requirement in accordance with the Solvency II standard formula. The risk profile is dominated by market and non-life underwriting risk. To a lesser extent, we are also exposed to other types of risk: health underwriting risk, counterparty default risk and operational risk. Apart from the above risks, which are captured by the standard formula, we are also exposed to liquidity risk, and additionally to various strategic risks as a result of our complex internal and external environment.

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

(EUR thousand)	31/12/2018	31/12/2017
SCR	162,522	160,073
Adjustments for TP and DT	-4,269	0
Operational risk	4,568	4,469
Basic solvency capital requirement (BSCR)	162,223	155,604
Sum of risk components	208,911	201,727
Diversification effect	-46,687	-46,124
Market risk	113,799	98,476
Counterparty default risk	6,422	5,518
Life underwriting risk	444	0
Health underwriting risk	2,537	3,615
Non-life underwriting risk	85,708	94,118

Valuation for solvency purposes

In accordance with article 174 of the Slovenian Insurance Act (ZZavar-1), assets are valued at amounts for which they could be exchanged between knowledgeable and willing parties in arm's-length transactions. Similarly, the Company values liabilities at amounts for which they could be transferred or settled between knowledgeable and willing parties in arm's-length transactions.

The following table shows the adjustments to the balance sheet items in accordance with the International Financial Reporting Standards (hereinafter: IFRS) made by the Company for Solvency II purposes. The table below shows equity in accordance with IFRSs and eligible own funds under Solvency II.

As can be seen from the table, Solvency II eligible own funds are significantly larger than IFRS equity.

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

(EUR thousand)	31/12/2018	31/12/2017
IFRS equity	319,355	290,966
Difference in the valuation of participations	145,124	147,582
Difference in the valuation of other assets	-77,683	-82,116
Difference in the valuation of technical provisions	92,651	98,527
Difference in the valuation of other liabilities	11,194	11,003
Foreseeable dividends, distributions and charges	-14,723	-12,398
Solvency II eligible own funds	475,918	453,565

Capital management

The Company manages its capital to ensure that it has available, on an ongoing basis, sufficient own 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 the achievement of the Company's strategic and operational goals.

The allocation of own funds to business activities must ensure the achievement of the Company's target return on equity.

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

The following table sets out the Company's capital adequacy as at 31 December 2018.

(EUR thousand) 31/12/2018 31/12/2017 Solvency capital requirement (SCR) 162,522 160,073 Eligible own funds to meet the SCR 475,918 453,565 Of which tier 1 475,918 453,565 Of which tier 2 0 0 Of which tier 3 0 0 Solvency ratio 293% 283% Minimum capital requirement (MCR) 40,630 40,018 Eligible own funds to meet the MCR 475,918 453,565 Of which tier 1 475,918 453,565 Of which tier 2 0 0 Of which tier 3 0 0 MCR ratio 1,171% 1,133%

The Company's capital adequacy

As at 31 December 2018, all the Company's eligible own funds were tier 1 funds. As at 31 December 2018, it complied with the regulatory requirements on the level and quality of capital to cover the SCR and MSR because its solvency ratio exceeded the regulatory requirement of 100% and stood at 293%, whereas the MCR ratio was 1,171%.

The Company also tested the adequacy of eligible own funds to cover the SCR and MCR several times during the year and found that it complied with the regulatory requirements throughout the year.

According to the risk strategy, a solvency ratio of 180% is still considered adequate, albeit suboptimal, and the optimal level of capitalisation starts at 220%. This demonstrates that the Company has an excellent capital position, also by its own criteria.

A. Business and performance

A.1 Business

Name and legal form of the Company

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

Sava Re transacts reinsurance business. In addition, it is the controlling company in the Sava Re Group. The Sava Re Group comprises one composite insurance company in Slovenia (Zavarovalnica Sava), two life insurers based outside Slovenia (Sava Životno Osiguranje (SRB) and Illyria Life) and four non-life insurers outside Slovenia (Sava Neživotno Osiguranje (SRB), Sava Osiguruvanje (MKD), Illyria and Sava Osiguranje (MNE)).

In addition to the above (re)insurers, the Sava Re Group consists of:

Sava Pokojninska: a Slovenia-based pension company wholly-owned by Sava Re;
Illyria Hospital: a wholly-owned subsidiary based in Kosovo, which owns some property but currently does not transact any business;
TBS Team 24: a Slovenia-based company providing assistance services relating to motor, health and homeowners insurance; 75% owned by Sava Re;
Sava Penzisko Društvo: pension fund manager based in North Macedonia managing second- and third-pillar pension funds; wholly owned by Sava Re;
ZTSR: an associate company offering market research services;
G2I: associate company marketing on-line motor polices;
Sava Terra: a subsidiary company renting out property and managing its own and leased property.

The following chart shows the position of Sava Re within the legal structure of the Group.

The tables below give details of all the subsidiaries of Sava Re.

Subsidiaries as at 31 December 2018

Name	Zavarovalnica Sava	Sava Pokojninska	Sava Neživotno Osiguranje (SRB)	Sava Životno Osiguranje (SRB)
Registered office	Cankarjeva 3, 2507 Maribor, Slovenia	Ulica Vita Kraigherja 5, 2103 Maribor, Slovenia	Bulevar vojvode Mišića 51, 11040 Belgrade, Serbia	Bulevar vojvode Mišića 51, 11040 Belgrade, Serbia
Business activity	composite insurer	pension company	non-life insurer	life insurer
Share capital	EUR 68,417,377	EUR 6,301,109	EUR 10,570,373	EUR 4,496,544
Book value of equity interest	EUR 68,417,377	EUR 6,301,109	EUR 10,570,373	EUR 4,496,544
% 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/loss for 2018	EUR 29,540,622	EUR 258,571	EUR 1,049,526	-EUR 168,562
Position in the Group	subsidiary insurance company	subsidiary pension company	subsidiary insurance company	subsidiary insurance company

Name	Illyria	Illyria Life	Sava Osiguruvanje (MKD)	Sava Osiguranje (MNE)	Illyria Hospital
Registered office	Sheshi Nëna Terezë 33, 10000 Priština, Kosovo	Sheshi Nëna Terezë 33, 10000 Priština, Kosovo	Zagrebska br. 28 A, 1000 Skopje, North 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	currently none
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/loss for 2018	-EUR 390,799	EUR 305,169	EUR 391,284	EUR 1,943,280	-EUR 6
Position in the Group	subsidiary insurance company	subsidiary insurance company	subsidiary insurance company	subsidiary insurance company	subsidiary

Name	Sava Penzisko Društvo	TBS Team 24	ZTSR	G2I	Sava Terra
Registered office	Majka Tereza 1, 1000 Skopje, North Macedonia	Ljubljanska ulica 42, 2000 Maribor, Slovenia	Dunajska cesta 22, 1000 Ljubljana, Slovenia	Bailey House, 4- 10 Barttelot Road, Horsham, West Sussex, RH12 1DQ, UK	Jarška cesta 10a, 1000 Ljubljana
Business activity	pension fund management	assistance services and customer care	market research	insurance	renting out property and operating its own and leased property
Share capital	EUR 2,110,791	EUR 8,902	EUR 250,000	EUR 121,300	EUR 7,500
Book value of equity interest	EUR 2,110,791	EUR 6,677	EUR 125,000	EUR 21,228	EUR 2,250
% equity share / voting rights held by Group members	Sava Re: 100.0%	Sava Re: 75.0%	Sava Re: 50.0%	Sava Re: 17.5% / 25.0%	Sava Re: 30.0% Zavarovalnica Sava: 70%
Profit/loss for 2018	EUR 1,133,199	EUR 759,757			-EUR 1 47,863
Position in the Group	subsidiary	subsidiary	associate company	associate company	subsidiary

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

Insurance Supervision Agency Trg republike 3 1000 Ljubljana Email: [email protected]

Name and contact details of the 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

Email: [email protected]

The financial statements of the controlling company have been audited by Ernst & Young d.o.o., Dunajska 111, Ljubljana, who were tasked with the auditing of the financial statements of the Sava Re Group and Sava Re in 2018 for the sixth year in a row. In 2018, most of the Group's subsidiary companies were audited by the local auditing staff of the same auditing firm. The 2018 financial statements of four Group member were audited by another audit firm. A contract for the auditing of the financial statements was signed with Ernst & Young in 2016, applying to the period 2016–2018.

Holders of qualifying shares in the Company as at 31 December 2018

No. of shares	Holding	% voting rights
3,043,883	17.7%	19.6%
2,439,852	14.2%	15.7%

Source: KDD d.d. central securities register and own sources.

Notes:

Sava Re holds 1,721,966 own shares with no voting rights attached.

On 2 June 2016, Sava Re received a notice from Adris Grupa 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 shares and 21.15% of outstanding shares.

Material lines of business transacted by the Company and its main markets

The Company writes reinsurance contracts in the Slovenian market and globally. The following two tables list Sava Re's most important markets in 2018 (with premiums written exceeding EUR 3.5 million) and the Company's material lines of business. As evident from the first table, Sava Re (apart from its intra-Group business) sources most of its premiums from Asian markets.

Major markets that the Company operates in

(EUR thousand)	Premiums in 2018	Premiums in 2017	Index
Slovenia	58,214	52,944	110.0
South Korea	14,219	15,569	91.3
China	8,332	9,260	90.0
Russia	3,913	4,725	82.8
Other countries	66,959	70,722	94.7
Total	151,636	153,220	99.0

In terms of lines of business, proportional and non-proportional property reinsurance were the dominant lines, accounting for 61.1% of total gross premiums written in 2018. These were followed by proportional motor reinsurance lines, representing 19.9% of the total gross premiums written.

Premiums by line of business

(EUR thousand)	Premiums in 2018	Premiums in 2017	Index
Proportional fire and other damage to property reinsurance	61,246	59,290	103.3
Non-proportional property reinsurance	31,331	33,093	94.7
Proportional other motor reinsurance	16,753	15,657	107.0
Proportional motor vehicle liability reinsurance	13,418	12,571	106.7
Proportional marine, aviation and transport reinsurance	6,476	7,916	81.8
Non-proportional marine, aviation and transport reinsurance	6,168	3,736	165.1
Proportional general liability reinsurance	6,077	5,727	106.1
Proportional income protection reinsurance	4,973	5,934	83.8
Non-proportional casualty reinsurance	3,233	3,742	86.4
Proportional credit and suretyship reinsurance	807	1,030	78.3
Non-proportional health reinsurance	335	286	117.1
Proportional miscellaneous financial loss reinsurance	159	1,003	15.9
Proportional medical expense reinsurance	107	3,225	3.3
Proportional legal expenses reinsurance	0	10	-0.7
Life reinsurance	553	0	-
Total	151,636	153,220	99.0

Significant events in 2018

In January 2018, Polona Pirš Zupančič began her five-year term of office as a member of the management board. After Polona Pirš Zupančič began her term of office, the Sava Re management board continued to operate as a four-member body. Mateja Treven concluded her role as management board member on 13 January 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; Official Gazette of the Republic of Slovenia, no. 93/15), Sava Re d.d. signed an outsourcing contract with Zavarovalnica Sava d.d. and Sava Pokojninska Družba d.d., under which Zavarovalnica Sava d.d. and Sava Pokojninska Družba d.d. transferred performance of the internal audit key function to Sava Re d.d. as of 1 February 2018 for an indefinite period of time.
On 13 March 2018, Sava Re satisfied all suspensive conditions, thus becoming the owner of 100% of NLB Nov Penziski Fond AD Skopje.
Having satisfied all suspensive conditions in March 2018, Sava Re became the owner of 92.94% of the Serbia-based company Energoprojekt Garant. In July 2018, following its takeover bid and subsequent squeeze-out procedure, Sava Re become the sole owner of the company. At the yearend, Sava Re merged the acquired company with its Serbian non-life insurance subsidiary Sava Neživotno Osiguranje (SRB).
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 Croatia-based companies ERGO Osiguranje d.d. and ERGO Životno Osiguranje d.d.
In May 2018, Sava Re issued the "Solvency and financial condition report of Sava Re d.d. 2017". The Company's solvency ratio for 2018 was 283%. In June 2018, Sava Re published its "Sava Re Group solvency and financial condition report 2017". The Group's solvency ratio for 2018 was 220%.
In May 2018, the Company's 34th general meeting of shareholders took place.
In June 2018, Srečko Čebron and Jošt Dolničar were re-elected to serve a further term on the management board.
On 8 June 2018, south-east Slovenia was hit by a hail storm, with the largest damage in and around the town of Črnomelj. Zavarovalnica Sava, the Group's subsidiary with heavy exposure in this part of Slovenia, assured its policyholders that it would deliver on its promise to cover all insured damage. Claims relating to this event had an effect of EUR 5 million on the 2018 result.
In July 2018, after its regular annual rating review, the rating agency Standard & Poor's improved Sava Re's issuer credit and financial strength ratings to "A" with a stable outlook.
In September 2018, Japan was hit by a strong typhoon. The event had an effect of EUR 5 million on the net result of reinsurance operations.
In December 2018, after its regular annual rating review, the rating agency AM Best upgraded the financial strength rating of Sava Re to "A" (excellent) and its issuer credit rating to "a", both with a stable outlook.
In December 2018, Nova KBM d.d., as the seller, and Sava Re d.d., as the purchaser, signed a share purchase agreement for the sale and purchase of two business shares in KBM Infond, Družba za Upravljanje d.o.o., jointly representing 77% of the registered share capital of the company. The transaction's completion depends on the satisfaction of certain suspensive conditions, such as regulatory approvals.
Along with some other investors whose qualified bank credit has been terminated, Sava Re has proposed some concrete amendments to the draft "Act on judicial relief granted to holders of qualified bank credit". They emphasised that the draft law did not eliminate the unconstitutionality as such, nor did it fully comply with the requirements of the Constitutional Court. They reiterated that the cancellation of junior bonds was without merit and wrong. By the time this report was finalised, the law had not been passed.

Significant events after the reporting date

On 27 February 2019, Zavarovalnica Sava, after satisfying all suspensive conditions, became the sole owner of the Croatian companies ERGO Osiguranje d.d. and ERGO Životno Osiguranje d.d.

A.2 Underwriting performance

Premiums, claims, expenses, and profit or loss

(EUR thousand)	2018	2017	Index
Gross premiums written	151,636	153,220	99.0
Gross claims paid	82,688	83,525	99.0
Net operating expenses	25,698	24,093	106.7
Net profit/loss for the period	41,867	32,974	127.0

Gross premiums written by material line of business

(EUR thousand)	2018	2017	Index
Proportional fire and other damage to property reinsurance	61,246	59,290	103.3
Non-proportional property reinsurance	31,331	33,093	94.7
Proportional other motor reinsurance	16,753	15,657	107.0
Proportional motor vehicle liability reinsurance	13,418	12,571	106.7
Other lines of business	28,888	32,609	88.6
Total	151,636	153,220	99.0

Gross premiums written by geographical area

(EUR thousand)	2018	2017	Index
Slovenia	58,214	52,944	110.0
International	93,423	100,276	93.2
Gross premiums written	151,636	153,220	99.0

In 2018, gross premiums written in Slovenia rose by 10.0%, or EUR 5.3 million (increase in premiums written by Zavarovalnica Sava). This favourable premium growth is a result of growth in motor business (increase in both the average premium and number of policies written), attraction of some new customers and growth in the portfolio of direct international business based on the freedom of services principle. Gross premiums written from abroad dropped by 6.8%, or EUR 6.8 million. This was due to strict underwriting discipline during the soft market phase of the underwriting cycle and the related selective underwriting.

In 2018, property business still dominated gross premiums written grouped by material line of business. The share of proportional reinsurance premiums rose by 1.7 percentage points compared to 2017, and the share of non-proportional premiums dropped by 0.9 percentage points.

Gross claims paid by material line of business

(EUR thousand)	2018	2017	Index
Proportional fire and other damage to property reinsurance	31,121	29,763	104.6
Non-proportional property reinsurance	14,751	15,360	96.0
Proportional other motor reinsurance	11,946	10,652	112.2
Proportional motor vehicle liability reinsurance	7,552	7,302	103.4
Other lines of business	17,317	20,449	84.7
Total	82,688	83,525	99.0

Gross claims paid by geographical area

(EUR thousand)	2018	2017	Index
Slovenia	28,900	28,635	100.9
International	53,788	54,891	98.0
Total	82,688	83,525	99.0

Sava Re gross claims paid decreased by 1.0% in 2018. Slovenian gross claims paid increased by 0.9% in 2018 compared to 2017, and international gross claims paid dropped by 2.0%. The structure of claims paid by large material line of business did not change significantly compared to 2017.

Net claims incurred dropped by 2.5% compared to 2017. In 2017, foreign exchange differences had a positive impact on claims incurred of EUR 6.2 million. Therefore, the change (increase) in the net provisions for outstanding claims, excluding the effect of exchange differences, was lower in 2018 compared to the previous year. In 2017 more additional provisions were set aside for new loss events of the year (US storms and large individual loss events in Russia) than in 2018 (a typhoon in Japan and floods in India).

As a result, the net incurred loss ratio of Sava Re in 2018 was a 2.7 percentage point improvement over 2017 and stood at 57.5%. Excluding exchange differences, the ratio improved by only 7.3 percentage points.

Net operating expenses

(EUR thousand)	2018	2017	Index
Acquisition costs, including change in deferred acquisition costs	34,848	33,186	105.0
Change in deferred acquisition costs (+/-)	-43	-881	4.9
Other operating expenses	12,759	10,808	118.0
Reinsurance commission income	-2,530	-1,935	130.8
Net operating expenses	45,033	41,178	109.4

Net operating expenses by material line of business¹

(EUR thousand)	2018	2017	Index
Proportional fire and other damage to property reinsurance	14,223	12,027	118.3
Non-proportional property reinsurance	4,631	4,608	100.5
Proportional marine, aviation and transport reinsurance	1,817	2,076	87.5
Proportional other motor reinsurance	1,451	616	235.7
Other lines of business	3,576	4,766	75.0
Total	25,698	24,093	106.7
Other lines of business	19,335	17,086	113.2
Total	45,033	41,178	109.4

Acquisition costs (commissions) rose 5.0% in 2018 despite a 1.0% drop in gross premiums written. Commission expenses increased as a result of writing more profitable business with higher commission rates, especially during the soft market phase in the reinsurance markets.

The share of acquisition costs as a percentage of gross premiums written increased by 1.3 percentage points year on year to 23.0%. The change in deferred acquisition costs (increase) was lower in 2018 than in 2017 due to less in premiums written, leading to a lower amount of unearned premiums.

¹ Excluded are expenses relating to the management of subsidiary companies.

Other operating expenses rose by 18.0% compared to 2017, primarily due to the rise in personnel costs and costs of intellectual and personal services. The latter were mostly incurred in the preparations to implement new international financial reporting standards and in new strategic acquisitions carried out in 2018. Amortisation costs also increased, reflecting higher costs of software.

The higher reinsurance commission income is primarily the result of increased commission income generated by Sava Re's retrocession business relating to reinsurance programmes of the Slovenian cedants. This effect is the result of higher commission income from excess of loss reinsurance treaties, meaning that Sava Re collected more commissions from its retrocessionaires due to the favourable claims development in 2017.

Other technical income and other technical expenses

In 2018, the Company realised EUR 2.5 million (2017: EUR 1.9 million) of reinsurance commission income. Because it is largely operating in international markets, exchange differences play an important role. Exchange gains relating to other technical income totalled EUR 5.3 million (2017: EUR 3.7 million), and exchange losses relating to other technical expenses amounted to EUR 5.3 million (2017: EUR 5.4 million).

A.3 Investment performance

The Company monitors the performance of its portfolio investment activities and investment property by investment register and for the Company as a whole. Net investment income and return on investments 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. The income and expenses relating to strategic investments in subsidiaries are monitored separately.

Type of income	1/1/ – 31/12/
(EUR thousand)	2018	2017
Interest income	3,590	3,896
Change in fair value and gains on disposal of FVPL assets	92	78
Gains on disposal of other IFRS asset categories	478	1,227
Income from dividends and shares in Group companies and associates	33,558	26,137
Income from dividends and shares – other investments	676	619
Exchange gains	6,113	3,823
Diverse other income	698	336
Income relating to the investment portfolio	45,204	36,116
Income relating to the investment portfolio, excluding exchange differences	39,092	32,293
Type of expense
	1/1/ – 31/12/
(EUR thousand)	2018	2017
Interest expenses	0	718
Change in fair value and losses on disposal of FVPL assets	218	76
Losses on disposal of other IFRS asset categories	125	130
Impairment losses on subsidiaries and associates	4,021	0
Impairment losses on investments	1,944	320
Exchange losses	6,209	9,306
Other	256	232
Expenses relating to the investment portfolio	12,772	10,783

In 2018, investment income totalled EUR 45.2 million, up EUR 9.1 million year on year; excluding exchange differences, investment income increased by EUR 6.8 million. The largest contribution to total 2018 income related to dividend income from subsidiaries, totalling EUR 33.6 million (accounting for 74.2% of total income relating to the investment portfolio), up EUR 7.4 million year on year. Compared to the previous period, capital gains dropped by EUR 0.7 million to EUR 0.5 million in 2018. Interest income fell by EUR 0.3 million, accounting for 7.9% of financial income. In 2018, exchange gains of EUR 6.1 million were realised (2017: EUR 3.8 million).

Compared to the same period last year, investment portfolio expenses increased by EUR 2.0 million, and by EUR 5.1 million excluding exchange differences. In 2018, investment expenses were mainly comprised of exchange losses of EUR 6.2 million (2017: EUR 9.3 million) and impairment losses on financial investments of EUR 6.0 million (2017: EUR 0.3 million).

Net investment income by class of asset

	Interest income/expenses	Change in fair value and gains/losses on disposal of FVPL assets	Gains/losses on disposal of other IFRS asset categories	Income from dividends and shares – other investments	Impairment losses on investment s	Foreign exchange gains/losse s	Other income/expense s	Total	Income/expe nses of associates
Held to maturity	103	0	0	0	0	0	0	103	0
Debt instruments	103	0	0	0	0	0	0	103	0
Other investments	0	0	0	0	0	0	0	0	0
At fair value through P/L	0	-126	0	22	0	0	0	-49	0
Held for trading	0	0	0	0	0	0	0	0	0
Debt instruments	0	0	0	0	0	0	0	0	0
Equity instruments	0	0	0	0	0	0	0	0	0
Other investments	0	0	0	0	0	0	0	0	0
Designated to this category	55	2	0	22	0	1	0	-49	0
Debt instruments	55	-127	0	0	0	0	0	-72	0
Equity instruments	0	1	0	22	0	1	0	24	0
Other investments	0	0	0	0	0	0	0	0	0
Investments in infrastructure funds
Derivatives	0	0	0	0	0	0	0	0	0
Available for sale	3,176	0	352	655	-1,944	-20	6	2,225	29,538
Debt instruments	3,176	0	292	0	0	-19	6	3,454	0
Equity instruments	0	0	61	625	-1,944	0	0	-1,258	29,538
Other investments	0	0	0	0	0	0	0	0	0
Investments in infrastructure funds				29				29
Loans and receivables	238	0	0	0	0	-78	0	160	0
Debt instruments	209	0	0	0	0	0	0	209	0
Other investments	29	0	0	0	0	-78	0	-49	0
Financial investments of reinsurers i.r.o. reinsurance contracts with cedants	18	0	0	0	0	0	0	18	0
Subordinated liabilities	0	0	0	0	0	0	0	-718	0
Total	3,590	-126	352	676	-1,944	-97	6	2,457	29,538

The bulk of the Company's net investment income was net investment income generated by Group companies and associates, amounting to EUR 29.5 million. Net investment income accounted for in 2018 was severely impacted by exchange losses of EUR 1.9 million. Net interest income totalled EUR 3.6 million.

Fair value reserve – movement

(EUR thousand)	2018	2017
As at 1 January	3,805	3,786
Change in fair value	-1,165	692
Transfer from fair value reserve to the IS due to disposal	-202	-668
Deferred tax	260	-5
As at 31 December	2,697	3,805

The Company holds no securitised assets.

A.4 Performance of other activities

Other income and expenses

In 2018, the Company realised other income of EUR 701 thousand (2017: EUR 444 thousand) and EUR 279 thousand of other expenses (2017: EUR 235 thousand).

Other income and expenses mainly include collected bad debt relating to other receivables that had been written off, default interest under a final court decision and, to a minor extent, gains on the disposal of fixed assets and income from the use of holiday facilities. The other expenses item mainly comprises expenses incurred by the Company on investment property before it was leased.

A.5 Any other information

The Company has no other material information relating to its business.

B. System of governance

B.1 General information on the system of governance

B.1.1 Governing bodies

General

Sava Re has a two-tier management system with a management board that conducts the business and a supervisory board in charge of oversight. The governing bodies – the general meeting, and the supervisory and management boards – are governed by laws, regulations, the Company's articles of association, and internal rules. The Company's articles of association and the rules of procedure of both the general meeting and the supervisory board are posted on the Company's website, at www.sava-re.si.

The governing bodies carry out their duties in accordance with statutory regulations, the Company's internal rules, general guidelines established by the Company's corporate governance policy, other policies of the Company and other internal acts.

The Company is run by the management board, whose work is supervised by the supervisory board. The management and supervisory boards work for the benefit of the Company. The Company's articles of association, the Companies Act, the Insurance Act, the rules of procedure of the management board and those of the supervisory board establish the segregation of duties and responsibilities between the management and supervisory boards, and the mode of their cooperation.

The management board is autonomous in conducting the Company's business and decision-making. Before making major decisions that could significantly affect the operations, financial position or legal position of the Company, the management board notifies the supervisory board thereof in order to reach a consensus regarding such issues. The management board consults the supervisory board on business operations, strategy, risk management and matters concerning public relations.

The chairman of the management board informs the chairman of the supervisory board or the entire supervisory board about major events essential to assessing the Company's position and to conducting the business. When only the chair of the supervisory board is informed, the chair must communicate the information to other members of the supervisory board and, if necessary, call a supervisory board meeting. The management and supervisory boards collaborate closely in accordance with the law and good practice for the benefit of the Company.

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 general meeting decides on the following:

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 discharge to the management and supervisory board members;
adopting amendments to the articles of association;
measures for increasing and decreasing 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.

Supervisory board

Terms of reference

The supervisory board oversees the management of the Company during the financial year in line with the Company's business strategy and financial plan. In this regard, it acts in accordance with applicable regulations, particularly the Slovenian Companies Act and the Insurance Act, as well as with the Company's articles of association and its own rules of procedure.

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

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

Size and composition

Pursuant to the Company's articles of association and applicable legislation, the supervisory board is composed of six members, of which four (shareholder representatives) are elected by the Company's general meeting, and two (employee representatives) are elected by the workers' council, which informs the general meeting of its decisions. Supervisory board members are appointed for a term of up to four years and may be re-elected. The supervisory board members elect a chair and deputy chair from among its members.

The supervisory board is composed so as to ensure responsible oversight and decision-making in the best interest of the Company. Its composition takes 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. In 2018, the Company sought to align the composition of the supervisory board with its policy on the diversity of the management and supervisory boards.

Aspects considered by the diversity policy relating to the composition of the supervisory board are:

professional diversity to ensure the complementarity of knowledge and skills,
gender balance and appropriate representation of the under-represented gender in the selection of candidates,
efforts to avoid the simultaneous replacement of all members of the supervisory board in order to ensure working continuity,
an adequate proportion of members on the management and supervisory boards with international experience, and
an appropriate balance between members of different age groups.

Member	Title	Beginning of term of office	Duration/expiry of term
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 2018

Supervisory board committees

Pursuant to legislation, the Slovenian Corporate Governance Code for Listed Companies and best practices, the supervisory board may appoint one or more committees, tasking them with specific areas, with the preparation of proposed resolutions of the supervisory board and with the implementation of resolutions of the supervisory board in order for the committee to provide professional support to the supervisory board. Notwithstanding the appointment of any committee, decision-making remains the responsibility of the supervisory board.

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.

The Company has established the following supervisory board committees:

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

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.

Audit committee

The chief tasks of the audit committee are to:

oversee the integrity of financial information;
monitor the efficiency and effectiveness of internal controls, the operation of the internal audit department and risk management systems;
monitor the statutory audit of independent and consolidated financial statements;
perform other tasks assigned by a valid resolution of the supervisory board, in line with statutory requirements and best practices of comparable companies or insurance groups.

Risk committee

The chief tasks of the risk committee are to:

assess the impact of various types of risk on economic and regulatory solvency capital requirements;
assess the Group's overall risk governance framework, including the risk management policy, the risk strategy and monitoring operational risk;
assess the appropriateness and adequacy of risk management documents to be approved by the supervisory board;
perform other tasks assigned by a resolution of the supervisory board, in line with statutory requirements and best practices of comparable companies or insurance groups.

Nominations and remuneration committee

The chief tasks of the nominations and remuneration committee of the supervisory board include:

drafting proposals for the supervisory board regarding the criteria for membership of the management board, and considering and drafting proposals concerning nominations to be decided by the supervisory board;
preliminarily considering the proposal of the chair of the management board regarding the composition of the management board and the Company's governance, and drawing up proposals for the supervisory board;
carrying out the nomination procedure for candidates for membership of the supervisory board who are shareholder representatives;
providing support in drawing up and implementing a system for remuneration, reimbursements and other benefits for management board members.

Fit and proper committee

The chief tasks of the fit and proper committee are:

to carry out procedures for assessing the competence of the supervisory board, supervisory board committees and the management board as collective bodies, and to conduct fit and proper assessments of individual members of these bodies;
at the request of the Company's workers' council, to carry out a fit and proper assessment of any member of the supervisory board (employee representative) elected by the workers' council.

Management board

Terms of reference

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 structure of human resources and prudent use of financial resources. In this respect, it acts in accordance with applicable legislation, particularly the Slovenian Companies Act and the Insurance Act, as well as with its articles of association and the management board's charter and rules of procedure. The management board is committed to high ethical standards and considers the interests of all stakeholder groups.

The chief duties of the management board are to:

provide leadership and organise the operations of the Company;
represent the Company;
be responsible for the legality of the Company's operations;
adopt the development strategy of the Company and the Group, which is presented to the supervisory board for consent;
adopt the business policy and financial plan of the Company and the Group, which is presented to the supervisory board for consent;
adopt internal acts of the Company;
approve and periodically review strategies and written rules on risk management, the internal control system, internal audit, the actuarial function and outsourcing, and ensure their implementation;
adopt the report on the solvency and financial condition and submit it to the supervisory board for consent;
grant authorisation to key function holders of the Company subject to the consent of the supervisory board;
report to the supervisory board on operations of the Company and the Group;
prepare a draft annual report, including a business report, and submit it to the supervisory board together with the auditor's report and a proposal regarding appropriation of distributable profit for approval;
convene the general meeting of shareholders;
implement the resolutions adopted by the supervisory board.

Size and composition

The management board, which conducts the business and represents the Company in public and legal matters, is composed of at least two but no more than five members, of whom one is the chair and the others are members of the management board. The chair and members of the management board are appointed by the supervisory board for a period of five years. Such appointments are renewable without limitations. The chairperson and all members of the management board are employed on a full-time basis. The exact number of management board members and the areas for which each individual member is responsible is laid down in the act on the management board, which is adopted by the supervisory board at the proposal of the chair of the management board.

The management is composed so as to ensure responsible oversight and decision-making in the best interest of the Company. Its composition takes into account diversity 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. In 2018, the Company sought to implement its policy on the diversity of the management and supervisory boards.

Aspects considered by the diversity policy relating to the composition of the management board are:

professional diversity to ensure the complementarity of knowledge and skills,
gender balance and appropriate representation of the under-represented gender in the selection of candidates,
efforts to avoid the simultaneous replacement of all of the members of the supervisory board in order to ensure working continuity,
an adequate proportion of members on the management board with international experience,
an appropriate balance between members of different age groups.

The Company's policy on the diversity of the management and supervisory boards is posted on the Company's website, at www.sava-re.si, under the About Us tab.

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 their third consecutive terms of office, starting on 1 June 2018. Polona Pirš Zupančič was appointed as the fourth member of the management board, starting her term on 14 January 2018. Mateja Treven concluded her role as management board member on 13 January 2018.

Composition of the management board in 2018

Member	Title	Beginning of term of office	Expiry of term of office
Marko Jazbec	chairman	12/05/2017	12/05/2022
Srečko Čebron	member	01/06/2018	01/06/2023
Jošt Dolničar	member	01/06/2018	01/06/2023
Polona Pirš Zupančič	member	14/01/2018	14/01/2023
Mateja Treven	member	01/06/2013	13/01/2018

Areas of responsibility of the management board members in much of 2018:

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

Reporting

The management board reports, at least quarterly, to the 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.

B.1.2 Risk management

The risk management system is one of the key building blocks of the system of governance. The management board ensures that it has in place an effective risk management system based on an appropriate organisational structure. More about these risks is contained in section B.3.

B.1.3 Key functions of the risk management system

General

The Company has certain functions integrated into its organisational structure and decision-making processes. These are the risk management function, internal audit function, actuarial function and compliance function, defined by applicable law as the key functions of the governance system (hereinafter: key functions).

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

The key functions perform their duties independently from each other and from other organisational units of the Company. The Company's key functions are organised as services of the risk management system and are directly subordinated to the Company's management board, as illustrated in the chart below.

Internal organisational chart of the Company as at 31 December 2018

Generally, the controlling company's key function holders also act as key function holders at the Group level. They have access to all information, data and reports required for their smooth operation.

The chief responsibilities of individual key function holders at the level of the Company are set out in the following section, and the chief responsibilities of any key function holder at the Group level are:

coordinating the development of a uniform methodology for all key functions in the Sava Re Group,
seeking to develop appropriate framework policies for individual key functions 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 activities in the Sava Re Group,
providing guidance and overseeing the operations of key functions in all Group companies,
professional development and exchange of good practices relating to the key functions of the 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,
periodically monitoring 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.

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 and participating 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 Company's actuarial function 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,
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 and on the findings of the audit reviews carried out, and proposing recommendations for improvements.

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 Company's internal audit policy.

The compliance function is primarily responsible for:

seeking to ensure 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 providing assistance with their management.

Details on the 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 Company's compliance policy.

Reporting by key function holders

Individual key function holders report to the management and supervisory boards or individual supervisory board committees, if so stipulated by the Company's rules and regulations.

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

B.1.4 Committees of the governance system

The Company's management board sets up committees tasked with advisory roles based on resolutions. Such committees 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 Company's system of governance, dealing with issues from various areas, such as risk management, asset-liability management, actuarial affairs.

Committees set up at the controlling company level perform their roles at both the controlling company and the Group levels.

The terms of reference, powers and composition of committees are set out in internal regulations adopted by the Company's management board.

The Company has set up a risk management committee and an actuarial committee as detailed in section B.6.

Risk management committee

The risk management committee is primarily responsible for drafting recommendations and proposals for the management board and monitoring the Company's risk profile. It also plays a crucial role in the communication process, because it acts as a discussion forum on elements of the risk management system. In addition, it is responsible for reviewing the effectiveness of the risk management processes in place. The main objectives of the committee are to unify risk management practices throughout the Company and provide professional risk management advice to the Company's management board in order to ensure effective operation.

The chief responsibilities of the risk committee are to:

set up and review the functioning of the risk management system,
regularly monitor key risks and the risk profile against the Company's risk appetite and review the compliance with the risk strategy,
prepare recommendations for the management board relating to risk management,
monitor quantitative risk assessment calculations and respond adequately,
issue opinions relating to major business decisions with a significant impact on the risk profile,
identify and monitor any emerging new risks.

B.1.5 Information about the remuneration policy

The Company's remuneration policy establishes the framework for the planning, implementing and monitoring remuneration systems and schemes that support the Company's long-term strategy and risk management policy.

The remuneration policy applies to all organisational levels of the Company and to all employees: the management board, senior and lower management, key function holders and other employees.

Principles of the remuneration policy

The Company's remuneration policy aims to build 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.

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 and adapting to market trends and practices,
sustainable pay for sustainable performance,
employee motivation and retention.

Remuneration structure

The Company's remuneration structure includes:

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

The base salary is set based on the employee's role and position, taking into account knowledge acquired, professional experience, responsibilities, complexity of the job and the situation on the local labour market.

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 the 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 agreedupon 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 duties 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 ranges from 0% to 30% of the total annual remuneration.

The system and scheme for the variable part of the remuneration for the management board are considered and approved by the supervisory board. The variable remuneration for the management board is based on the achievement of the board's goals and performance of the Company or the Group as a whole.

The system and scheme of variable remuneration for the risk management system's key function holders are considered, determined and approved by the management board. If necessary, the supervisory board gives its consent to it. In addition to the Group's performance, the variable part of the salaries of key function holders depends primarily on the attainment of the goals of each key function, which are strictly separate from the goals of the business functions they oversee.

The system and scheme of variable remuneration for senior and junior management is considered, determined and approved by the management board. Variable remuneration of senior and lower management is based on a combination of performance assessment of the individual, the team they head, and the performance of the Group.

The system and scheme of remuneration for other employees is considered and approved by the management board. This is done with due regard to the statutory provisions relating to cooperation with social partners. The variable part of the salary of other employees depends on a combination of the employee's assessed individual performance and overall performance of the Group.

The Company runs no share-option schemes.

Other benefits and incentives: The Company set up a collective voluntary supplementary pension insurance scheme funded by the employer. It has a contract in place on joining the pension company's pension scheme, entered into the pension scheme register with the Financial Administration of the Republic of Slovenia (second pension pillar). The Company pays voluntary supplementary pension insurance premiums for its employees who have joined the pension scheme. This entitles the Company to tax relief related to the amount of voluntary supplementary pension insurance premiums paid to the pension scheme provider for its employees in any one tax year. Employees may opt to join a third pillar pension scheme, for which the level of contributions paid by the Company depends on the type of employment contract (management board, employees with special powers, and other employees), level of gross salary, and seniority. Contributions to pension insurance schemes are accounted for as employee benefits.

Remuneration upon termination of the employment contract: Upon termination of a contract of employment, employees are eligible for severance pay in accordance with the law and their employment contract. Severance payments not prescribed by law are capped at six times the average monthly salary in the last year of employment. Upon the termination of a contract of employment, any additional remuneration cannot include payments in the event of failure.

The Company granted no loans neither to its employees nor members of the management or supervisory boards, and so there were no such transactions in 2018.

The Company has no additional pension schemes.

B.1.6 Material related-party transactions

Below are set out material transactions with related-parties, consisting of:

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

Material transactions in 2018 include:

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 3.7 million (previous year: EUR 3.3 million),
loans granted to subsidiaries of EUR 2.5 million as at 31 December 2018 (previous year: EUR 4.6 million), and
dividend payout of EUR 14.7 million (previous year: EUR 12.4 million).

All third-party transactions are set out in detail in the Company's annual report, in section 23.10 "Related party disclosures", posted on the Sava Re website.

B.2 Fit and proper requirements

B.2.1 General

In accordance with the law, the Company ensures that persons who effectively run and oversee the Company are properly qualified (fit) and suitable (proper) for doing so in a professional manner.

To this end, the Company conducts fit and proper assessments of its employees: management and supervisory board members, members of the supervisory board's committees, key managers, key function holders of the risk management system and personnel overseeing outsourced activities. The assessment is carried out before the appointment to the role and periodically thereafter 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 have 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 character, personal behaviour and business conduct, including any criminal, financial and supervision aspects, irrespective of the jurisdiction.

All relevant personnel are subject to the reporting duty regarding any new facts or circumstances, or changes to information submitted in the initial suitability assessment. An appropriately composed fit and proper committee 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. Statements submitted by relevant persons confirm compliance with current fit and proper standards and their commitment to notify the human resources function immediately of any circumstances that may affect their fit and proper assessment.

In 2018, full fit and proper assessment procedures were carried out for new relevant personnel as well as an annual review based on annual statements for persons already assessed.

B.2.2 Fitness requirements for relevant personnel

Supervisory board and its committees

In assessing the fitness of members of the Company's supervisory board, including its committees, it is necessary to consider knowledge acquired through education and work experience. Requirements considered in the fitness assessment:

qualifications,
sufficient professional experience,
general knowledge and experience.

The supervisory board is composed so as to ensure responsible oversight and decision-making in the best interest of the Company. Members are selected so that their professional expertise, experience and skills are complementary. The supervisory board, viewed as a whole, must have sufficient expertise. Individual members of the supervisory body with distinct special expertise may, in

Management board

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

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.

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

The management board, viewed as a whole, must have sufficient expertise. Its members must have relevant experience and knowledge of the areas mentioned above, depending on their specific area of responsibility. Individual members of the management board 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 knowledge acquired through education and work experience. Based on this, the assessment is made considering assigned responsibilities for each key function. Requirements considered in the fitness assessment are:

qualifications, including additional training, required licenses obtained or specialist examinations;
sufficient professional experience relevant to a particular key function;
general knowledge and experience.

Other relevant personnel

In assessing the fitness of other relevant personnel, it is necessary to consider knowledge acquired through education and work experience. Based on this, the assessment is made considering assigned responsibilities for individual areas. Requirements considered in the fitness assessment are:

qualifications,
sufficient professional experience relevant to a particular area of responsibility,
general knowledge and experience.

Personal reliability and reputation

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

Personal reliability and good repute are 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 business relations. Any relevant person that experiences a conflict of interest in their work must disclose such conflict of interest and act in the interests of the Company. If this is not possible, such person must inform the Company's management or supervisory board, if a conflict of interest is perceived with any member of either the management or supervisory boards.

Time input

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

B.2.4 Assessment procedure

The fit and proper assessment procedure is conducted by a special committee set up according to an internal framework document (policy). During the assessment of relevant personnel, the Company's human resources function assists with the implementation of operational tasks, such as the acquisition, submission, processing and storage of documents and issuance of the assessment results.

The committees conduct fit and proper assessments and issue relevant results based on documents and statements compiled. Based on assessments thus 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

The Company's management is aware that risk management is key to achieving operational and strategic objectives and to ensuring long-term solvency. Therefore, the Company is continuously improving its risk management system.

The Company's strong risk culture is essential to its security and financial stability, and to achieving its goals. In order to establish good risk management practices, the Company promotes a risk management culture with appropriately defined remuneration for employees, employee training and relevant internal information flow.

The Company has implemented a risk strategy that defines the 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, the Company has set up its own risk strategy and policies, taking into account its specificities.

B.3.1 Risk management organisation

Systematic risk management includes an appropriate organisational structure and a clear delineation of responsibilities.

The efficient functioning of the risk management system is primarily the responsibility of the Company's management board. To ensure efficient risk management, the Company uses a threelines-of-defence model, which clearly segregates responsibilities and tasks among the following lines:

The first line of defence constitutes all organisational units with operational responsibilities (development, sales and reinsurance management, provision of reinsurance services, financial operations, accounting, controlling, human resources and others).
The second line of defence consists of three key functions (the risk management function, actuarial function, compliance function) and the risk management committee.
The third line of defence consists of the internal audit function.

The management board 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, it has the following chief responsibilities:

establishment of the risk strategy and approval of risk tolerance limits and operational limits,
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 decisionmaking.

The supervisory board approves the risk strategy, the risk management policy 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 as part of the supervisory board to provide expertise in particular with regard to the Company's risk management.

The first line of defence involves all the Company's employees who are responsible for ensuring that operational tasks are performed in such a way as to reduce or eliminate risk. In addition, risk owners are responsible for individual risks listed in the risk register. Departmental executive directors, line directors 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, preparing data for periodic risk reports for individual areas of risk and identifying new risks.

The Company's second line of defence comprises the Company's risk management committee and three key functions: the actuarial function, risk management function and compliance function. 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. The Company's key functions are organised as management support services and report directly to the Company's 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 risk management function is mainly responsible for setting up effective risk management processes and coordinating risk management processes already in place. It is involved in all stages of identifying, assessing, monitoring, managing and reporting risks. It is also involved in preparing the risk strategy and setting risk tolerance limits. The risk management function regularly reports to the risk management committee, the management board, the supervisory board's risk committee, and the supervisory board. 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 includes the Company's risk management committee. 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 Company's risk profile, analysing risk reports and issuing recommendations to the management board.

The third line of defence consists of the internal audit function. It is completely independent of the business areas 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.

B.3.2 Components 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
Own Risk and Solvency Assessment (hereinafter: ORSA).

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

Risk strategy

In order to establish a solid risk management framework, in 2016 the management board – with the consent of the Company's supervisory board – approved the risk strategy for the period 2017–2019, which, based on its risk bearing capacity, defines:

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

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

The Company's risk appetite is based on four major areas:

capital,
liquidity,
product profitability, and
the Company's reputation.

Based on its risk appetite, the Company sets its risk strategy, risk tolerance limits and operational limits. Risk tolerance limits are limits set for individual risk categories included in the Company's risk profile, 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 risk appetite and risk tolerance limits, the Company sets operational limits, such as reinsurance underwriting limits and investment limits in order to ensure that the activities of the first For periodic monitoring of compliance with the risk strategy, the Company has defined a minimum set of risk measures for each risk category to allow a simplified monitoring of the Company's current risk profile and capital position without having to carry out a complete calculation of the solvency capital requirement. The Company periodically reviews these risk measures.

Risk management processes

for breaches of operational limits.

Risk management processes are inseparable from and fully integrated into business processes carried out in the Company. All organisational units are involved in the Company's 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 identification

Risk management processes are incorporated into all three lines of defence. The role of each line of defence is 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.

In the process of risk identification, the Company identifies the risks it is exposed to. The key risks are compiled in the risk register, constituting the Company's risk profile, and are reviewed and amended on a regular basis to add new risks as required.

Risk identification is both a top-down and a bottom-up process. Using a top-down approach, risk identification is conducted by the risk management function, the risk management committee and the management board. Such identification of new and emerging risks is based on monitoring the legal and business environment, market developments and trends, and expert knowledge. This process is mainly used by the Company with strategic risks, such as reputational risk and legal risk.

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

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 Company has established a periodic assessment of the risks it is exposed to. Both qualitative and quantitative methods are used to measure risk. In addition, the Company has set up a modelling department for the development of own quantitative models for Group-wide risk assessment.

using the Solvency II standard formula,
calculating overall solvency needs as part of its own risk and solvency assessment (ORSA),
analysing stress tests and scenarios,
conducting qualitative risk assessment in the risk register,
using various risk measures that allow simplified measuring and monitoring of the current risk profile.

Risk management

The Company's management board 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 Company conducts an analysis of the measure in terms of its economic and financial viability. Elimination or mitigation of 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 its financial implications.

In practice, it is already in the business planning process that the Company examines the impact of the business strategy on its capital position, with regard to both the regulator as well as the own risk and solvency assessment. If decisions are made during the financial year 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 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 on several levels: at the level of individual organisational units and risk owners: the risk management department, the risk management committee, the management board, the supervisory board's risk committee, and the supervisory board. A standard set of risk measures is defined and monitored on a regular basis. Both risks and risk management measures are subject to monitoring and control.

Risk reporting

The Company also has in place periodic risk reporting. 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 the Company's entire risk profile. The report is first discussed by the risk management committee, followed by the management board, risk committee and supervisory board.

Own risk and solvency assessment (ORSA)

In addition to the risk management processes mentioned, the Company also conducts an own risk and solvency assessment (ORSA) as defined in its own risk and solvency assessment policy. ORSA is a process that includes identification of the differences between the Company'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 Company from either an economic or a regulatory perspective. The Company conducts the ORSA process for both the Group and Company levels, and both are inseparably intertwined.

It conducts the ORSA based on the business and strategic plans taking into account the current risk profile, including any planned changes to it. The ORSA results are taken account of in other processes conducted by the Company, in particular in capital and risk management processes, which the ORSA is increasingly more closely connected to.

The ORSA is primarily conducted to understand the own risk profile and the standard formula, and to analyse the impact of the changes in the risk profile on capital adequacy over the next three years. ORSA is an integral part of the decision-making process and contributes to the Company's key decisions and business strategy being adopted with consideration of risks and associated capital requirements. Based on ORSA results, we also check the compliance of the business strategy with the risk strategy. This establishes 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 Company generally conducts the 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, the Company conducts an ad hoc ORSA. The management and supervisory boards review and confirm the ORSA report (at least) on an annual basis. The Company reports (at least) annually to the regulator on the ORSA.

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 Company 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, the Company 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 Company's risk profile, the Company then uses its own solvency model to conduct an own risk and solvency assessment for a further three-year period. In the ORSA process, the Company also carries out stress tests and scenario analyses as relevant with regard to its (planned) risk profile.

Throughout the ORSA, the Company's 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 ORSA conducted, the Company prepares a report that is considered on several levels: it is first discussed by the risk management committee, followed by the management board, the supervisory board's risk committee and the supervisory board. After the results are approved at all levels, they are distributed to all the heads of business units. The ORSA report is also submitted to the Insurance Supervision Agency.

The ORSA process is embedded in the decision-making process, which allows key decisions of the Company 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 in decision-making, capital management and product development.

The ORSA is subject to continuous improvement, both with regard to risk assessment as well as in terms of its integration into the Company's ongoing processes and business decision-making.

B.4 Internal control system

B.4.1 Internal control system

The purpose of the Company's internal control system is to identify, measure, monitor, and manage risks at all levels of operations, including reporting on risks that the Company is or may be exposed to in its operations. In addition, the system ensures compliance with the Company's 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 be 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 Company has a policy of internal controls 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 system of internal controls as part of the Company's system of governance.

B.4.2 Compliance function

The compliance function is organised as one of the four key functions constituting the risk management system. Being an internal control function, it is part of the second line of defence in the internal 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 compliance function is organised within the department "Office of the management board and compliance". Although the compliance function is not organised as an independent organisational unit, it is ensured that the compliance function holder has direct access to the management board at all times. The compliance function holder also has other responsibilities; therefore, relevant internal measures have been taken by the Company to avoid potential conflicts of interest for the function holder when in the compliance function holder role.

The compliance function holder is authorised by the management board subject to the consent of the supervisory board.

The chief responsibilities 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;
advise and assist in the coordination of the Company's operations with the obligations imposed by regulations and other commitments;
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, and report on them to the Company's management board, individual organisational units, and business and key functions;
identify and assesses risks to the Company's compliance with regulations and other commitments, and, if necessary, propose recommendations and guidelines for the management of compliance risk;
inform the management and supervisory boards of the Company's compliance with regulations and other commitments and the risk assessment regarding compliance with regulations and other commitments;
coordinate with top management regarding compliance matters and offer consulting services to them;
cooperate in exchanging compliance-related questions, best practices and experiences on the controlling company level with other control and supervision functions;
coordinate the preparation and adoption of policies and rules on the controlling company level and between the controlling company and Group subsidiaries;
coordinate the preparation of comments on draft insurance-related legislation;
participate in setting up and updating compliance programmes in certain separate 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);
prepare a draft annual compliance monitoring plan covering the identification and assessment of the main compliance risks that the Company faces for submission to the management and supervisory boards;
compile period reports, submitting them to the management and supervisory boards;
draw up reports on the findings related to individual compliance audits, submitting them to the Company's management board.

Internal auditing in the Company is carried out by an independent organisational unit, the internal audit department, which reports to the management board and is functionally and organisationally separate from other organisational units. Its 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. Internal audit reports directly (orally and in writing) to the management board, the audit committee and the supervisory board.

The internal audit function, being an internal control function, is part of the third line of defence of the Company's internal control system.

The chief responsibilities of the internal audit are to:

set up a risk-based, permanent and comprehensive supervision of the Company's operations aimed at verifying and assessing whether the processes of risk management, control procedures and corporate governance are appropriate and function in a manner that ensures the achievement of the following major goals of the Company:
- o effective and efficient operation of the Company;
- o business and financial efficiency, including safeguarding assets against loss;
- o reliable, timely and transparent internal and external accounting and nonfinancial reporting;
- o compliance with laws, other regulations and internal rules;
assess whether the Company's information technology supports and furthers the Company's strategies and goals;
assess fraud risk and the procedures for its management in the Company (although the expertise of a person whose primary task is to identify and investigate cases of fraud is neither expected nor required);
offer advice;
carry out other tasks subject to the law.

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. Furthermore, it establishes the position of the internal audit within the organisation, including the nature of the functional responsibilities of the head of internal audit with regard to the supervisory body, authorises access to records, personnel, premises and equipment relevant to the performance of engagements, and defines the scope and activities of the internal audit.

The internal audit function annually submits the annual work plan and the annual report of the internal audit service to the management and supervisory boards, including its audit committee.

The internal audit function holder has been appointed by the 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 internal audit must be independent, and internal auditors must be impartial and unbiased, and avoid any conflicts of interest. The director of the internal audit must confirm to the supervisory body, at least annually, the organisational independence of the internal audit as part of the annual reporting on the activities of the internal audit service.

In accordance with article 171(7) of the Insurance Act (ZZavar-1; Official Gazette of the Republic of Slovenia, no. 93/15), Sava Re d.d. signed an outsourcing contract with Zavarovalnica Sava d.d. and Sava Pokojninska Družba d.d. under which the performance of the internal audit key function was transferred to Sava Re d.d. as of 1 February 2018 for an indefinite period of time.

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. They also perform first-line-of-defence actuarial tasks. Although the actuarial function is part of the second line of defence, it is organised in a way that prevents any one person from both implementing (first line) and controlling (second line) the same tasks.

The Company's actuarial function holder is responsible for carrying out the actuarial function.

The chief responsibilities of the Company's actuarial function are to:

coordinate the calculation of technical provisions and ensure their consistency with applicable regulations;
ensure the appropriateness of the methodologies, underlying models and assumptions made in calculating technical provisions so that they reflect key risks and are sufficiently stable;
assess the sufficiency and quality of the data used in calculating technical provisions and to provide recommendations on how to adapt processes in order to improve data quality;
compare best estimates of SII provisions against experience and, in the event of any deviation, suggest changes to the assumptions and valuation models used (in this text and hereinafter SII provisions are technical provisions established in accordance with Solvency II principles);
oversee the use of approximations in calculating SII provisions;
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;
verify the adequacy of reinsurance arrangements;
participate in introducing and implementing 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;
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 by issuing recommendations for how to eliminate those weaknesses.

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

The actuarial function holders of Sava Re Group companies serve on the Group's actuarial committee. The Group's actuarial committee adopts decisions in the form of proposed resolutions and recommendations to the Sava Re management board, 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 Sava Re Group's actuarial function policy. The members of the actuarial committee have a responsibility toward the Company to communicate information about relevant arrangements to relevant parts of the Company.

B.7 Outsourcing

In accordance with the provisions of the applicable Insurance Act, the Company has adopted a policy and rules that govern the outsourcing of critical or important operational functions or activities. The policy defines the framework for outsourcing 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 functions or activities, defining the standards of management and control of such a process. The policy further defines the registration of outsourced operations comprising all contracts considered as outsourced and defines how to document the entire decision-making process, collect the necessary documents and sign 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.

In 2018, the Company had no outsourced operations.

B.8 Any other information

The Company has in place a transparent and appropriate risk-based governance system.

The Sava Re corporate governance policy sets out the main governance principles, taking into account the Company's goals, mission, vision and values. The purpose of the policy is to define the foundation of the Company's system of governance, the basic management rules, rules of corporate governance and a transparent organisational structure with clear and transparent 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 amended in December 2017, with the most recent review in December 2018.

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 Company 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 follow-up 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.

C. Risk profile

The Company is exposed to various risks in its operations, which it identifies, measures, manages and monitors, and it reports on them in accordance with the processes described in section B.3. The main risk categories that the Company is exposed to are:

underwriting risk,
market risk,
credit risk,
liquidity risk,
operational risk, and
strategic risk.

The following subsections discuss individual risk categories, except strategic risk, which is discussed in subsection C.6 "Other material risks".

The Company regularly measures some of the above risk categories using the Solvency II standard formula, whereas other risks (in particular those not readily quantifiable) are measured using the methods described in section B.3. The chart below shows the Company's risk profile in accordance with the standard formula.

Undiversified SCR by risk module

At year-end 2018, the risk profile continues to be dominated by non-life underwriting and market risk; other risk categories are small. In 2018, there was a rise in market risk, mostly as a result of new strategic investments. The proportion of non-life underwriting risk decreased slightly owing to the rise in market risk, reclassifications to life underwriting risk, a smaller than planned reinsurance portfolio and better catastrophe reinsurance protection.

C.1 Underwriting risk

The Company's exposure to underwriting risk arises out of its accepted reinsurance contracts. It is associated with the risks covered under reinsurance contracts and with the relevant 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 (including annuities stemming from non-life insurance business),
health underwriting risk (including accident reinsurance).

The Company markets all three types of reinsurance. In 2018, the Company started separate risk calculation for accepted life reinsurance business ceded by Sava Re Group companies, which previously had been treated under accidental insurance risks. Accepted life reinsurance business of cedants outside the Sava Re Group is still grouped with accident reinsurance risk. This is because, due to its annual coverage period and technical basis, such life reinsurance business is similar to accepted accident reinsurance business.

The chart below shows gross premiums written by three different criteria: geographical area, form of reinsurance and insurance group.

Gross premiums written by geographical area

The Company is mainly exposed to the following risks associated with non-life insurance and notsimilar-to-life-technique health insurance (hereinafter: "NSLT health business").

Premium risk – the risk that premiums written are insufficient to meet the obligations arising from reinsurance contracts. This risk depends on many factors, such as inadequate assessment of market developments, poor assessment of claims development, use of inadequate statistics, intentionally inadequate pricing in 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:

o underwriting process risk,
o product design risk,
o risk of unexpected increase in claims.

Given the portfolio composition, property reinsurance business contributes the most to premium risk, both proportional reinsurance business, as the largest form of reinsurance, and nonproportional reinsurance business, because it is relatively riskier due to claims volatility.

Reserve risk – the risk that 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 the Company's financial position. These include the following risks:

o risk related to data availability and accuracy,
o risk related to adequacy of methods and assumptions used,
o risk of calculation error,
o risk stemming from complex tools used in processes yielding misleading results.

As with premium risk, property insurance contributes most to the reserve risk, but due to the Company's long experience with this business, the amount of best estimate technical provisions is also the largest.

Catastrophe risk includes the risk of occurrence of a catastrophic event; such events are rare but their financial impact is too high to simply be covered by otherwise appropriate premiums and provisions. Catastrophe risk may materialise as an extreme event or as a large number of catastrophic events in a short period. The risk also includes an excessive geographical accumulation of risks. The Company's portfolio is geographically well diversified and also further balanced through the retrocession programme, and so the relatively high capital requirement results from the aggregation of a large number of such requirements for various smaller natural perils and regions and various man-made catastrophic events, and is due to the fact that coverage against catastrophic events is the Company's primary and most important role.

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 Company is not significantly exposed to this type of risk.

The Company is exposed to the following life underwriting risks:

biometric risk, comprising mortality, longevity and disability-morbidity risk,
life-expense risk,
revision risk,
lapse risk, the risk of early termination of life insurance contracts, comprises termination due to surrender, conversion to paid-up status, and premium default,

life catastrophe risk.

Other underwriting 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 and life underwriting risk.

C.1.2 Risk measurement

For the quantitative assessment of underwriting risk, the Company uses the Solvency II standard formula. To this end, it does not apply undertaking-specific parameters for individual companies, in accordance with article 104(7) of Directive 2009/138/EC. For the quantitative assessment of underwriting risk, the Company also uses its own assessment (in ORSA).

As at 31 December 2018, the Company was exposed to non-life underwriting risk in the amount of EUR 85.7 million (31/12/2017: EUR 94.1 million), health NSLT underwriting risk in the amount of EUR 2.5 million (31/12/2017: EUR 3.6 million) and life underwriting risk in the amount of EUR 0.4 million (31/12/2017: EUR 0 million). Capital requirements for non-life underwriting risk, health NSLT underwriting risk and life underwriting risk accounted for 40.1%, 1.2% and 0.2%, respectively, of the undiversified basic solvency capital requirement. Catastrophe risk and premium and reserve risk represent the largest portion of the undiversified non-life underwriting risk.

The chart below shows the composition of non-life underwriting risks, the largest category of underwriting risks.

Undiversified non-life underwriting risk by risk sub-module

Non-life underwriting risk is measured quantitatively, also as part of the ORSA. Premium and reserve risks are estimated using undertaking-specific parameters (hereinafter: USP). Also as part of the ORSA, we calculated capital requirements for storm and hail risks in Slovenia, which are not included in the standard formula, and adjusted the assessment for man-made fire catastrophe risk, by using probable maximum loss figures within a 200-metre radius instead of sums insured. The result of all effects together is a slightly lower capital requirement for non-life underwriting risk compared to the standard formula.

In addition to this quantitative risk measurement, the Company also monitors its exposure to nonlife underwriting risk quarterly, analysing the combined ratios of individual contracts and homogeneous risk groups, verifying the adequacy of technical provisions, monitoring aggregate exposures to natural perils by geographical location, and monitoring major new contracts. Based on all interim information, the Company monitors its underwriting risk profile to detect any changes, which allows the management to respond in a timely manner.

C.1.3 Risk concentration

The Company considers the risk related to natural perils to be the largest non-life underwriting risk. The largest exposure to natural perils is in Slovenia; other exposures are relatively well diversified globally. The life insurance portfolio is diversified; therefore, concentration does not represent a significant risk.

The table below shows the ten largest gross exposures to natural perils by country as at 31 December 2018.

(EUR thousand)	31/12/2018	31/12/2017
Slovenia	276,886	277,688
Croatia	52,290	28,136
Serbia	34,638	32,393
China	34,082	42,249
India	32,258	33,958
Poland	29,007	22,101
Greece	27,744	26,078
Philippines	26,808	27,054
Turkey	26,436	28,645
Japan	26,203	30,787
Total	566,352	549,205

Ten largest gross exposures to natural perils (EUR thousand)

C.1.4 Risk management

The Company manages underwriting risk mainly through an established underwriting process, as set out in internal reinsurance underwriting guidelines. These define the requirements for partners, the minimum required level of information about the business, and the expected profitability range. In addition, they also define the underwriting process and levels of authority so that appropriate controls are included in the process. The Company also manages underwriting risk by means of geographical diversification, aggregate exposure limits and an appropriate reinsurance (retrocession) programme.

The Company annually reviews and sets underwriting limits. These limits relate to the sums insured or probable maximum loss figures of individual contracts and to reinsurance premiums, all for assumed shares in the Company's retention, as well as to the expected aggregate exposure to catastrophic risk by geographical area. Underwriting limits must also be confirmed by the holder of the actuarial function to ensure their consistency with the Company's risk appetite. Underwriting limits are an integral part of the reinsurance underwriting guidelines. For more complex transactions, these guidelines also define the process of approving risk acceptance, including roles and responsibilities and escalation procedures.

In addition to the above, the Company analyses the impact of various stress tests on risk levels. In the calculation as at 31 December 2018, we tested the impact of a 10% increase in the volume measure for the premium risk of non-life and NSLT health insurance on the level of premium and reserving risk and the overall SCR. A 10% increase in the premium volume measure would result in a 5.5% increase in the premium and reserving risk of non-life insurance (31/12/2017: 5.3%) and a 6.4% increase in the premium and reserving risk of NSLT health insurance (31/12/2017: 6.3%). The increase in the Company's overall SCR is smaller than the materiality threshold² and does not materially affect the Company's solvency. The impact of the stress test is on the same level as at 31 December 2017.

We also analysed the impact of a 10% increase in the volume measure for the reserving risk of nonlife and NSLT health insurance on the level of premium and reserving risk and the overall SCR. A 10% increase in the provision volume measure would result in a 4.5% increase in the premium and reserving risk of non-life insurance (31/12/2017: 4.7%) and a 3.6% increase in the premium and reserving risk of NSLT health insurance (31/12/2017: 3.7%). The increase in the overall SCR is below the materiality threshold; and the stress test does not affect the Company's solvency. The impact of the stress test is on the same level as at 31 December 2017.

Below we set out the risk management of individual non-life and health NSLT underwriting risks in greater detail, along with an overview of risk management of life underwriting risk.

Premium risk

Premium risk is mainly managed through proper reinsurance underwriting and quarterly performance monitoring by insurance class, if necessary also by contract or partner, and through measures taken on this basis.

Underwriting process risk is managed by means of additional training of underwriters; by producing understandable, clear and detailed instructions; and by defining appropriate underwriting limits that are consistent with the Company's risk appetite as defined in its risk strategy, business strategies and retrocession programme. In addition, we pay special attention that contracts are entered into with verified and trusted cedants, and that there are appropriate limits on exposure concentration by geographical area and homogeneous risk groups in order to meet the required risk diversification. Significant reinsurance underwriting process risks include the risk of error in the assessment of the probable maximum loss (hereinafter: PML), especially by the cedants of the Sava Re Group. To reduce this risk, the Company provides guidance on PML assessment, cooperates with its cedants' underwriters when underwriting large risks, offers training in this area and ensures that the retrocession programme covers PML errors.

As regards product design risk, the Company is only able to manage such risk indirectly, because it must follow the fortunes of its cedants in proportional reinsurance business. This is why the verification of cedants constitutes the main part of the underwriting process. The Company can

² The materiality threshold is a measure of the Company associated with the level of the Company's eligible own funds and solvency capital requirement. As at 31 December 2018, the Company's materiality threshold was EUR 5.5 million.

manage product design risk directly only as regards the contractual terms and conditions, which, if inappropriate, may include associated risks that the Company, unaware of such when entering into the contract, fails to take account of when setting the premium. This can arise owing to poor and inadequate information provided by the cedant, or due to inadequate interpretation of the terms and conditions. To properly assess all risks, the Company must fully understand all positive and negative aspects of the contract and the associated risks. Before entering into a contract, the Company therefore analyses in detail both the partner and the market, collects the information available (from the media, competitors, clients), monitors the applicable regulations and the related requirements, and observes trends in historical claims data (for the entire market) and forecasts. In addition, the Company may use special clauses in reinsurance contracts to limit performance volatility; for example, sliding scale or profit commissions, or loss ratio ceilings.

As regards claims risk, this can be related to an incorrect risk assessment in the underwriting process, new types of claims, changes in case law, increased awareness of policyholders of their rights, changes in macroeconomic circumstances, activities adversely affecting the environment or an inappropriate retrocession programme. This risk is mitigated through in-depth assessments of risks during reinsurance underwriting and prudent granting of underwriting authority. As with product design risk, the Company can manage this risk through the use of special clauses in proportional reinsurance contracts that limit the reinsurer's share of unexpected claims and by not accepting unlimited layers under non-proportional contracts. Also central to reducing this risk is the annual testing of the appropriateness of retrocession protection using a variety of stress tests and scenarios, and setting appropriate retentions.

Reserve risk

The Company manages reserve risk by means of robust processes and effective controls as regards the calculation of IFRS and Solvency II technical provisions. In addition, it conducts annual backtesting of the appropriateness of technical provisions, analysing the major reasons for their insufficiency. All experience so gained is then used in calculating future technical provisions. An effective calculation process for technical provisions comprises several key steps. By documenting and understanding such a process, the Group can identify and describe potential risks, such as:

risk related to data availability and accuracy,
risk related to the adequacy of methods and assumptions used,
risk of calculation error,
risk associated with supporting IT systems and tools.

Controls are put in place for the mitigation of each identified risk. These controls ensure data quality and mitigate the risks associated with calculating technical provisions. The design and operational effectiveness of controls are reviewed at least annually or whenever a significant change occurs in the process or methods and models used to calculate the technical provisions.

Examples of controls include:

reconciliation of technical provision items with accounting records,
peer review of actuarial methods and assumptions,
changes to management controls relating to the IT tools used in the process,
actuarial review and approval of the amounts of technical provisions.

The process by which technical provisions are calculated is subject to periodic approval. If there are substantial changes to the process, the methodology or models used in calculating technical provisions, validation is carried out in accordance with the reporting calendar.

Lapse risk

It is estimated that lapse risk, being the risk of early termination of reinsurance contracts, is less important for the Company, because the vast majority of reinsurance contracts are entered into for one year, and the risk is also managed by developing and maintaining good business relations with cedants and closely monitoring the market situation.

Catastrophe risk

The Company manages catastrophe risk by means of a well-designed underwriting process, geographical diversification and adequate retrocession protection against natural and man-made catastrophes.

To protect against catastrophic events, the Company has in place catastrophe retrocession covers (CAT XL), for both intra- and extra-Group business; with a retention of EUR 5 million for both parts of the portfolio. This means that, if a catastrophic event occurs, the Company will suffer a loss of EUR 5 million and will have to pay a reinstatement premium (of about EUR 2 million). Both parts of the portfolio are additionally protected against a significant rise in the frequency of disasters. This ensures that the Company remains solvent even if several catastrophic events occur in any one year.

For the intra-Group business, the Group level exposure in one geographical area is relatively large; therefore, the CAT XL protection has a larger capacity, i.e. EUR 65 million for all natural catastrophes or EUR 115 million for an earthquake, divided into four or five layers, with the first two layers with two free reinstatements each and one free reinstatement for each other layer. The aggregate catastrophe excess of loss cover of EUR 7.5 million in excess of a priority of EUR 7.5 million covers the aggregate catastrophic claims within one year in excess of the priority for claims that range between EUR 1 million and EUR 5 million at the Group level.

The extra-Group business is very diversified in terms of geography, and therefore, the reinsurance cover has a per event capacity of EUR 20 million in two layers, with one free reinstatement for each. If the number of free reinstatements is exhausted in a year with an extreme loss experience, the Company will purchase a further CAT XL cover for the remaining period. This is an ordinary instrument available in international reinsurance markets, the price of which is lower than the initial cover because of the shorter period of exposure. Owing to a potentially higher frequency of catastrophic events, the extra-Group business is additionally protected by a cover in the amount of EUR 3 million in excess of a EUR 2 million priority. The coverage may be used starting from the occurrence of the third catastrophic event in the year. In the case of a third event, the Company's net loss would amount to EUR 2 million.

The Company also considered scenarios and their impact on operations and the solvency position. We selected scenarios based on the own risk profile, striving to identify events with a potentially maximum impact on the operations and capital adequacy, and taking into account their probability of occurrence.

Catastrophe risk is a very important risk for the Company. Therefore, as part of the annual ORSA process, the Company tests one or more natural catastrophe scenarios in terms of their impact on solvency. To date, the following has been tested: an earthquake in Ljubljana with a return period of one thousand years (including default of lead retrocessionaire), a Kyrill-type hurricane (2007), an Andrew-type hurricane (1990), an earthquake in China, an earthquake in Turkey, the scenario of three catastrophic events in Slovenia in one year (two hail storms and one flood) and the impact of two hurricane events in the Caribbean as in 2017. In each of these cases, eligible own funds would be impacted by the amount of the claim payment, which would also have an effect on the profit or loss for the year (in which the event happened); nevertheless, Sava Re would maintain a large surplus of eligible own funds over the SCR. The solvency ratio would drop by a few percentage points but still remain within the optimal capitalisation range.

Life underwriting risk

We assess that life underwriting risk is less significant for the Company. The risk is mitigated through a unified underwriting process in the Sava Re Group, nurturing good business relations with non-Group cedants of long standing and closely analysing the market situation. Procedures put in place to mitigate lapse risk include monitoring lapses in absolute and relative terms and overseeing cedant measures taken to minimise policy lapses. Procedures put in place to manage mortality risk include consistent application of underwriting protocols, which specify in detail the deviation from normal mortality risk, use of appropriate mortality tables and adequate retrocession protection. Procedures put in place to manage life expense risk include monitoring the macroeconomic situation (e.g. inflation) and planning service expenses for the coming years.

C.2 Market risk

Market risk is the risk of loss or adverse change in the financial situation resulting, directly or indirectly, from fluctuations in the level and volatility of market prices of assets, liabilities and financial instruments. Market risks include the following:

Interest rate risk is the risk of a change in market interest rates adversely affecting the value of interest-rate-sensitive assets and liabilities. Interest-rate-sensitive investments include bonds, deposits and loans. When calculating capital requirements for interest rate risk, the amount of interest-rate-sensitive assets is considered on the assets side, and best estimate technical provisions, subordinated debt and employee provisions are considered on the liabilities side.
Equity risk is the risk of a fall in the level of equity prices resulting in a fall in the value of equities. Participations in subsidiaries are exposed to this risk, as well as investments in equities, and equity and mixed mutual funds.
Property risk is the risk of a fall in the value of property due to changes in the level and volatility of property prices.
Currency risk is the risk of a drop in the value of assets or increase in the level of liabilities due to changes in the level of currency exchange rates.
Spread risk is the risk of the sensitivity of the values of assets and financial instruments to changes in the level or in the volatility of credit spreads over the risk-free interest rate term structure.
Market concentration risk is the risk of a suboptimal diversification of the asset portfolio or an increased exposure to the default of a single counterparty or group of counterparties.

C.2.1 Risk exposure

As at the date of this report, the Company had the following composition of assets, which influences its exposure to market risk.

		Structure as		Structure as
(EUR thousand)	31/12/2018	at	31/12/2017	at
		31/12/2018		31/12/2017
Asset class
Bonds	221,895	36.01%	225,422	37.6%
Government bonds	121,483	19.71%	117,013	19.5%
Corporate bonds	100,412	16.30%	108,409	18.1%
Mutual funds	4,964	0.81%	2,862	0.5%
Deposits	0	0.00%	3,127	0.5%
Equity investments	374,064	60.70%	351,391	58.6%
Participations in subsidiaries	365,343	59.29%	340,992	56.9%
Listed equities	7,086	1.15%	6,820	1.1%
Unlisted equities	1,635	0.27%	3,579	0.6%
Property	12,189	1.98%	11,834	2.0%
Own-use property	3,585	0.58%	3,361	0.6%
Other property	8,604	1.40%	8,473	1.4%
Loans and mortgages	3,090	0.50%	4,610	0.8%
Total	616,201	100.00%	599,246	100.0%

The value of assets that the Company includes in the calculation of market risks was EUR 616.2 million as at 31 December 2018 (31/12/2017: EUR 599.2 million). The increase in investments in 2018 is mainly due to the increased value of participations of EUR 24.4 million.

Their structure shows that the Company's financial investments mainly consist of strategic participations and fixed-income financial instruments. The predominance of fixed-income financial instruments in the composition of portfolio investments reflects the Company's policy that defines asset and liability matching as one of the main objectives of asset management.

Variable-income investments account for a relatively low share of portfolio investments³ , because the majority of equity investments consist of participations. Portfolio investments show a relatively high exposure to interest rate and credit risk.

C.2.2 Measurement and concentration of market risk

For the quantitative assessment of market risk, the Company uses the Solvency II standard formula in addition to its own risk assessment.

The solvency capital requirement in accordance with the Solvency II standard formula for market risk stood at EUR 113.8 million as at 31 December 2018 (31/12/2017: EUR 98.5 million) or 53% of the total undiversified basic solvency capital requirement.

The higher capital requirement is largely due to the higher exposure to Group companies, which experienced a rise in equity risk and concentration risk.

The Company has participations in insurance companies, both EU- and non-EU-based, in the amount of EUR 282.6 million and EUR 49.5 million, respectively. The Company's exposure due to participations in subsidiaries therefore accounts for a significant proportion of the capital requirement for equity and concentration risks.

³ Assets included in the calculation of market risk less participations.

Undiversified market risk by risk sub-module

Interest rate risk accounts for a relatively small proportion of capital requirements for market risk. Interest-rate-sensitive investments include bonds, deposits and loans. Interest-ratesensitive liabilities mainly include technical provisions. The Company regularly monitors, analyses and addresses the scope of the assumed interest rate risk. We believe that, with its specific measures and internal controls, it manages interest rate risk well.
Equity risk is the largest type of market risk, with 48% of total market risk. The major part of the capital requirement stems from participations in subsidiaries. Equity risk arising from portfolio investments is relatively low due to the smaller exposure.
Property risk. The proportion of property within the investment portfolio is capped through the Company's limits system and therefore relatively small. Consequently, property risk that the Company is exposed to is low.
Currency risk represents 11% of market risk. Both assets and liabilities are exposed to this risk. The monitoring and management of currency risk is presented in greater detail in the Company's annual report, in section 23.5.3.2.4 "Currency risk". As at 31 December 2018, the Company reported highly matched assets and liabilities in accordance with IFRSs. Nevertheless, the Company still had some currency mismatches under the Solvency II methodology as a result of the lower level of best estimate technical provisions. Currency risk increased compared to the previous year mainly because of the use of a look-through approach with subsidiaries, which affected the currency structure of their assets and liabilities. This had an effect on the currency structure of the Company's assets through participations, and these in turn affected the level of currency risk.
Spread risk represents a relatively small proportion of market risk and contributed 4% to the capital requirement. The Company has a limits system in place to manage credit risk, which defines maximum exposures to a single issuer, region, sector and credit rating, and thus prevents the assumption of risks inconsistent with the Company's risk appetite.
Market concentration risk is the second-largest subcategory of market risk, accounting for 34%. The level of this risk is due to the Company's participations in non-EU-based subsidiaries, which are considered a single exposure under the standard formula. Portfolio investments are exposed

to only minor market concentration risk because the Company monitors and regulates its exposure, i.e. concentration, of portfolio investments by region, sector and asset class. thus preventing any large concentrations in the investment portfolio and limiting the risk. The Company's portfolio broken down by theses parameters and by rating is shown in its annual report, in section 23.5.3.4 "Credit risk".

When assessing the risks associated with the investment portfolio, the Company also regularly monitors other risk measures, i.e. performance of the investment portfolio:

income volatility,

market and book return.

As part of its asset and liability matching procedures, on a quarterly basis the Company calculates and monitors the following for each asset and liability portfolio:

risk measures: modified duration, convexity and key rate duration,
estimated future cash flows,
the currency structure of assets and liabilities.

In addition to the standard formula, the Company also uses its own solvency risk assessment model (within ORSA) to monitor and assess market risk. In our own calculation of risk, we assess the following financial risks: equity risk, interest rate risk and credit risk of financial investments. The valuation of equities is conducted using the capital asset pricing model (CAPM), where, for each equity instrument, a stock index is determined representing market return in the model (relevant economic scenario generators are used as a basis). In its own model, the Company includes all marketable equity securities sufficiently liquid to allow it to estimate, with sufficient accuracy, the parameters of the model using historic data. For other investments, the Company uses stresses prescribed by the standard formula. In ORSA, interest rate risk is assessed for all assets and liabilities. To this end, each currency representing a relatively small proportion of the portfolio is translated into a modelled currency with which it had the most stable exchange rate over the past five-year period. Modelled currencies include the EUR, USD, CNY, INR, KRW and RUB ⁴ . In its own model, the Company also assesses the credit risk of financial investments, which also captures market concentration and spread risks.

The own model only takes account of financial investments, excluding participations in subsidiaries, which are included in the ORSA equity risk assessment similar as in the standard formula, whereas in concentration risk, the exposure stemming from participations in non-EU-based subsidiaries is treated as a separate exposure.

In its financial investments in subsidiaries and associates, Sava Re has one major exposure – that is to Zavarovalnica Sava – accounting for 77.3% (2017: 85.2%) of the total value of its financial investments in subsidiaries and associates. The United States represents the largest concentration in a single issuer. The Company's largest regional concentration is in Slovenia. The Company is aware of the risks related to these concentrations and is actively managing them by gradually reducing exposures and setting adequate maximum exposure limits in the Company's limits system.

⁴ The euro, US dollar, Chinese yuan, Indian rupee, Korean won and Russian ruble.

C.2.3 Risk management

The framework for the market risk management is set out in the Company's asset and liability management policy and investment risk management policy. Specifically, the two policies define the following:

basic investment guidelines,
measures to be used in monitoring investment performance,
measures to be used in monitoring investment risks,
monitoring the compliance of the portfolio with the limits system,
persons responsible in the investment process.

In the management and monitoring of market risk, the Company takes account of the following:

its risk appetite as set out in the risk strategy,
operational limits for financial investments,
performance and risk measures relating to investments and liabilities.

The Company's main method of matching assets and liabilities is through matching and hedging. If possible and cost effective, the Company does so by matching assets to liability cash flows. The Company does not use derivative financial instruments for asset and liability matching.

The Company manages the risks arising from the financial investments portfolio by regularly monitoring and analysing issuers' financial data, monitoring the market prices of financial instruments, regularly analysing asset and liability management figures submitted to the risk management committee and analysing sensitivity tests for material parameters of market risk.

We carried out four stress tests applying various parameters that affect the level of the solvency capital requirement for market risk and the level of the Company's eligible own funds, and consequently the solvency position.

The first sensitivity test was an increase and decrease in interest rates. We carried out a stress test of interest rate sensitivity by increasing and lowering the base curve of the risk-free interest rate for all maturities by 100 basis points. Then, a new calculation was made of eligible own funds and the solvency capital requirement for all interest-rate-sensitive assets and liabilities. An increase in interest rates of 100 basis points resulted in a decrease in the Company's eligible own funds slightly below the Company's materiality threshold⁵ as well as a decline in its SCR. Thus the impact of the stress test on the solvency ratio is relatively small and comparable with the calculation of the stress test impact as at 31 December 2017. A drop in interest rates of 100 basis points had an inverse impact on eligible own funds and the SCR, and the impact on the solvency ratio was also relatively small and comparable to the calculation of the impact as at 31 December 2017.

The second was a stress test of a fall in the prices of the Company's equities, which was carried out by decreasing equity prices by 20% as at the reporting date. However, we did not decrease the value of participations in subsidiaries. The impact on equities was proportionate to the shock. This mainly resulted in a decrease of eligible own funds, as well as in a decline in the capital requirement within the equity risk sub-module. The decline in eligible own funds and the SCR is below the Company's

⁵ The materiality threshold is an internal measure associated with the level of eligible own funds and solvency capital requirement. As at 31 December 2018, the Company's materiality threshold was EUR 5.5 million.

materiality threshold, and the impact on the solvency ratio is very small and comparable to the calculation of the stress test impact as at 31 December 2017.

The impact of a change in property prices on the Company's solvency position was analysed through a stress test assuming a 25% fall in property prices. The calculation was made using the amount of property as at the reporting date. This mainly resulted in a decline in eligible own funds, but the capital requirement of the property risk sub-module also decreased. The impact of a fall in property prices on eligible own funds and the SCR is below the materiality threshold. The impact of the stress test on the solvency ratio is therefore very small and comparable to the impact calculation as at 31 December 2017.

As mentioned, the value of participations in subsidiaries has a material effect on the balance sheet and the level of the Company's market risk; we, therefore, tested the impact on the solvency position of a 20% fall in the value of the largest subsidiary, Zavarovalnica Sava. Investments in the Company's insurance subsidiaries are valued in the Solvency II balance sheet using the adjusted capital method – as the excess of the companies' Solvency II assets over liabilities. The value of the equity investment in Zavarovalnica Sava totalled EUR 282.6 million in the Solvency II balance sheet as at 31 December 2018 (31/12/2017: EUR 290.6 million), accounting for 77.3% (31/12/2017: 85.2%) of the total value of financial investments in subsidiaries and associates. The stress test assuming a 20% fall in the value of the participation in Zavarovalnica Sava materially reduces the eligible own funds and the Sava Re SCR. Because eligible own funds suffer a greater loss than the SCR, there is also a significant fall in the Company's solvency ratio, whereas its solvency is not compromised thanks to a remaining high solvency ratio. The impact of the stress test on the Company's solvency position is similar to the impact of the stress test as at 31 December 2017.

In addition to sensitivity and stress tests in the ORSA, the Company considered a number of scenarios and their impact on its operations and solvency position. We selected scenarios based on the own risk profile, striving to identify events with a potentially maximum impact on the operations and capital adequacy, and taking into account their probability of occurrence. Regarding market risk, we decided to test an extreme financial scenario and analysed a deterioration in economic conditions in 2019, assuming a change in interest rates and credit risk spreads. We assumed the largest yield drop for bonds would be seen in secure bonds (German and US government bonds) – that is, their prices rise – while there is an increase in the yield spread of other bonds depending on the asset type, country of issuer, and issuer sector, which results in a lower price for these investments. For equities, infrastructure funds and investment property, we assumed various value drops, depending on the region and type of investment. We also assumed a change in the value of currencies and a rating downgrade of all issuers and reinsurers by one class as a result of a deteriorated economic situation. Such a scenario would have a very large impact on the Company's eligible own funds (the impact considerably exceeding the Company's materiality threshold). Such a decline in the value of investments would also result in lower capital requirements for market risk and, consequently, a lower SCR for the Company. The decline in the SCR also exceedsthe materiality threshold. While such a scenario would reduce solvency, the solvency ratio would remain within the range of optimal capitalisation as defined in the risk strategy.

Prudent person principle

The Company makes investment decisions that take into account all investment-related risks, not only risks considered in capital requirements. In the optimisation process, strategic asset allocation is defined based on risk appetite.

Persons responsible for undertaking investment decisions assume and manage investment risk in line with the guidelines set out in the investment risk management policy, which is designed in accordance with the prudent person principle.

All assets are invested in such a way as to ensure the security, quality, liquidity and profitability of the portfolio as a whole. In addition, these assets are localised to ensure their availability.

Assets held to cover technical provisions are invested in a manner appropriate to the nature and duration of the reinsurance liabilities. These assets are invested in the best interest of all policyholders and beneficiaries.

The Company has in place a limit system based on the calculated maximum expected losses of individual issuers, restrictions regarding concentration risk prescribed by the Solvency II standard formula and restrictions arising out of risk appetite, and acceptable volatility of return on financial investments. In addition to limits by type of investment, industry, region and issuer, the Company set a minimum proportion of investments rated "A-" or better of at least 40% of the investment portfolio value and a restriction on the maturity of debt instruments, the credit rating of which must not exceed the investment grade level.

In the case of a conflict of interest, the Company ensures that the investment is made in the best interest of policyholders and beneficiaries.

C.3 Credit risk

Credit risk is the risk of loss or adverse change in the Company's financial position, resulting from fluctuations in the credit standing of issuers, counterparties and any debtors that the Company is exposed to.

C.3.1 Risk exposure

The Company is exposed to the following risks:

counterparty default risk,
spread risk, and
market concentration risk.

Spread and market concentration risks are discussed and presented within the market risk section, in accordance with the risk classification and measurement in the standard formula. Below, we provide details regarding counterparty default risk.

Counterparty default risk may result in losses due to unexpected default or deterioration in the credit standing of counterparties and debtors over the coming 12 months. Counterparty default risk covers risk-mitigating contracts, such as reinsurance arrangements and receivables from intermediaries, as well as any other credit exposures not covered in the spread risk sub-module of the standard formula (cash and cash equivalents). Credit risk from receivables arises out of delays in the payment of liabilities under inwards reinsurance business and recovery arrangements under subrogation rights. In order to avoid such delays, the Company closely monitors the payment behaviour of cedants, running procedures to collect overdue receivables. This explains its low exposure to counterparty default risk.

C.3.2 Risk measurement

For the quantitative assessment of credit risk, the Company uses the Solvency II standard formula. As mentioned, spread and market concentration risks are assessed within the market risk module, whereas counterparty default risk is assessed in a separate counterparty default risk module. This section shows the results for counterparty default risk, and market risk is discussed in section C.2.

The Company's solvency capital requirement in accordance with the Solvency II standard formula for counterparty default risk amounted to EUR 6.4 million as at 31 December 2018 (31/12/2017: EUR 5.5 million) or 3% of the total undiversified basic solvency capital requirement.

The chart below shows the structure of the counterparty default risk module in accordance with the standard formula.

Undiversified counterparty default risk by risk sub-module

Type 1 exposure includes exposures related to reinsurance and co-insurance contracts, cash and cash equivalents, and deposits to cedants. Type 2 exposure includes all receivables not included under type 1 exposure other than pending premium receivables, pending commission receivables, tax assets and deferred tax assets.

In addition to the calculation of the solvency capital requirement in accordance with the standard formula, the Company develops its own model (in ORSA) to assess credit risk relating to financial investments. This model takes account of spread, migration and default risks for all investments in debt instruments. Closely interrelated, these risks are addressed within a single model in the ORSA. For more information on the own model for assessing market and credit risk, see section C.2.2.

As regards counterparty default risk related to reinsurers and co-insurers, we believe that the standard formula appropriately evaluates the risk, and we therefore made no own calculations for this part. In our own credit risk calculation, we also consider the diversification effect.

The Company has no significant concentration with counterparty default risk.

C.3.3 Risk management

The Company's investment portfolio is reasonably diversified in accordance with the Slovenian Insurance Act and the Company's limits system in order to avoid large concentration of a certain type of investment, large concentration with any counterparty or economic sector, or other potential forms of concentration.

The Company manages its credit risk associated with assets under re(co)insurance contracts by limiting the exposure to a single re(co)insurer and by entering into contracts with highly-rated partners.

In order to avoid such delays, the Company closely monitors the payment behaviour of cedants, running procedures to collect overdue receivables.

The Company monitors and reports on credit risk exposure on a quarterly basis and is thus able to take timely action if necessary. Partners' credit ratings are also monitored, with a focus on any indications of their possible downgrading. To this end, a process has been put in place for reviewing external credit ratings by the credit rating committee.

As part of its review of reinsurer credit ratings in the capital adequacy calculation, the Company tested the impact of a deterioration in reinsurer credit standing on counterparty default risk. We assumed a rating downgrade for all partners by one class, based on which we calculated the impact on the SCR and the solvency ratio. The impact is small and similar to the one as at 31 December 2017.

Liquidity risk is the risk that an entity will not have sufficient liquid assets to meet its obligations as they fall due, and will have to sell its less liquid assets at a discount or raise new loans. Liquidity risk should be understood as risk arising from short-term cash flows rather than risk arising from a longterm mismatch of assets and liabilities.

C.4.1 Risk exposure

The Company has substantial monetary obligations (mainly to policyholders), and it must therefore adequately manage its cash flows, ensuring an appropriate level of liquidity. The Company carefully plans and monitors cash flows (both inflows and outflows). Furthermore, it regularly monitors the receivables aging analysis, considering the impact of the settlement of receivables on its current liquidity.

C.4.2 Risk measurement

Liquidity risk is a risk difficult to quantify and hence is not covered within the Solvency II standard formula. It is regularly monitored and managed by the Company.

To determine its exposure to liquidity risk, the Company monitors and analyses the following risk measures:

cash in bank accounts,
the percentage of highly liquid assets and the haircut category with regard to the total amount of financial investments, in the valuation in accordance with the ECB methodology,
liquidity buffer,
the difference between the projected cash outflows and inflows for the next quarter, and the percentage of the liquidity buffer represented by this difference,
any other legally required measures.

C.4.3 Risk concentration

The Company is not exposed to a concentration of liquidity risks, but it may in certain cases still face certain emergency liquidity needs.

C.4.4 Risk management

The Company defined liquidity risk as one of its key risk exposures in its risk strategy. In order to effectively manage liquidity risk, the Company has adopted a liquidity risk management policy, which sets out the risk management processes and risk measures, as well as the processes involved in the case of emergency liquidity needs. Due to the nature of liquidity risk, the Company does not manage such risk by holding additional capital, but through an appropriate strategy for ensuring sufficient liquidity.

The estimated liquidity requirement of the Company is composed of the estimated normal current liquidity requirement (arising from operations and investment maturities) and a liquidity buffer (estimated based on historic data on maximum weekly outflows).

The Company conducts an assessment of the normal current liquidity requirement within a period of up to one year based on projected three-month and weekly cash flows, which take account of the planned investment maturity dynamics and of other inflows and outflows from operations by using historical financial data from previous monthly and weekly liquidity plans and expectations regarding future performance.

Liquidity requirements are met by allocating funds to money market instruments in a percentage consistent with the estimated normal current liquidity requirement. In this regard, the Company maintains a liquidity buffer of highly liquid assets accounting for at least 15% of its investment portfolio. As at 31 December 2018, Sava Re had 25% of its investment portfolio invested in highly liquid assets (31/12/2017: 28.2%), which is well above the level defined in the risk strategy.

Due to the significant proportion of highly liquid assets and the way this risk is managed, the Company believes that its liquidity risk is well managed.

Expected profits included in future premiums

Expected profits included in future premiums (hereinafter: "EPIFP") are those that the Company, in accordance with article 260(2) of Commission Delegated Regulation (EU) (2015/35) (hereinafter: "Delegated Regulation"), calculated as the difference between technical provisions without a risk margin calculated in accordance with Solvency II and a calculation of the technical provisions without a risk margin under the assumption that the premiums relating to existing insurance and reinsurance contracts that are expected to be received in the future are not received for any reason other than the insured event having occurred, regardless of the legal or contractual rights of the policyholder to discontinue the policy. In the latter calculation, a 100% rate of cancellation is assumed, whereas all life policies are treated as paid-up.

EPIFP is calculated separately for each homogeneous risk group of non-life and NSLT health insurance business and for each underwriting year, in the amount of expected future premiums less the related expected claims, commissions and other expenses, as used for calculating best estimate provisions.

Expected profits included in future premiums as at 31 December 2018 totalled EUR 5,792 thousand (31/12/2017: EUR 6,720 thousand).

C.5 Operational risk

Operational risk is the risk of loss arising from inadequate or failed internal processes, personnel or systems, or external events.

C.5.1 Risk exposure

Operational risks are not among the Company's major risks. Nevertheless, some are relatively important, in particular:

risk associated with the computer and communication system,
risk associated with supervision and reporting,
risk of loss of key, expert and high-potential employees,
risk of incorrect data input and inadequate documentation,
compliance risk relating to laws and regulations,
risk of theft and fraud,
risks associated with outsourcing.

C.5.2 Risk measurement

At least annually, the Company calculates its capital requirements for operational risk using the Solvency II standard formula. Such a calculation, however, is only of limited practical value because the formula is not based on the Company's actual exposure to operational risk, but on an approximation calculated mainly based on the Company's premiums, provisions and expenses.

As at 31 December 2018, the Company's exposure to operational risk calculated using the standard formula amounted to EUR 4.6 million (31/12/2017: EUR 4.5 million).

Due to the reasons mentioned above, the Company assesses operational risk mainly by qualitatively assessing the related probability and financial severity within the risk register, and by analysing various scenarios (also within ORSA). The Company makes quarterly risk assessments to obtain insight into the level of its current exposure to such risks.

C.5.3 Risk concentration

The Company is not exposed to significant concentrations of operational risk; there is, however, an increase in risks related to ongoing development projects (e.g. IT risk).

C.5.4 Risk management

The Company has in place various processes that ensure it can properly identify, measure, monitor, manage, control and report on operational risk, thus ensuring its effective management. Accountability and operational risk management processes are set out in greater detail in the operational risk policy and the risk management rules.

The chief operational risk management measures that the Company implements are:

streamlining the business processes management system and the internal control system;
awareness-raising and training of all employees on their role in implementing the internal control system and managing operational risks;
assessing the adequacy and effectiveness of internal controls;
a positive climate, good business culture and continuous employee training;
implementing appropriate policies as regards information security and developing IT to reduce cyber risk;
having in place a business continuity plan for all critical processes (in order to minimise the risk of unpreparedness for incidents and external events and any resulting interruption of business);
developing IT-supported processes and controls in key business areas;
awareness-raising and training of all employees.

In addition, the Company manages such risks through oversight by the internal audit department.

All major internal controls related to operational risk are included in the risk register.

The Company regularly reports on assessed operational risks in the risk report, which is submitted to the risk management committee, the Company's management board, the supervisory board's risk committee and the supervisory board. If necessary, the risk management function and the risk management committee issue recommendations to the management board for further steps and improvements to operational risk management processes.

C.6 Other material risks

Other material risks faced by the Company primarily consist of strategic risks. These include the risk of an unexpected decrease in the Company's value due to the adverse effects of management decisions, changes in the business and legal environment, or market developments. Such adverse events could impact the Company's income and capital adequacy.

C.6.1 Risk exposure

The Company is exposed to a variety of internal and external strategic risks. In 2018, the Company's key strategic risks included:

risk of an inadequate development strategy,
risks associated with strategic investments,
political risk,
project risk,
risk of market and economic conditions,
reputation risk and
regulatory risk.

C.6.2 Risk measurement

Strategic risks are by their nature very diverse, difficult to quantify and heavily dependent on various (including external) factors. They are also not included in the calculation of capital requirement in accordance with the Solvency II standard formula.

Therefore, strategic risks relating to the risk register are assessed qualitatively by assessing the frequency and potential financial impact of each event. In addition, the Group seeks to evaluate key strategic risks using a qualitative analysis of various scenarios (also as part of the ORSA). Based on both analyses combined, the Company obtains an overview of the extent and change in the exposure to this type of risk.

C.6.3 Risk concentration

The Company manages strategic risks well and has no material exposure to concentration risk.

C.6.4 Risk management

The Company mitigates individual strategic risks mainly through preventive measures.

In addition to individual organisational units, the management board, the risk management committee and risk management functions are actively involved in identifying and managing strategic risks.

Strategic risks are also managed through on-going monitoring of the realisation of the Company's short- and long-term goals, and by monitoring regulatory changes in the pipeline and market developments.

Strategic risks arising from participations in subsidiaries and associates are among the largest risks of this type. The Company actively manages risks through:

a governance system and clear segregation of responsibilities at all levels;
risk management policies;
systematic risk management with a three-lines-of-defence framework (discussed in detail in section B.3);
top-down setting of business and risk management strategies, taking into account both the Group as a whole as well as its individual members;
a comprehensive system of monitoring operations, reporting on business results and risks at all levels.

The Company is aware that its reputation is important for realising its business goals and achieving strategic plans in the long term. The risk strategy therefore identifies reputation risk as a key risk. The Company seeks to minimise the likelihood of actions that could have a material impact on the reputation of any Group company or the Group as a whole. In addition, the Company has taken steps aimed at mitigating reputation risk, such as setting up fit and proper procedures applicable to key employees, ensuring systematic operations of their respective compliance functions, having in place business continuity plans, developing stress tests and scenarios, and planning actions and responses in case risks materialise. Risks related to reputation are also managed through seeking to improve services, timely and accurate reporting to supervisory bodies, and well-planned public communication. A crucial factor in ensuring the Company's good reputation and successful performance is the quality of services; therefore, each and every employee is responsible for improving the quality of services and customer satisfaction.

The Company manages and mitigates regulatory risk through ongoing monitoring of legal changes and assessing such potential effects on operations in the short and longer term. In accordance with statutory regulations, the Company has established a compliance function to monitor and assess the adequacy and effectiveness of regular procedures and measures taken to remedy any deficiencies in the Company's compliance with regulations and other commitments.

The Company is currently running a project for implementing the new international accounting standards IFRS 9 and 17. Due to the fact that implementation risks are high, requiring a high level of management of existing resources, a project team for the implementation at the Group-level was set up as early as 2017. Currently, the related project risks are assessed as medium. In addition, a number of important IT projects are underway.

C.7 Any other information

The Company has no other material information relating to its risk profile.

In accordance with article 174 of the Slovenian Insurance Act ("ZZavar-1"), assets are valued at amounts for which they could be exchanged between knowledgeable and willing parties in an arm's length transaction. Liabilities are valued at amounts for which they could be transferred or settled between knowledgeable and willing parties in an arm's length transaction. The value of liabilities is not adjusted with respect to the Company's creditworthiness.

The valuation of assets is conducted in accordance with IFRSs as adopted by the European Commission. If the IFRSs allow for several valuation methods, a method has to be chosen that is consistent with Solvency II principles as set out in the Delegated Regulation and other Solvency II implementing regulations. For most other cases of assets and liabilities (apart from technical provisions; "TP"), the IFRSs provide for a valuation method consistent with Solvency II principles.

The Company measures all financial instruments at fair value, except for deposits, equities not listed in any regulated market and loans (for which it is assumed that the carrying amount is a reasonable approximation of fair value). The fair value of investment property and land, and buildings used in business operations, is reported based on appraisals conducted by independent external property appraisers (market approach and income approach, weighted 50 : 50), whereas new purchases are reported at cost.

The Company determines the fair value of a financial asset on the valuation date by determining the price in the principal market based on:

for stock exchanges: the quoted closing price on the stock exchange on the measurement date or on the last day of operation of the exchange on which the investment is quoted;
for the OTC market: quoted closing bid CBBT price or, if unavailable, the Bloomberg bid BVAL on the valuation date or on the last day of operation of the OTC market;
the price is calculated on the basis of an internal valuation model.

Investments measured at fair value are presented in accordance with the levels of fair value under IFRS 13, which categorises the inputs used to measure fair value into the following three levels of the fair value hierarchy:

Level 1 financial investments are those for which the fair value is determined based on quoted prices (unadjusted) in active markets for identical financial assets that the Company can access at the measurement date.
Level 2 financial investments are those whose fair value is determined using data that are directly or indirectly observable other than the prices quoted within level 1.
Level 3 comprises financial investments for which observed market data are unavailable. Thus the fair value is determined based on valuation techniques using inputs that are not directly or indirectly observable in the market.

Methodology for measuring financial investments

Asset class / principal market	Level 1	Level 2	Level 3
		Debt securities
	Debt securities	Debt securities measured based on the CBBT price in an inactive market.
OTC market	measured based on the CBBT price in an	Debt securities measured at the BVAL price if the CBBT price is unavailable.	Debt securities measured using an internal model that does not consider level 2 inputs.
	active market.	Debt securities measured using an internal model based on level 2 inputs.
	Debt securities	Debt securities measured based on stock exchange prices in an inactive market.
Stock exchange	measured based on stock exchange prices in an active market.	Debt securities measured at the BVAL price when the stock exchange price is unavailable.	Debt securities measured using an internal model that does not consider level 2 inputs.
		Debt securities measured using an internal model based on level 2 inputs.
Equities
	Shares measured	Shares measured based on stock exchange
Stock exchange	based on stock	prices in an inactive market. Shares without available stock exchange	Shares measured using an internal model that does not
	exchange prices in an	prices and that are measured using an	consider level 2 inputs.
	active market.	internal model based on level 2 inputs.
		Unlisted shares and participating interests
			Unlisted shares measured at cost. Fair value for the purpose of disclosures calculated based on an internal model used for impairment testing mainly using unobserved inputs.
		Mutual funds
	Mutual funds measured at the quoted unit value on the measurement date.
		Alternative funds
			Fair value is determined based on the valuation of individual projects, using the discounted cash flow method.
		Deposits and loans
– with maturity		Measured at amortised cost; fair value for the purpose of disclosure calculated using an internal model with level 2 inputs.	Measured at amortised cost; fair value for the purposes of disclosure calculated using an internal model not using level 2 inputs.

The basis for the balance sheet in accordance with Solvency II ("SII balance sheet"), with assets and liabilities valued in accordance with the valuation principles set out in articles 174–190 of ZZavar-1, is the balance sheet drawn up by the Company for reporting purposes in accordance with IFRSs, referred to in this document as the IFRS balance sheet.

The reclassification and revaluation of SII balance sheet items is based on the IFRS balance sheet. This section describes the implementation of such reclassifications and revaluations for only those items where the Solvency II value ("SII value") differs from the IFRS value. For all other items, IFRSs are deemed to ensure a valuation consistent with Solvency II principles.

The tables below show the balance sheet as at 31 December 2017 and 31 December 2018 with IFRS values of assets and liabilities ("IFRS balance sheet") along with assets and liabilities in accordance with the valuation principles set out in articles 174–190 of ZZavar-1 ("SII balance sheet"), taking into account the revaluations and reclassifications of asset and liability items.

IFRS and SII balance sheets as at 31 December 2018

	(EUR thousand)	IFRS	Revaluation	Reclassification	Solvency II
	Assets
1.	Deferred acquisition costs	7,822	-7,822	0	0
2.	Intangible assets	893	-893	0	0
3.	Deferred tax assets	1,867	2,095	0	3,962
4.	Property, plant and equipment held for own use	2,618	966	0	3,585
5.	Property, plant and equipment other than for own use	8,322	282	0	8,604
6.	Investments in subsidiaries and associates	220,219	145,124	0	365,343
7.	Equities	8,721	0	0	8,721
8.	Bonds	218,910	654	2,332	221,895
9.	Investment funds	4,964	0	0	4,964
10.	Deposits other than cash equivalents	2,332	0	-2,332	0
11.	Loans and mortgages	3,090	0	0	3,090
12.	Reinsurance recoverables	21,437	-1,931	-2,288	17,218
13.	Deposits to cedants	6,275	0	0	6,275
14.	Insurance and intermediaries receivables	82,519	0	-68,037	14,482
15.	Reinsurance and co-insurance receivables	4,842	0	-330	4,512
16.	Other receivables	469	0	0	469
17.	Own shares	24,939	1,407	0	26,346
18.	Cash and cash equivalents	10,651	0	0	10,651
19.	Other assets	379	-379	0	0
	TOTAL ASSETS	631,270	139,503	-70,655	700,118
	Liabilities
20.	Gross technical provisions – non-life and NSLT health	224,727	-39,740	-51,744	133,243
21	Technical provisions – life (excl. index-linked and unit-linked)	9,447	-1,167	0	8,280
22.	Provisions other than technical provisions	377	0	0	377
23.	Deferred tax liabilities	0	8,231	0	8,231
24.	Financial liabilities other than debts owed to credit institutions	88	0	0	88
25.	Insurance and intermediaries payables	44,039	0	-16,293	27,746
26.	Reinsurance and co-insurance payables	3,149	0	-2,618	531
27.	Other trade payables	1,365	0	0	1,365
28.	Subordinated liabilities	0	0	0	0
29.	Other liabilities	3,785	-515	0	3,270
	TOTAL LIABILITIES	286,976	-33,190	-70,655	183,131
	Excess of assets over liabilities	344,294	172,693	0	516,987

IFRS and SII balance sheets as at 31 December 2017

	(EUR thousand)	IFRS	Revaluation	Reclassification	Solvency II
Assets
1.	Deferred acquisition costs	7,778	-7,778	0	0
2.	Intangible assets	807	-807	0	0
3.	Deferred tax assets	1,239	2,712	0	3,951
4.	Property, plant and equipment held for own use	2,444	916	0	3,361
5.	Property, plant and equipment other than for own use	8,272	201	0	8,473
6.	Investments in subsidiaries and associates	193,410	147,582	0	340,992
7.	Equities	10,399	0	0	10,399
8.	Bonds	224,679	743	0	225,422
9.	Investment funds	2,862	0	0	2,862
10.	Deposits other than cash equivalents	2,399	729	0	3,127
11.	Loans and mortgages	4,610	0	0	4,610
12.	Reinsurance recoverables	20,074	-4,887	-2,497	12,689
13.	Deposits to cedants	5,832	0	0	5,832
14.	Insurance and intermediaries receivables	85,168	0	-69,840	15,328
15.	Reinsurance and co-insurance receivables	3,203	0	-806	2,397
16.	Other receivables	232	0	0	232
17.	Own shares	24,939	2,268	0	27,207
18.	Cash and cash equivalents	6,678	0	0	6,678
19.	Other assets	800	-800	0	0
	TOTAL ASSETS	605,825	140,879	-73,144	673,560
	Liabilities
20.	Gross technical provisions – non-life and NSLT health	232,639	-45,070	-53,458	134,112
21.	Provisions other than technical provisions	351	0	0	351
22.	Deferred tax liabilities	0	9,142	0	9,142
23.	Financial liabilities other than debts owed to credit institutions	91	0	0	91
24.	Insurance and intermediaries payables	51,323	0	-16,876	34,447
25.	Reinsurance and co-insurance payables	3,090	0	-2,973	117
26.	Other trade payables	1,395	0	0	1,395
27.	Subordinated liabilities	0	0	0	0
28.	Other liabilities	1,193	-460	0	733
TOTAL LIABILITIES 289,920 -36,387 -73,144				180,389
	Excess of assets over liabilities	315,905	177,266	0	493,171

The Company's off-balance sheet items include contingent assets in the amount of the cancelled subordinated instruments (EUR 10.0 million), regarding which the Company continues with measures designed to protect its interests. In addition, off-balance sheet items as at 31 December 2018 also include contingent liabilities associated with commitments to make payments into alternative funds, in the amount of EUR 6.7 million.

Following are individual categories of assets, along with the valuation methods for material categories.

D.1.1 Deferred acquisition costs

Deferred acquisition costs are stated at zero in the Company's SII balance sheet.

D.1.2 Intangible assets

The Company has not identified any intangible assets that may be sold separately and it cannot prove that there is a market value for identical or similar assets. The SII value of intangible assets is stated at zero.

D.1.3 Deferred tax assets and liabilities

Deferred tax assets and liabilities are defined based on identified temporary differences. These are differences between the tax value and the book value of assets or liabilities. Temporary differences may be taxable temporary differences, either amounts to be added to the taxable profit in future periods, or amounts to be deducted from the taxable profit in future periods. Deferred taxes are thus recognised as either deferred tax assets or liabilities as a result of accounting for current and future tax implications.

Deferred tax liabilities are the amounts of income taxes recoverable in future periods depending on:

deductible temporary differences,
the carryforward of unused tax losses to future periods, and
the transfer of credits utilised to future periods.

If a company has a loss in its income statement for tax purposes, until the covering of such a loss (there is no time limit under the Slovenian Corporate Income Tax Act ZDDPO-2), the company is not subject to payment of corporate income tax, but it may recognise deferred tax assets, thus reducing its deferred tax expenses. In the statements for tax purposes, a company does not show unused tax losses.

As a general rule, the recognition of deferred tax liabilities is mandatory, while deferred tax assets only need to be recognised to the extent that it is probable that taxable profit will be available against which the deductible temporary differences can be utilised. In the SII balance sheet, deferred tax assets and liabilities are accounted for on all revaluations apart from:

the revaluation of the participations in subsidiaries and associates item if such participations are considered strategic investments; in such cases, revaluation differences are treated as permanent differences and do not meet the requirements of temporary differences and, therefore, there is no basis for accounting for deferred taxes with regard to this item;
the revaluation of the "own shares listed on a stock exchange" item because it does not constitute a taxable temporary difference;
reclassifications among balance sheet items.

with Solvency II principles, the Company is reporting a net deferred tax liability resulting from revaluations in the amount of EUR 6.1 million (2017: EUR 6.4 million).

The largest effect on deferred tax assets is associated with the revaluation of deferred acquisition costs to zero. Based on this, a total of EUR 1.5 million of deferred tax assets were recognised (2017: EUR 1.5 million).

The largest effect on deferred tax assets is associated with the revaluation of gross technical provisions. Based on this, a total of EUR 7.8 million of deferred tax liabilities were recognised (2017: EUR 8.6 million).

D.1.4 Property, plant and equipment held for own use

Every three years, the Company has the fair values of its properties held for own use appraised by independent external property appraisers. Equipment for own use represents an immaterial amount and is stated in the same amounts in both the SII and IFRS balance sheets.

In assessing fair value and fair value less costs to sell, certified property appraisers take into account the International Valuation Standards and the International Accounting Standards. The appraisal includes verifying the adequacy of all the methods used for appraising property rights. Depending on the purpose of the valuation and the quantity of available data, a market value appraisal will make use of the market approach and the income approach.

D.1.5 Investments

Property, plant and equipment other than for own use

The methodology is consistent with the methodology used for property, plant and equipment held for own use, which is described in detail in section D.1.4 "Property, plant and equipment held for own use".

Participations

Participations in insurance and pension companies

Two methodologies are applied, one for the revaluation of participations in insurance companies and one for participations in non-insurance companies.

Participations in insurance companies

In the balance sheet, participations in insurance companies are valued on a market-consistent basis. This can be obtained in the following ways:

market prices that are directly observable, or
on the basis of an adjusted equity method of valuation (net asset value of the share of participations with adjustment to SII value).

For equity investments in the insurance subsidiaries of Sava Re not listed in a regulated market, market value for the purpose of capital requirement calculation is calculated in accordance with the standard formula, on the basis of an adjusted equity method of valuation – the excess of an insurer's SII assets over liabilities – because none of the Company's subsidiaries are a member of any stock exchange.

Where Sava Re holds less than a 100% interest in a subsidiary, proportionate adjustments are made.

Participations in non-insurance companies

The Company values participations in strategic non-insurance companies using the IFRS equity method, in accordance with article 13(5) of the Delegated Regulation. The value of goodwill and other intangible assets that would be valued at zero in accordance with the asset valuation methodology is deducted from the obtained value of the company.

Equities

The Solvency II revaluation methodology for listed equities is consistent with the methodology used for the IFRS balance sheet.

Unlisted equities are initially recognised at cost. As at the balance sheet date, their value is determined using a model. This is designed to determine whether the cost still represents their fair value. If the model shows that the cost is too high, an impairment loss is recognised in the amount of the difference between the model value and its cost.

Because unlisted equities represent an immaterial proportion of the Sava Re investment portfolio, they are not stated at fair value in the SII balance sheet but rather at IFRS balance sheet amounts.

Bonds

In the IFRS balance sheet, bonds are measured in accordance with International Accounting Standard ("IAS") 39. They are measured based on the IAS fair value category and level into which they are classified.

Market value is also calculated for held-to-maturity bonds.

The Company obtains market prices from the Bloomberg system, from the local stock exchange or from any other market on which the bond is listed.

Corporate bonds are valued in the same way as government bonds. In the SII balance sheet, subordinated deposits are reclassified under this item from deposits other than cash equivalents.

Investment funds

The IFRS value is calculated based on the most recent published net asset value per share ("NAVPS"). The value in IFRS reporting is the fair value (market value) of investment funds. Notwithstanding their classification, the book value of these funds equals their market value and is calculated using the formula: NAVPS as at the valuation day x number of lots. NAVPS amounts are obtained from asset managers.

Deposits other than cash equivalents

These deposits are measured at amortised cost or acquisition cost plus accrued interest. In accordance with IAS 39, they are classified in the Company's IFRS balance sheet as loans and receivables. In the SII balance sheet subordinated deposits are reclassified from deposits to corporate bonds.

D.1.6 Loans and mortgages

Loans and mortgages are initially recognised at their contract value.

As at the reporting date, they are stated at amortised cost in accordance with the amortisation plan, taking into account the actual interest and principal payments. If payments are not made in accordance with the amortisation plan, amounts must be impaired.

The Company's assets do not include loans and mortgages to individuals, but only other loans, which are loans granted to subsidiaries.

D.1.7 Reinsurance recoverables

The Company reclassifies items from retroceded premium provisions for booked, not-past-due commission receivables from retroceded business and booked not-past-due payables for retrocession premiums.

The amount of reinsurance recoverables is measured by the Company's actuarial function. This document only summarises the methodology set out in detail in the Company's rules on making best estimate provisions. These rules take into account the guidelines set out in the Company's underwriting and reserving risk policy.

The Company's core business is accepted reinsurance, which is why, for the sake of clarity, we use the term retrocession for the insurance of such business with subsequent reinsurers: reinsurance ceded.

In view of the relatively small volume of retrocession, we cannot use the same actuarial methods for calculating retroceded provisions as we do for gross provisions. Instead, based on retrocession data, a simplification is used to calculate the share of retrocession for each homogeneous group and every underwriting year by taking into account the type of retrocession. The calculated share of retrocession is used in non-life business to calculate the retroceded technical best estimate premium and claims provisions from the gross technical best estimate premium and claims provisions (before including expenses, future premium and commission cash flows, and without taking into account the time value of money). In life business, the share of retrocession is used to calculate the retroceded undiscounted best estimate provisions. Retrocessionaires' shares of provisions for expenses are not accounted for. The currency structure and the time value of money are taken into account in the same way as for gross best estimate provisions. In terms of cash flows, a potential expected time lag in payments from retrocessionaires is checked against gross payments, based on historical data on claims paid. Adjustments for a counterparty's anticipated default are made on the basis of the amount of reinsurance recoverables (for IFRS balance sheet valuation) being divided according to the credit ratings of counterparties (retrocessionaires) and the probability of default associated with these ratings.

D.1.8 Deposits to cedants

Under certain reinsurance contracts, cedants retain part of the reinsurance premiums as a guarantee for the payment of future claims, which is generally released after one year. These deposits bear contractually agreed-upon interest. Deposits to cedants are stated at cost, less any impairment losses.

D.1.9 Insurance and intermediaries receivables

The SII valuation of receivables does not differ from the IFRS balance sheet valuation.

In the SII balance sheet, the Company eliminates from the insurance and intermediaries receivables item not-past-due receivables as at the SII balance sheet date, specifically not-past-due receivables for premiums arising out of accepted reinsurance.

The Company takes the item into account as future cash flows when calculating gross best estimate premium provisions where it is also recognised as a reclassification.

D.1.10 Reinsurance and co-insurance receivables

The SII valuation of receivables does not differ from the IFRS balance sheet valuation.

In the SII balance sheet, the Company eliminates not-past-due receivables from the reinsurance and co-insurance receivables item as at the SII balance sheet date, specifically not-past-due commission receivables arising from retroceded business.

The Company takes the item into account as future cash flows when calculating the reinsurers' share of best estimate premium provisions, where it is also disclosed as a reclassification.

D.1.11 Other receivables

Other receivables include short-term receivables from the government and other institutions, shortterm receivables from leasing out premises and equipment, and similar.

Measurement is the same as for the IFRS balance sheet because the book value constitutes a sufficient approximation of fair value.

D.1.12 Own shares

Own shares are listed on a regulated market; therefore, they are restated at their stock exchange price for the purposes of the SII balance sheet as at the SII balance sheet valuation date.

D.1.13 Cash and cash equivalents

Measurement is the same as for the IFRS balance sheet. Deposits with an original maturity of up to three months are treated in the SII balance sheet in the same way as deposits with longer maturities, and they are therefore reclassified under deposits other than cash equivalents.

D.1.14 Any other assets, not elsewhere shown

Other assets include short-term deferred costs and short-term accrued income. Short-term deferred costs comprise prepaid costs of insurance, licenses, rent and similar. In the SII balance sheet, other assets are recognised at the same amounts as in the IFRS balance sheet, except for prepaid costs, which are stated at zero.

D.2 Technical provisions

The Company reclassifies the items of the gross premium provision for booked not-past-due premium receivables relating to accepted reinsurance and for booked not-past-due commission payables relating to accepted reinsurance.

The valuation of gross technical provisions is carried out by the Company's actuarial function. This document only summarises the calculation methodology for best estimate provisions in the valuation of balance sheet items for the purpose of the Solvency II capital requirement calculation, as detailed in the Company's rules on making best estimate provisions. These rules take into account the guidelines set out in the Company's underwriting and reserving risk policy. The valuation of the reinsurers' share of technical provisions is described under asset valuation in section D.1.7.

The calculations are made based on the lines of business specified in annex I to the Delegated Regulation, with a distinction made between intra-Group and extra-Group business. The accepted life insurance business of the Group (which accounts for the bulk of liabilities associated with the Company's accepted life business) is generally valued using life techniques based on expected cash flows. For the extra-Group portfolio, in accordance with the nature of liabilities, data availability and the proportionality principle, life business is valued using non-life and not-similar-to-life techniques (NSLT); therefore, the Company classifies these liabilities under NSLT health.

Technical provisions are made up of a best estimate and a risk margin.

Best estimate life business provisions include provisions for the reinsurance of reported life annuities originating from liability insurance, and provisions for the reinsurance of the life business. For life insurance based on the expected cash flows for accepted reinsurance received from cedants, the Company forms the following separate categories:

best estimate provisions for life business (including the best estimate of claims provisions), best estimates for reported annuities from non-life business.

The Company introduced the valuation of best estimates provisions for its life business using life techniques in 2018 because the premium volume in this line of business increased (in particular for annuities from non-life contracts) and adequate data became available for such calculations. In previous years, these liabilities were calculated using non-life techniques and were classified under non-life and NSLT health business.

Best estimate provisions for non-life business types (including NSLT health) consist of best estimate premium provisions and best estimate claims provisions. The calculation is based on the classification of business by underwriting year.

Calculating best estimate provisions for the non-life business comprises the following steps:

calculating the "technical" gross provision, which consists of best estimate claims (either incurred or future) relating to business written prior to taking into account the time value of money;
breakdown of the "technical" gross provision into the "technical" premium provision (for future claims) and the "technical" claims provision (for claims incurred, but not yet settled);
taking into account future expenses relating to in-force contracts;
taking into account future cash flows from premiums and commissions, including booked, but not past-due, premiums and commissions;
preparation of cash flows, taking into account the currency structure of cash flows and discounting.

Gross technical provisions are calculated using the chain-ladder method applied to cumulative paid claims triangles, using the Bornhuetter–Ferguson ("BF") modification. In the chain-ladder method, the development factors are selected based on data from the years reflecting the nature of the portfolio for which the provision is calculated. If, due to extraordinary events, individual factors deviate excessively from the average, they are excluded from the calculation of development factors. The development tail is calculated using an approximation together with one distribution function: Exponential, Weibull, Power, Inverse Power; the R-squared criterion is applied in the selection of the distribution function. The BF prior loss ratio is selected based on the judgement of the actuary and the reinsurance underwriting department. If claims triangles are too dispersed, ultimate losses are assessed based on loss ratios. The expected incurred loss ratio for an underwriting year is set as the selected average of a pre-assessed naive loss ratio set by expert judgement, multi-year averages, information from the reinsurance underwriting department, and the IFRS incurred loss ratio (excluding provisions at the portfolio level). For less recent years for which the development is known, greater weight is assigned to the realised ratio, whereas for more recent years the naive loss ratio is assigned greater weight. For payment development or cash flow, the pattern is applied that is obtained from the triangle development. The joint view summarises the results of all methods, based on which the best estimate of ultimate losses is selected, which is used to calculate technical gross provisions.

Future loss adjustment and administrative expenses relating to contracts written are taken into account through expense ratios.

The basis for the split of cash inflows by currency is the currency structure for the IFRS valuation of the balance sheet, specifically the structure of the sum of the claims provision and unearned premiums, net of deferred commissions. Future cash flows split on this basis are discounted using the appropriate risk-free interest rate curves, in which case the Company does not apply the matching adjustment referred to in article 77b of Directive 2009/138/EC, the volatility adjustment referred to in article 77d of Directive 2009/138/EC, the transitional adjustment of the risk-free interest rate term structure referred to in article 308c of Directive 2009/138/EC, or the transitional deduction referred to in article 308d of Directive 2009/138/EC.

The Company calculates the risk margin according to articles 37–39 of the Delegated Regulation. In accordance with article 58 of the Delegated Regulation, a simplified calculation method is used for projecting the solvency capital requirement, taking into account the level 2 hierarchy referred to in article 61 of the "Decision on detailed instructions for the evaluation of technical provisions". The total solvency capital requirement for each future year is calculated based on the ratio of the best estimate in that future year to best estimate technical provisions as at the valuation date. Pursuant to article 37(3) of the Delegated Regulation, the risk margin obtained is allocated to lines of business based on the ratio of calculated capital requirements.

D.2.1 Values of SII technical provisions

The following tables set out the values of gross best estimate provisions, the reinsurers' share of best estimate provisions and the risk margin as at 31 December 2018 and 31 December 2017 by line of business.

(EUR thousand)	Gross amount	Reinsurers' share	Risk margin
Proportional medical expense reinsurance	22	0	6
Proportional income protection reinsurance	2,765	48	331
Proportional workers' compensation reinsurance	0	0	0
Proportional motor vehicle liability reinsurance	10,070	47	809
Other proportional motor reinsurance	6,380	80	763
Proportional marine, aviation and transport reinsurance	5,646	86	743
Proportional fire and other damage to property reinsurance	36,913	3,641	4,293
Proportional general liability reinsurance	5,305	242	1,218
Proportional credit and suretyship reinsurance	881	0	550
Proportional legal expenses reinsurance	1	0	0
Proportional assistance reinsurance	0	0	0
Miscellaneous financial loss	-4	4	60
Non-proportional health reinsurance	324	1	59
Non-proportional casualty reinsurance	14,778	7,171	950
Non-proportional marine, aviation and transport reinsurance	5,789	238	1,610
Non-proportional property reinsurance	24,953	1,827	8,026
Accepted life reinsurance	8,181	3,834	99
Total portfolio	122,004	17,218	19,519

Best estimate provisions by line of business as at 31 December 2018

Best estimate provisions by line of business as at 31 December 2017

(EUR thousand)	Gross amount	Reinsurers' share	Risk margin
Proportional medical expense reinsurance	307	0	81
Proportional income protection reinsurance	4,093	307	313
Proportional workers' compensation reinsurance	0	0	0
Proportional motor vehicle liability reinsurance	16,009	157	768
Other proportional motor reinsurance	6,399	9	609
Proportional marine, aviation and transport reinsurance	3,715	54	630
Proportional fire and other damage to property reinsurance	32,302	3,506	3,604
Proportional general liability reinsurance	6,087	245	1,153
Proportional credit and suretyship reinsurance	924	0	217
Proportional legal expenses reinsurance	-13	0	0
Proportional assistance reinsurance	0	0	0
Miscellaneous financial loss	369	50	137
Non-proportional health reinsurance	1,204	3	119
Non-proportional casualty reinsurance	14,832	8,258	736
Non-proportional marine, aviation and transport reinsurance	4,310	64	1,420
Non-proportional property reinsurance	26,121	940	7,665
Total portfolio	116,659	13,594	17,453

Gross best estimate provisions increased by EUR 5.3 million in 2018, and the reinsurer's share by EUR 3.6 million. These are the most important drivers:

The increase of EUR 2.5 million relates to the rise in expected future payments for incurred and future claims of the existing portfolio (technical best estimate provision). The largest increase was in the technical provision for proportional fire and other damage to property reinsurance, mainly due to extensive damage caused by Japanese Typhoon Jebi, which also affected the increase in the reinsurer's share. The decrease in motor vehicle liability proportional reinsurance is attributable to the reclassification of liabilities for reported annuities among accepted life reinsurance, with liabilities for annuities up due to a few newly notified high annuities, which also drove the reinsurer's share up.
The increase of EUR 1.7 million is attributable to the reclassification of lower not-past-due items (premium receivables less commission payable), which decreased mainly due to lower extra-Group premium volumes. The remaining increase primarily relates to lower expected future premiums and higher expected future (sliding scale and profit) commissions on the existing portfolio (future sliding scale and profit commissions). Both, the reclassification of not-past-due receivables and the consideration of future inflows, reduce best estimate provisions.

The main differences in the valuation of (gross) SII and IFRS technical provisions are (in the calculations of differences for IFRS provisions, gross provisions less deferred commissions are considered):

SII provisions are based on the cash flow principle, whereas IFRS provisions are based on the principle of earned income less expenses. Thus, the SII provisions are reduced by not-past-due premium receivable (and increased by the associated not-past-due commission payables), which are recorded in the IFRS balance sheet under insurance receivables (or payables). As at 31 December 2018, a proportion of 61.0% (2017: 58.9%) of the difference between the gross SII and IFRS provisions related to the reclassification of not-past-due receivables and payables (without an effect on the amount of eligible own funds).
SII best estimate provisions are expected to suffice for the repayment of obligations merely in the case of the weighted average of all potential scenarios (random fluctuations should be partly covered by the risk margin), whereas the IFRS provisions should suffice in almost all cases. As at 31 December 2018, a proportion of 21.5% (2017: 26.3%) of the difference between gross IFRS and SII provisions related to the different levels of prudence used in making assumptions and to more detailed segmentation of the IFRS provision calculations.
The assumptions for shares of claims considered in exposure, measured as premiums less commission, in the IFRS and the SII valuation of technical provisions, in the two most important lines of business, for the most recent underwriting year, which is subject to the greatest uncertainty due to unexpired coverage: for proportional reinsurance of fire and other damage to property, these shares total 82.6% in IFRS calculations and 75.4% in SII calculations (2017: IFRS 91.4%; SII 81.5%). For non-proportional property reinsurance, the IFRS share is 87.7%, and the SII share is 82.4% (2017: IFRS 85.8%; SII 71.2%).
The SII provisions also include all future expected profits (EPIFP) arising from the inward reinsurance portfolio. Future profits from the inward reinsurance portfolio, which are already recognised in accordance with SII principles and reduce SII provisions, account for 11.0% of the difference between the gross IFRS and SII provisions as at 31 December 2018 (2017: 9.6%) (referring to gross future profits before retrocession and before income tax).
SII provisions take into account the time value of money in non-life business, whereas IFRS provisions are generally not discounted. As at 31 December 2018, 6.6% of the difference between gross IFRS and SII provisions arose from discounted non-life business (2017: 5.2%).

D.2.2 Description of the level of uncertainty associated with the value of SII technical provisions

Regarding the impacts on best estimate premium and claims provisions, the Company chose sensitivity to assumptions about the loss ratio for the sensitivity analysis. A 5% increase in BF ratios and naive loss ratios in all homogeneous groups and underwriting years in which the methods use these ratios, would raise gross best estimate provisions for 2018 by 7.3% (2017: 7.0%). The Company also carried out a sensitivity test assuming a 10% reduction in written but not-past-due premiums and commissions as part of premiums and commissions; gross best estimate provisions would increase by 4.4% (2017: 4.4%), which, however, does not affect the change in eligible own funds (reclassification). In addition, the Company also tested sensitivity to a 50% increase in other expenses considered (excluding commissions, which are included directly); gross best estimate provisions would increase by 0.5% (2017: 0.5%).

To test the sensitivity of best estimate provisions for the life business, the Company chose the two most material shocks for the portfolio of these liabilities in accordance with the standard formula. In the longevity shock, best estimate provisions for 2018 increase by 4.2%, and in the annuity revision shock by 3.1%.

In addition, we report the effect of changes in interest rates for discounting. A downward shock in the standard formula would result in a 2.5% rise in gross best estimate provisions (2017: 2.1%); an upward shock in the standard formula would lead to a 4.2% decrease in gross best estimate provisions (2017: 3.4%).

The Company identified no other areas of uncertainty. The sensitivity calculations presented show that best estimate provisions are moderately sensitive to insensitive to changes in the above assumptions. The sensitivity analysis thus revealed no area or assumptions that would cause a major uncertainty of established best estimate provisions.

D.3.1 Provisions other than technical provisions

Other provisions comprise the net present value of employee benefits, including severance pay upon retirement and jubilee benefits. They are calculated in accordance with IAS 19 based on the ratio of the period of service in the Company. The Company does not defer the recognition of actuarial gains and losses (i.e. the corridor approach) for defined benefit plans.

The value of other provisions under the Solvency II methodology is the same as in the IFRS balance sheet. The Company makes no reclassifications in the scope of these liabilities.

D.3.2 Insurance and intermediaries payables

Insurance and intermediaries payables comprise payables for claims and commission relating to inward reinsurance contracts. In the IFRS balance sheet, these are recognised on the accrual basis by reference to reinsurance accounts. In the IFRS balance sheet, liabilities denominated in foreign currencies are revalued at the ECB exchange rate applicable as at the balance sheet date.

The Solvency II valuation of insurance and intermediaries payables does not differ from the IFRS valuation.

From this item of liabilities, the Company eliminates not-past-due commission payables relating to accepted reinsurance business as at the SII balance sheet date, reporting them as a reclassification.

The Company takes the item into account as future cash flows when calculating gross best estimate premium provisions, where they are also reported as a reclassification.

D.3.3 Reinsurance and co-insurance payables

Reinsurance and co-insurance payables comprise premium payables for outward retrocession business. In the IFRS balance sheet, these are recognised on the accrual basis by reference to reinsurance accounts. In the IFRS balance sheet, liabilities denominated in foreign currencies are revalued at the ECB exchange rate applicable as at the balance sheet date.

The Solvency II valuation of reinsurance and co-insurance payables does not differ from the IFRS valuation.

The Company eliminates non-past-due retrocession premium payables from reinsurance payables as at the IFRS balance sheet date, reporting it as a reclassification.

The Company takes the item into account as future cash flows when calculating the reinsurers' share of best estimate premium provisions where it is also disclosed as a reclassification.

D.3.4 Other payables

Other payables comprise short-term payables to employees for accrued salaries and reimbursement of expenses, tax liabilities, trade payables for operating expenses, and other payables. In the IFRS balance sheet, these are recognised on the accrual basis based on authentic documents.

These items are not revalued in the SII balance sheet, nor are these items subject to reclassification based on SII requirements.

D.3.5 Any other liabilities, not elsewhere shown

Within the any other liabilities item, we value at zero any deferred commissions relating to accepted co-insurance and reinsurance, and other deferred income. The Solvency II valuation of other liabilities does not differ from the IFRS valuation.

D.4 Alternative methods for valuation

Periodically (every three years) the Company obtains market value appraisals of its property for own use and investment property assets from an independent external appraiser. In the Company's estimate, these appraisals are most representative of the amount for which the appraised properties could be exchanged between knowledgeable parties in arm's-length transactions.

For equity investments in Sava Re insurance subsidiaries not listed in a regulated market, the SII value of capital requirements is calculated in accordance with the standard formula, using an adjusted equity method of valuation: the excess of the insurance company's assets over its liabilities (in accordance with article 13(4) of the Delegated Regulation). Where Sava Re holds less than a 100% interest in a subsidiary, proportionate adjustments are made.

In the SII balance sheet, the Company measures holdings in strategic non-insurance companies using the IFRS equity method in accordance with article 13(5) of the Delegated Regulation. The value of goodwill and other intangible assets that would be valued at zero in accordance with the asset valuation methodology is deducted from the obtained value of the company.

Unlisted equities are measured at cost. The market value calculated using the internal model, which largely takes into account unobserved input, is only used for impairment testing.

D.5 Any other information

The Company has no other material information relating to valuations.

E. Capital management

The Company's capital management is defined in the capital management policy of the Sava Re Group and Sava Re d.d., laying down the goals and key activities related to capital management. Capital management is inseparable from the risk strategy, which defines the risk appetite.

The Company's capital management objectives are:

solvency in the target/optimal range of capitalisation in the long term as defined in the risk strategy,
adequate degree of financing flexibility,
ability to achieve adequate profitability for operating segments that tie up capital,
ability to report an adequate return on equity and adequate dividend yields for shareholders.

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 own funds held to ensure capital adequacy must comply with regulatory requirements and ensure an optimal balance between debt and equity capital. The amount of own funds must be sufficient, at all times, at least to meet the statutory solvency capital requirement, as well as to satisfy the requirements of its target credit rating and other objectives.

An important input element of capital management and business planning is the risk strategy, including the risk appetite set out therein. With regard to capital and capital adequacy, the risk strategy determines the acceptable level of the solvency ratio. Acceptable levels are first determined for the Sava Re Group, and then for each Group company, thus including Sava Re. The capital adequacy part of the risk strategy is designed in compliance with the Group's risk management strategy and statutory requirements, and taking into account the requirements of rating agencies.

Every year the Company prepares a financial plan for the next three-year period. The first phase of the annual verification of the potential for capital optimisation and additional allocation of capital (dividends, own shares, acquisitions and similar) includes a review of the results of the last calculation of the amount and structure of eligible own funds and the SCR. A business plan for the following three-year period and a capital management plan are prepared based on this, including measures required to achieve the target capital allocation.

Three-year projections of financial parameters are the basis for calculating eligible own funds, the SCR and consequently the Company's solvency ratio. Calculations verify the alignment with the risk appetite, whereupon adjustments to the business plan are made, if necessary. The planned use of capital duly includes capital consumption items, such as regular dividends, own shares and projects that require additional capital.

In allocating capital to business segments, adequate return on equity is a prerequisite. Taking into account the business aspect, we strive to maximise the ratio of return generated by a particular operating segment tying up capital, to allocated capital in terms of the capital allocated to cover risks (optimum ratio of return to risk).

E.1 Own funds

As at 31 December 2018, the Company reported an excess of assets over liabilities of EUR 517 million (31 December 2017: EUR 493.2 million).

The following is then deducted from basic own funds, i.e. the excess of the Company's assets over its liabilities:

own shares of EUR 26.3 million,
foreseeable dividends of EUR 14.7 million; that is, the amount stated in the management and supervisory boards' proposed resolution for the general meeting,
other items in accordance with the provisions of ZZavar-1.

For the purposes of determining basic own funds, basic own funds are reduced by the total value of participations in other financial and credit institutions (excluding insurers) exceeding 10% of the Company's own-fund items (paid-up share capital plus capital reserves). Similarly, for the purposes of determining basic own funds, basic own funds are reduced by part of the value of all participations in financial and credit institutions that exceeds 10% of the Company's own-fund items (other than those alone exceeding 10% and thus being excluded). As at 31 December 2018, the Company is not reporting such exclusions from own funds.

As at 31 December 2018, the Company did not report adjustments for other items in accordance with ZZavar-1.

Ancillary own funds are items that do not constitute basic own funds and that the Company may call up to absorb its losses. They include unpaid share capital or uncalled initial funds, letters of credit and guarantees, and any other legal commitments received by the Company. As at 31 December 2018, the Company reported no ancillary own funds.

The table below shows the structure of the Company's own funds.

(EUR thousand)	31/12/2018	31/12/2017
Ordinary share capital (gross of own shares)	71,856	71,856
Share premium account related to ordinary share capital	54,240	54,240
Initial funds, members' contributions or the equivalent basic own-fund item		0
for mutual and mutual-type undertakings	0
Subordinated mutual member accounts	0	0
Surplus funds	0	0
Preference shares	0	0
Share premium account related to preference shares	0	0
Reconciliation reserve (= (1) - (2) - (3) - (4) - (5))	349,822	327,469
(1) Excess of assets over liabilities	516,987	493,170
(2) Own shares (held directly and indirectly)	26,346	27,207
(3) Adjustment for own-fund restricted items with respect to matching		0
adjustment portfolios and ring-fenced funds	0
(4) Foreseeable dividends, distributions and charges	14,723	12,398
(5) Other basic own fund items	126,096	126,096
Subordinated liabilities	0	0
Amount equal to the value of net deferred tax assets	0	0
Total basic own funds after deductions	475,918	453,565

Structure of own funds

Total basic own funds after deductions increased by EUR 22.4 million compared to the balance as at 31 December 2017, mainly attributable to the effects of the increase in IFRS equity and revaluation in accordance with SII.

The table below shows adjustments to IFRS equity in the balance sheet valuation in accordance with SII.

(EUR thousand)	31/12/2018	31/12/2017
IFRS equity	319,355	290,966
Difference in the valuation of participations	145,124	147,582
Difference in the valuation of other assets	-77,683	-82,116
Difference in the valuation of technical provisions	92,651	98,527
Difference in the valuation of other liabilities	11,194	11,003
Foreseeable dividends, distributions and charges	-14,723	-12,398
Solvency II eligible own funds	475,918	453,565
Of which tier 1	475,918	453,565
Of which tier 2	0	0
Of which tier 3	0	0

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

As evident from the table, the majority of differences in assets relates to revaluations of participations in subsidiaries, both EU- and non-EU-based, predominantly insurance companies. With liabilities, the largest difference is in the revaluation of technical provisions in line with Solvency II requirements. A detailed description of the used valuation methodology is provided in section D.

The Company covers the minimum capital requirement ("MCR") and SCR with eligible own funds. The Solvency II legislation classifies own funds into three capital tiers based on both permanence and loss absorbency.

In accordance with the law, the Company is not permitted to use just any kind of own funds to meet its capital requirements. Thus, tier 1 funds include own funds that mostly meet the conditions laid down in items one and two of article 196(1) of ZZavar-1; such items are available to absorb losses at all times (permanent availability) and in the event of the Company's winding-up, they become available to the holder only after all of the Company's other obligations are met. It is important whether an item of own funds has a maturity, whether the absence of incentives to repay has been confirmed and whether the item is free of encumbrances.

The Company includes the following into its tier 1 own funds:

paid-up ordinary shares;
paid-up capital reserves;
reconciliation reserves set as the excess of assets over liabilities, less paid-up ordinary shares and capital reserves, and less the value of own shares and foreseeable dividends.

Tier 2 funds include own fund items that mostly exhibit the features from item two of article 196(1) of ZZavar-1; in the event of the Company's winding-up, such items become available to the holder only after all of the Company's other obligations are met and paid. It is important whether an item of own funds has a maturity, whether the absence of incentives to repay has been confirmed and whether the item is free of encumbrances.

Tier 3 includes own fund items classified as neither tier 1 nor tier 2. They include letters of credit and guarantees that are held in trust for the benefit of insurance creditors by an independent trustee and are provided by credit institutions. Tier 3 also includes own funds from net deferred tax assets.

The following table includes statutory restrictions as to how the SCR and MCR are to be met.

Restrictions for own funds designated to meet the SCR and MCR

	Tier 1	Tier 2	Tier 3
SCR	min. 50%	no restrictions	max. 15%
MCR	min. 80%	max. 20%	not eligible

The two tables below show the amounts of eligible own funds to meet the SCR and MCR. They are classified into the statutory tiers described above.

Eligible own funds to meet the SCR

(EUR thousand)	Total	Tier 1	Tier 2	Tier 3
As at 31/12/2018	475,918	475,918	0	0
As at 31/12/2017	453,565	453,565	0	0

Eligible own funds to meet the MCR

(EUR thousand)	Total	Tier 1	Tier 2	Tier 3
As at 31/12/2018	475,918	475,918	0	0
As at 31/12/2017	453,565	453,565	0	0

As at 31 December 2018, all the Company's eligible own funds were tier 1 funds and did not include ancillary own funds. There were no items subject to transitional arrangements of the new legislation among the disclosed eligible own funds.

The Company has no eligible own-fund items of limited duration. Items do not have a subordinate status and they cannot be subject to advance repayment.

E.2 Solvency capital requirement and minimum capital requirement

E.2.1 Solvency capital requirement (SCR)

The Company calculates its SCR and MCR in accordance with the Solvency II standard formula.

For the SCR calculation as at 31 December 2018, we made some adjustments to the methodology applied in the calculation as at 31 December 2017. They are mainly improvements that have no material effect on the level of the SCR (such as the use of the life underwriting module). As at 31 December 2018, the Company included an adjustment for deferred taxes into the calculation for the first time.

The table below shows the total amount of SCR, SCR by risk module, MCR and the Company's solvency ratio.

Solvency capital requirement by risk module

(EUR thousand)	31/12/2018	31/12/2017
	(reported)	(reported)
SCR	162,522	160,073
Adjustments for TP and DT	-4,269	0
Operational risk	4,568	4,469
Basic solvency capital requirement (BSCR)	162,223	155,604
Sum of risk components	208,911	201,727
Diversification effect	-46,687	-46,124
Market risk	113,799	98,476
Counterparty default risk	6,422	5,518
Life underwriting risk	444	0
Health underwriting risk	2,537	3,615
Non-life underwriting risk	85,708	94,118
Eligible own funds	475,918	453,565
Solvency ratio	293%	283%

The largest share of the SCR as at 31 December 2018 arises out of market risk. Market risks increased in 2018, mainly due to new strategic investments. However, non-life underwriting risk is also substantial. Risks are slightly lower as compared to 31 December 2017, attributable to somewhat lower exposure.

Due to the nature of the reinsurance business, the Company is mainly limited with regards to input data for certain calculations and therefore has to make certain simplifications. Because information is not available on all individual insurance contracts required to calculate the defined shock of the risk of insurance contract cancellations, a simplification has been used in the calculation.

The catastrophe risk module calculation requires assumptions about the scenarios on the basis of which calculations are made of the impact of the reinsurance programme.

The Company also has a relatively small portfolio of accepted life reinsurance business (from annuities related to non-life insurance and term life insurance). In 2018, the Company started separately calculating the risks of the accepted life reinsurance of the Group's cedants. For the Group's accepted reinsurance business, it calculates the SCR in the life insurance risk module based Milijoni

on the calculations of Group companies. Capital requirements for accepted extra-Group life reinsurance are calculated according to the nature of the business in the NSLT health insurance module.

The Company calculates its SCR without using the simplifications referred to in articles 88–112 of the Delegated Regulation. Nor does it use undertaking-specific parameters in calculating the SCR for nonlife and NSLT health business.

As at 31 December 2018, the Company adjusted the SCR for deferred taxes in the amount of EUR 4.3 million. Deferred taxes as at 31 December 2018 increased the solvency ratio by 7.5 percentage points. As at 31 December 2017, the SCR calculation did not involve an adjustment for deferred taxes.

The chart below shows the individual risk modules of the standard formula, the Company's SCR and its eligible own funds as at 31 December 2018.

Solvency capital requirement (SCR) by risk module as at 31 December 2018 (EUR million)

As evident from the figure above, eligible own funds significantly exceed the SCR, as reflected in the Company's high solvency ratio of 293% as at 31 December 2018 (31 December 2017: 283%).

In the Sava Re Group risk strategy, a major criterion for determining the risk appetite is its solvency ratio.

The Company has a strategy embedded in its capital management policy of pursuing solvency, in the long term, within the range of optimal capitalisation as per its risk strategy. In addition, to maintain its desired credit rating in line with its risk strategy, it maintains a level of capital that is required for an "A"-range credit rating. Because Sava Re is also the Group's controlling company, its strategy provides that it must have a sufficient level of eligible own funds to meet potential capital requirements of subsidiaries if a major stress scenario were to materialise in any of them. To this end, the Company keeps a certain amount of excess eligible own funds over the statutory minimum. In line with the risk strategy, the acceptable solvency ratio limit is therefore 180%, and the Company's optimum capitalisation is in the 220–260% range. Based on this, the Company's capitalisation as at 31 December 2018 is therefore also good by internal criteria. In December 2018, the Company's supervisory board approved the business plan of the Company and the Sava Re Group, including financial projections and calculating eligible own funds, the SCR and the solvency ratio for the 2019– 2021 period. In the 2019–2021 period, the Company's solvency ratio is planned at a level slightly above the optimal capitalisation as defined in the risk strategy.

E.2.2 Minimum capital requirement

Sava Re calculates the MCR in accordance with articles 248–251 of the Delegated Regulation. Nonlife MRC is calculated as the linear combination of written premiums after deduction of premiums for reinsurance contracts and technical provisions, net of the risk margin after deduction of amounts recoverable under reinsurance contracts. The linear combination captures all segments of non-life insurance. Calculation parameters are shown in the table below.

31/12/2018 (EUR thousand) Net best estimate technical provisions Net premiums written Medical expense insurance and proportional reinsurance 22 107 Income protection insurance and proportional reinsurance 2,717 4,843 Workers' compensation insurance and proportional reinsurance 0 0 Motor vehicle liability insurance and proportional reinsurance 10,022 13,418 Other motor insurance and proportional reinsurance 6,300 16,750 Marine, aviation and transport insurance and proportional reinsurance 5,560 6,385 Fire and other damage to property insurance and proportional reinsurance 33,272 51,417 General liability insurance and proportional reinsurance 5,063 5,951 Credit and suretyship insurance and proportional reinsurance 882 807 Legal expenses insurance and proportional reinsurance 1 0 Assistance insurance and proportional reinsurance 0 0 Miscellaneous financial loss insurance and proportional reinsurance 0 0 Non-proportional health reinsurance 323 335 Non-proportional casualty reinsurance 7,607 2,287 Non-proportional marine, aviation and transport reinsurance 5,550 5,570 Non-proportional property reinsurance 23,126 25,293

Input data for the Company's MCR calculation

Input data for the Company's MCR calculation

31/12/2017 (EUR thousand)	Net best estimate technical provisions	Net premiums written
Medical expense insurance and proportional reinsurance	308	3,225
Income protection insurance and proportional reinsurance	3,783	5,537
Workers' compensation insurance and proportional reinsurance	0	0
Motor vehicle liability insurance and proportional reinsurance	15,854	12,571
Other motor insurance and proportional reinsurance	6,396	15,647
Marine, aviation and transport insurance and proportional reinsurance	3,715	7,811
Fire and other damage to property insurance and proportional reinsurance	28,780	49,152
General liability insurance and proportional reinsurance	5,858	5,612
Credit and suretyship insurance and proportional reinsurance	924	1,030
Legal expenses insurance and proportional reinsurance	0	10
Assistance insurance and proportional reinsurance	0	0
Miscellaneous financial loss insurance and proportional reinsurance	352	661
Non-proportional health reinsurance	1,202	286
Non-proportional casualty reinsurance	6,749	2,460
Non-proportional marine, aviation and transport reinsurance	4,264	3,167
Non-proportional property reinsurance	25,799	27,143

Life MCR is calculated as a linear combination of technical provisions, net of the risk margin and capital at risk.

Inputs for calculating the Company's life MCR as at 31 December 2018.

(EUR thousand)	31/12/2018
Other life and health reinsurance obligations	4,347
Capital at risk for all life reinsurance obligations	121,040

* The Company calculated the capital requirement for life underwriting risk for the first time as at 31 December 2018.

The table below shows the amount of the Company's minimum capital requirement.

	Minimum capital requirement

(EUR thousand)	31/12/2018	31/12/2017
Linear required MCR	26,923	27,274
Absolute MCR floor	3,600	3,600
Combined MCR	40,630	40,018
MCR	40,630	40,018
Eligible own funds to meet the MCR	475,918	453,565
MCR ratio	1,171%	1,133%

E.3 Use of the duration-based equity risk sub-module in the calculation of the solvency capital requirement (SCR)

In calculating the SCR, the Company does not use the duration-based equity risk sub-module.

There are no differences between the standard formula and internal model, because the Company does not use an internal model for the calculation of the SCR.

E.4 Difference between the standard formula and internal model used

E.5 Non-compliance with the minimum capital requirement (MCR) and noncompliance with the solvency capital requirement (SCR)

As at 31 December 2018, the Company is compliant with legislation, its high solvency ratio being substantially higher than the statutory 100%. Moreover, as at 31 December 2018, the Company had a major surplus of eligible own funds in excess of the minimum capital requirement.

Based on the projections of the solvency capital requirement and eligible own funds, we estimate that the Sava Re solvency ratio will remain above the statutory 100% during the entire strategic plan period, as required by law. Therefore, the Company does not expect any further steps or measures in terms of ensuring compliance with capital requirements.

E.6 Any other information

The Company has no other material information relating to capital management.

Appendix – Glossary of selected terms

English term	Slovenian term	Meaning
Basic solvency capital requirement – BSCR	Osnovni zahtevani solventnostni kapital – BSCR	The basic solvency capital requirement within the framework of the standard formula is an amount based on the statutory calculation of the following risks: non-life underwriting risk, life underwriting risk, health underwriting risk, market risk and counterparty default risk.
Bloomberg valuation	Cena BVAL	Price obtained from the Bloomberg information system.
Business continuity procedures	Načrt neprekinjenega delovanja	Document that includes procedures for ensuring the continuous operation of key business processes and systems. The contingency plan is an integral part of the business continuity plan and sets out technical and organisational measures to restore operations and mitigate the consequences of severe business disruptions.
Capital asset pricing model	CAPM	Model describing the relationship between risk and expected return on assets.
Composite Bloomberg bond trader	Cena CBBT	Closing price published by the Bloomberg system based on binding bids.
European insurance and occupational pensions authority	EIOPA	European Insurance and Occupational Pensions Authority
IFRS	MSRP	International Financial Reporting Standards. EU-wide uniform set of rules governing the accounting of business transactions.
Key rate duration	Ključna stopnja trajanja	Key rate duration is an extension of modified duration, but measures the sensitivity of the shifts along the interest rate curve at specific (key) maturity points. The sum of all KRDs along all key maturity points approximates modified duration.
Market value	Tržna vrednost	The amount for which an asset could be exchanged, or a liability settled, between knowledgeable and willing parties in an arm's length transaction. The amounts are based on prices in active and liquid markets that a company has access to and are commonly used.
Minimum capital	Zahtevani minimalni	The minimum capital requirement is equal to the amount of own funds below which policyholders, insured persons and other beneficiaries
requirement – MCR	kapital – MCR	of insurance contracts would be exposed to an unacceptable level of risk if the insurer were allowed to continue operating.
Modified duration	Modificirano trajanje	Modified duration measures the portfolio's sensitivity to parallel shifts in the interest rate curve. A change in interest rates of +/-1% has an impact of approximately -/+MD% on the portfolio.
Operational limits	Operativni limiti	Operational limits for particular areas are determined on the basis of expressed risk tolerance limits. Underwriting limits or investment limits used by first-line-of-defence staff in the day-to-day risk management process to keep the Company within its set risk appetite range.
Over the counter	Trg OTC	A transaction in the OTC market is one between two parties in securities or other financial instruments outside a regulated market.
Own funds	Primerni lastni viri sredstev	Own funds eligible to cover the solvency capital requirement.
Own risk and solvency	Lastna ocena tveganj in	Own assessment of the risks associated with the Company's business and strategic plans and assessment of the adequacy of own funds to
assessment – ORSA	solventnosti – ORSA	cover risks.
Present value	Sedanja vrednost	The value of future cash flows recalculated to present-day values. This is done by discounting.
Probable maximum	Največja verjetna	This is the maximum loss for a risk an insurer assesses could occur in one loss event. Normally, it is expressed as a percentage of the sum
loss – PML	škoda – PML	insured; in extreme cases, it equals the sum insured (PML is 100% of the sum insured).

Risk appetite	Pripravljenost za prevzem tveganj	Risk level that a company is willing to take in order to meet its strategic goals. At Sava Re defined based on the acceptable solvency ratio, the liquidity ratio of the assets, profitability of insurance products and reputation risk.
Risk management system	Sistem upravljanja tveganj	The risk management system is a set of measures taken by an insurer to manage (i.e. to identify, monitor, measure, manage, report) material risks arising from both the operations of a company and the external environment in order to enhance the implementation of strategic objectives and minimise any loss of own funds.
Risk profile	Profil tveganj	All of the risks that the Company is exposed to and the quantification of these exposures for all risk categories.
Risk Register	Register tveganj	List of all identified risks maintained and periodically updated by the Company.
Risk tolerance limits	Meje dovoljenega tveganja	Limits for risk categories included in the Company's risk profile and for risk measures monitored as part of day-to-day risk management. Set annually and aligned with the risk appetite as stated in the Company's risk strategy and based on sensitivity analyses, stress tests and scenarios, or professional judgment.
Scenario test	Scenarijski test	Scenario-based tests seek to determine the impact of multiple changes in parameters, such as concurrent changes in different risks types affecting the insurance business, the value of financial assets and a change in interest rates.
Solvency and financial condition report – SFCR	Poročilo o solventnosti in finančnem položaju – PSFP	Insurance and reinsurance companies publish solvency and financial condition reports at least annually. The report includes a description of its business and operations, its governance system, risk profile, valuation for Solvency II purposes, structure and quality of own funds, and the level of the minimum and solvency capital requirement.
Solvency capital requirement – SCR	Zahtevani solventnostni kapital – SCR	The SCR is an amount based on the regulatory calculation of all quantifiable risk, including non-life underwriting risk, life underwriting risk, health underwriting risk, market risk, counterparty default risk and operational risk.
Solvency ratio	Solventnostni količnik	Ratio of eligible own funds to the solvency capital requirement. It represents a company's capital adequacy in accordance with the Solvency II principles. A solvency ratio in excess of 100 % indicates that the company has more than sufficient resources to meet the solvency capital requirement.
Standard formula	Standardna formula	Set of calculations prescribed by Solvency II regulations used for generating the solvency capital requirement.
Stress test	Stresni test	In a stress test, a single parameter is changed to observe the effect on the value of assets, liabilities and/or own funds as well as any effects on the value of the parameter itself.
Tier of capital	Kakovostni razred kapitala	Items of own funds are classified into three tiers based on certain criteria (such as duration and whether basic or ancillary).
Undertaking-specific parameters – USP	Parametri, specifični za posamezno podjetje – USP	Insurance and reinsurance undertakings may, within the design of the standard formula, replace standard deviations for premium and reserve risk of NSLT health underwriting for business for which a system for equalising health risk is used by parameters specific to the undertaking concerned, in accordance with article 104( 7) of Directive 2009/138/EC.
Unit value	Vrednost enote premoženja – VEP	The value of a unit or share is the worth of individual units of a sub-fund and is regularly published.

Quantitative Reporting Templates

All amounts in the quantitative reporting templates are in thousands of euros.

S.02.01.02 Balance sheet

		Solvency II value
Assets		C0010
Goodwill	R0010
Deferred acquisition costs	R0020
Intangible assets	R0030	0
Deferred tax assets	R0040	3,962
Pension benefit surplus	R0050	0
Property, plant & equipment held for own use	R0060	3,585
Investments (other than assets held for index-linked and unit-linked contracts)	R0070	609,526
Property (other than for own use)	R0080	8,604
Holdings in related undertakings, including participations	R0090	365,343
Equities	R0100	8,721
Equities – listed	R0110	7,086
Equities – unlisted	R0120	1,635
Bonds	R0130	221,895
Government Bonds	R0140	121,483
Corporate Bonds	R0150	100,412
Structured notes	R0160	0
Collateralised securities	R0170	0
Collective Investments Undertakings	R0180	4,964
Derivatives	R0190	0
Deposits other than cash equivalents	R0200	0
Other investments	R0210	0
Assets held for index-linked and unit-linked contracts	R0220	0
Loans and mortgages	R0230	3,090
Loans on policies	R0240	0
Loans and mortgages to individuals	R0250	0
Other loans and mortgages	R0260	3,090
Reinsurance recoverables from:	R0270	17,218
Non-life and health similar to non-life	R0280	13,385
Non-life excluding health	R0290	13,335
Health similar to non-life	R0300	50
Life and health similar to life, excluding health and index-linked and unit-linked	R0310	3,834
Health similar to life	R0320	0
Life excluding health and index-linked and unit-linked	R0330	3,834
Life index-linked and unit-linked	R0340	0
Deposits to cedants	R0350	6,275
Insurance and intermediaries receivables	R0360	14,482
Reinsurance receivables	R0370	4,512
Receivables (trade, not insurance)	R0380	469
Own shares (held directly)	R0390	26,346
Amounts due in respect of own fund items or initial fund called up but not yet paid in	R0400	0
Cash and cash equivalents	R0410	10,651
Any other assets, not elsewhere shown	R0420	0
Total assets	R0500	700,118

		Solvency II
		value
Liabilities		C0010
Technical provisions – non-life	R0510	133,243
Technical provisions – non-life (excluding health)	R0520	129,735
Technical provisions calculated as a whole	R0530	0
Best Estimate	R0540	110,712
Risk margin	R0550	19,023
Technical provisions – health (similar to non-life)	R0560	3,508
Technical provisions calculated as a whole	R0570	0
Best Estimate	R0580	3,111
Risk margin	R0590	397
Technical provisions – life (excluding index-linked and unit-linked)	R0600	8,280
Technical provisions – health (similar to life)	R0610	0
Technical provisions calculated as a whole	R0620	0
Best Estimate	R0630	0
Risk margin	R0640	0
Technical provisions – life (excluding health and index-linked and unit-linked)	R0650	8,280
Technical provisions calculated as a whole	R0660	0
Best Estimate	R0670	8,181
Risk margin	R0680	99
Technical provisions – index-linked and unit-linked	R0690	0
Technical provisions calculated as a whole	R0700	0
Best Estimate	R0710	0
Risk margin	R0720	0
Other technical provisions	R0730
Contingent liabilities	R0740	0
Provisions other than technical provisions	R0750	377
Pension benefit obligations	R0760	0
Deposits from reinsurers	R0770	0
Deferred tax liabilities	R0780	8,231
Derivatives	R0790	0
Debts owed to credit institutions	R0800	0
Financial liabilities other than debts owed to credit institutions	R0810	88
Insurance & intermediaries payables	R0820	27,746
Reinsurance payables	R0830	531
Payables (trade, not insurance)	R0840	1,365
Subordinated liabilities	R0850	0
Subordinated liabilities not in Basic Own Funds	R0860	0
Subordinated liabilities in Basic Own Funds	R0870	0
Any other liabilities, not elsewhere shown	R0880	3,270
Total liabilities	R0900	183,131

Excess of assets over liabilities R1000 516,987

S.05.01.02 Premiums, claims and expenses by line of business

		Line of Business for: non-life insurance and reinsurance obligations (direct business and accepted proportional reinsurance)
		Medical expense insurance	Income protection insurance	Workers' compensation insurance	Motor vehicle liability insurance	Other motor insurance	Marine, aviation and transport insurance	Fire and other damage to property insurance	General liability insurance	Credit and suretyship insurance
		C0010	C0020	C0030	C0040	C0050	C0060	C0070	C0080	C0090
Premiums written
Gross – Direct Business	R0110
Gross – Proportional reinsurance accepted	R0120	107	4,973	0	13,418	16,753	6,476	61,246	6,077	807
Gross – Non-proportional reinsurance accepted	R0130
Reinsurers' share	R0140	0	130	0	0	3	91	9,829	126	0
Net	R0200	107	4,843	0	13,418	16,750	6,385	51,417	5,951	807
Premiums earned
Gross – Direct Business	R0210
Gross – Proportional reinsurance accepted	R0220	112	4,944	0	12,775	16,944	6,437	61,993	5,874	813
Gross – Non-proportional reinsurance accepted	R0230
Reinsurers' share	R0240	0	132	0	0	4	85	9,802	127	0
Net	R0300	112	4,811	0	12,775	16,940	6,351	52,191	5,747	813
Claims incurred
Gross – Direct Business	R0310
Gross – Proportional reinsurance accepted	R0320	-108	1,699	0	2,762	12,331	5,365	33,512	1,547	-135
Gross – Non-proportional reinsurance accepted	R0330
Reinsurers' share	R0340	0	29	0	5	-4	30	2,531	7	0
Net	R0400	-108	1,670	0	2,757	12,334	5,335	30,981	1,540	-135
Changes in other technical provisions
Gross – Direct Business	R0410
Gross – Proportional reinsurance accepted	R0420	-1	-1	0	0	23	237	43	-4	-44
Gross – Non-proportional reinsurance accepted	R0430
Reinsurers' share	R0440	0	0	0	0	0	0	0	0	0
Net	R0500	-1	-1	0	0	23	237	43	-4	-44
Expenses incurred	R0550	97	585	0	476	1,451	1,817	14,223	1,097	73
Other expenses	R1200
Total expenses	R1300

Line of Business for: non-life insurance and reinsurance obligations (direct business and accepted					Line of Business for: accepted non-proportional
proportional reinsurance)				reinsurance				Total
		Legal		Miscellaneous			Marine,
		expenses	Assistance	financial loss	Health	Casualty	aviation,	Property
		insurance					transport
		C0100	C0110	C0120	C0130	C0140	C0150	C0160	C0200
Premiums written
Gross – Direct Business	R0110								0
Gross – Proportional reinsurance accepted	R0120	0	0	159					110,016
Gross – Non-proportional reinsurance accepted	R0130				335	3,233	6,168	31,331	41,067
Reinsurers' share	R0140	0	0	379	0	946	598	6,038	18,141
Net	R0200	0	0	-220	335	2,287	5,570	25,293	132,942
Premiums earned
Gross – Direct Business	R0210
Gross – Proportional reinsurance accepted	R0220	2	0	470					110,364
Gross – Non-proportional reinsurance accepted	R0230				299	3,275	5,813	31,796	41,183
Reinsurers' share	R0240	0	0	384	0	1,076	569	5,903	18,084
Net	R0300	2	0	86	299	2,199	5,244	25,893	133,464
Claims incurred
Gross – Direct Business	R0310
Gross – Proportional reinsurance accepted	R0320	-1	0	65					57,036
Gross – Non-proportional reinsurance accepted	R0330				234	1,542	7,454	12,018	21,248
Reinsurers' share	R0340	0	0	9	0	-192	125	2,157	4,698
Net	R0400	-1	0	56	234	1,734	7,329	9,861	73,586
Changes in other technical provisions
Gross – Direct Business	R0410
Gross – Proportional reinsurance accepted	R0420	0	0	16					270
Gross – Non-proportional reinsurance accepted	R0430				0	0	0	0	0
Reinsurers' share	R0440	0	0	0	0	0	0	0	0
Net	R0500	0	0	16	0	0	0	0	270
Expenses incurred	R0550	2	0	45	87	407	722	4,631	25,713
Other expenses	R1200								0
Total expenses	R1300								25,713

			Line of Business for: life insurance obligations	Life reinsurance obligations	Total I
		Health insurance	Insurance with profit participation	Insurance with profit participation	Other life insurance	Annuities stemming from non-life insurance contracts and relating to health insurance obligations	Annuities stemming from non-life insurance contracts and relating to insurance obligations other than health insurance obligations	Health reinsurance	Life reinsurance
		C0210	C0220	C0230	C0240	C0250	C0260	C0270	C0280	C0300
Premiums written
Gross	R1410	0	0	0	0	0	0	0	553	553
Reinsurers' share	R1420	0	0	0	0	0	0	0	267	267
Net	R1500	0	0	0	0	0	0	0	287	287
Premiums earned
Gross	R1510	0	0	0	0	0	0	0	544	544
Reinsurers' share	R1520	0	0	0	0	0	0	0	267	267
Net	R1600	0	0	0	0	0	0	0	276	276
Claims incurred									0
Gross	R1610	0	0	0	0	0	0	0	6,123	6,123
Reinsurers' share	R1620	0	0	0	0	0	0	0	3,104	3,104
Net	R1700	0	0	0	0	0	0	0	3,019	3,019
Changes in other technical provisions										0
Gross	R1710	0	0	0	0	0	0	0	0	0
Reinsurers' share	R1720								0	0
Net	R1800	0	0	0	0	0	0	0	0	0
Expenses incurred	R1900	0	0	0	0	0	0	0	-16	-16
Other expenses	R2500									0
Total expenses	R2600									-16

S.05.02.01 Premiums, claims and expenses by country

		Home Country	Top 5 countries (by amount of gross premiums written) –	Total Top 5 and home country
		C0010						C0070
	R0010		CN	HR	JP	KR	RU
		C0080	China	Croatia	Japan	Korea (Republic of)	Russian Federation	C0140
Premiums written
Gross – Direct Business	R0110
Gross – Proportional reinsurance accepted	R0120	52,659	5,773	2,868	2,034	12,537	300	76,171
Gross – Non-proportional reinsurance accepted	R0130	5,554	2,559	238	1,060	1,682	3,614	14,707
Reinsurers' share	R0140	14,058	0	78	0	0	0	14,136
Net	R0200	44,155	8,332	3,029	3,094	14,219	3,914	76,742
Premiums earned
Gross – Direct Business	R0210
Gross – Proportional reinsurance accepted	R0220	50,530	6,678	2,683	2,110	13,977	339	76,317
Gross – Non-proportional reinsurance accepted	R0230	5,590	2,637	265	1,050	1,636	3,902	15,079
Reinsurers' share	R0240	13,874	0	80	0	0	0	13,954
Net	R0300	42,245	9,315	2,869	3,160	15,613	4,241	77,442
Claims incurred
Gross – Direct Business	R0310
Gross – Proportional reinsurance accepted	R0320	22,576	4,728	1,058	1,848	9,268	391	39,869
Gross – Non-proportional reinsurance accepted	R0330	3,150	841	-183	4,972	3,283	256	12,319
Reinsurers' share	R0340	6,252	0	-393	0	0	0	5,859
Net	R0400	19,474	5,569	1,268	6,820	12,551	647	46,329
Changes in other technical provisions
Gross – Direct Business	R0410
Gross – Proportional reinsurance accepted	R0420	-2	14	10	5	31	1	59
Gross – Non-proportional reinsurance accepted	R0430	0	0	0	0	0	0	0
Reinsurers' share	R0440	0	0	0	0	0	0	0
Net	R0500	-2	14	10	5	31	1	59
Expenses incurred	R0550	12,581	2,936	774	800	5,721	658	23,470
Other expenses	R1200
Total expenses	R1300

S.12.01.02 Life and Health SLT Technical Provisions

			Insuran ce with		Index-linked and unit linked insurance			Other life insurance
		profit particip ation		Contrac ts without options and guarant ees	Contract s with options or guarante es		Contracts without options and guarantee s	Contract s with options or guarante es
		C0020	C0030	C0040	C0050	C0060	C0070	C0080	C0090	C0100
Technical provisions calculated as a whole	R0010
Total Recoverables from reinsurance/SPV and Finite Re after the adjustment for expected losses due to counterparty default associated to TP calculated as a whole	R0020
Technical provisions calculated as a sum of BE and RM
Best Estimate
Gross Best Estimate	R0030									8,181
Total recoverable from reinsurance/SPV and Finite Re after the adjustment for expected losses due to counterparty default	R0080									3,834
Best estimate minus recoverables from reinsurance/SPV and Finite Re – total	R0090									4,347
Risk margin	R0100									99
Amount of the transitional on Technical Provisions
Technical provisions calculated as a whole	R0110
Best Estimate	R0120
Risk margin	R0130
Technical provisions – total	R0200									8,280

		Total (Life other than health insurance, incl. Unit-Linked)		Contracts without options and guarantees	Health insurance (direct business) Contracts with options or guarantees	Annuities stemming from non-life insurance contracts and relating to health insurance obligations	Health reinsurance (reinsurance accepted)	Total (Health similar to life insurance)
		C0150	C0160	C0170	C0180	C0190	C0200	C0210
Technical provisions calculated as a whole	R0010
Total Recoverables from reinsurance/SPV and Finite Re after the adjustment for expected losses due to counterparty default associated to TP calculated as a whole	R0020
Technical provisions calculated as a sum of BE and RM
Best Estimate
Gross Best Estimate	R0030	8,181
Total recoverable from reinsurance/SPV and Finite Re after the adjustment for expected losses due to counterparty default	R0080	3,834
Best estimate minus recoverables from reinsurance/SPV and Finite Re – total	R0090	4,347
Risk margin	R0100	99
Amount of the transitional on Technical Provisions
Technical provisions calculated as a whole	R0110
Best Estimate	R0120
Risk margin	R0130
Technical provisions – total	R0200	8,280

S.17.01.02 Non-life Technical Provisions

Technical provisions calculated as a whole R0010

Best Estimate

Claims provisions

Amount of the transitional on Technical Provisions

Technical provisions – total

Technical provisions minus recoverables from reinsurance/SPV and Finite Re – total R0340 28 3,048 0 10,832 7,064 6,303

		Direct business and accepted proportional reinsurance
		Medical expense insurance	Income protection insurance	Workers' compensation insurance	Motor vehicle liability insurance	Other motor insurance	Marine, aviation and transport insurance
		C0020	C0030	C0040	C0050	C0060	C0070
Technical provisions calculated as a whole	R0010
Total Recoverables from reinsurance/SPV and Finite Re after the adjustment for expected losses due to counterparty default associated to TP calculated as a whole	R0050
Technical provisions calculated as a sum of BE and RM
Best Estimate
Premium provisions
Gross	R0060	3	-191	0	1,489	2,077	-541
Total recoverable from reinsurance/SPV and Finite Re after the adjustment for expected losses due to counterparty default	R0140	0	1	0	-1	26	-13
Net Best Estimate of Premium Provisions	R0150	3	-192	0	1,490	2,051	-528
Claims provisions
Gross	R0160	19	2,956	0	8,581	4,303	6,187
Total recoverable from reinsurance/SPV and Finite Re after the adjustment for expected losses due to counterparty default	R0240	0	47	0	48	53	99
Net Best Estimate of Claims Provisions	R0250	19	2,909	0	8,533	4,250	6,088
Total Best estimate – gross	R0260	22	2,765	0	10,070	6,380	5,646
Total Best estimate – net	R0270	22	2,717	0	10,023	6,301	5,560
Risk margin	R0280	6	331	0	809	763	743
Amount of the transitional on Technical Provisions
Technical provisions calculated as a whole	R0290	0	0	0	0	0	0
Best Estimate	R0300	0	0	0	0	0	0
Risk margin	R0310	0	0	0	0	0	0
Technical provisions – total
Technical provisions – total	R0320	28	3,096	0	10,879	7,143	6,389
Recoverable from reinsurance contract/SPV and Finite Re after the adjustment for expected losses due to counterparty default – total	R0330	0	48	0	47	79	86

Technical provisions calculated as a whole R0010

Best Estimate

Claims provisions

Amount of the transitional on Technical Provisions

Technical provisions – total

		Direct business and accepted proportional reinsurance
		Fire and other damage to property insurance	General liability insurance	Credit and suretyship insurance	Legal expenses insurance	Assistance	Miscellaneous financial loss
		C0080	C0090	C0100	C0110	C0120	C0130
Technical provisions calculated as a whole	R0010
Total Recoverables from reinsurance/SPV and Finite Re after the adjustment for expected losses due to counterparty default associated to TP calculated as a whole	R0050
Technical provisions calculated as a sum of BE and RM
Best Estimate
Premium provisions
Gross	R0060	-9,722	-414	491	0	0	-210
Total recoverable from reinsurance/SPV and Finite Re after the adjustment for expected losses due to counterparty default	R0140	26	2	0	0	0	-37
Net Best Estimate of Premium Provisions	R0150	-9,748	-416	491	0	0	-173
Claims provisions
Gross	R0160	46,636	5,719	390	1	0	206
Total recoverable from reinsurance/SPV and Finite Re after the adjustment for expected losses due to counterparty default	R0240	3,615	239	0	0	0	41
Net Best Estimate of Claims Provisions	R0250	43,021	5,480	390	1	0	165
Total Best estimate – gross	R0260	36,914	5,305	881	1	0	-4
Total Best estimate – net	R0270	33,273	5,064	881	1	0	-8
Risk margin	R0280	4,293	1,218	550	0	0	60
Amount of the transitional on Technical Provisions
Technical provisions calculated as a whole	R0290	0	0	0	0	0	0
Best Estimate	R0300	0	0	0	0	0	0
Risk margin	R0310	0	0	0	0	0	0
Technical provisions – total
Technical provisions – total	R0320	41,207	6,523	1,431	1	0	56
Recoverable from reinsurance contract/SPV and Finite Re after the adjustment for expected losses due to counterparty default – total	R0330	3,641	241	0	0	0	4
Technical provisions minus recoverables from reinsurance/SPV and Finite Re – total	R0340	37,566	6,282	1,431	1	0	52

Technical provisions calculated as a whole	R0010

Best Estimate

Claims provisions

Amount of the transitional on Technical Provisions

Technical provisions – total

			Total Non-Life obligation
		Non proportional health reinsurance	Non proportional casualty reinsurance	Non-proportional marine, aviation and transport reinsurance	Non proportional property reinsurance
		C0140	C0150	C0160	C0170	C0180
Technical provisions calculated as a whole	R0010
Total Recoverables from reinsurance/SPV and Finite Re after the adjustment for expected losses due to counterparty default associated to TP calculated as a whole	R0050
Technical provisions calculated as a sum of BE and RM
Best Estimate
Premium provisions
Gross	R0060	-158	-1,095	-2,411	-11,395	-22,077
Total recoverable from reinsurance/SPV and Finite Re after the adjustment for expected losses due to counterparty default	R0140	-1	76	-46	-505	-471
Net Best Estimate of Premium Provisions	R0150	-157	-1,171	-2,365	-10,890	-21,605
Claims provisions
Gross	R0160	482	15,874	8,199	36,348	135,900
Total recoverable from reinsurance/SPV and Finite Re after the adjustment for expected losses due to counterparty default	R0240	2	7,095	284	2,332	13,856
Net Best Estimate of Claims Provisions	R0250	480	8,779	7,915	34,016	122,046
Total Best estimate – gross	R0260	324	14,779	5,788	24,953	113,823
Total Best estimate – net	R0270	323	7,608	5,550	23,126	100,441
Risk margin	R0280	60	950	1,610	8,026	19,420
Amount of the transitional on Technical Provisions
Technical provisions calculated as a whole	R0290	0	0	0	0	0
Best Estimate	R0300	0	0	0	0	0
Risk margin	R0310	0	0	0	0	0
Technical provisions – total
Technical provisions – total	R0320	383	15,729	7,398	32,979	133,243
Recoverable from reinsurance contract/SPV and Finite Re after the adjustment for expected losses due to counterparty default – total	R0330	1	7,171	238	1,827	13,385
Technical provisions minus recoverables from reinsurance/SPV and Finite Re – total	R0340	382	8,558	7,160	31,152	119,861

S.19.01.21 Non-life Insurance Claims Information

Accident year / underwriting year Z0020 2

							Development year							In Current	Sum of years
	Year	0	1	2	3	4	5	6	7	8	9	10 & +		year	(cumulative)
		C0010	C0020	C0030	C0040	C0050	C0060	C0070	C0080	C0090	C0100	C0110		C0170	C0180
Prior	R0100											-519	R0100	-519	-519
N-9	R0160	31,063	39,510	9,146	4,097	1,951	1,465	842	373	624	-11		R0160	-11	89,062
N-8	R0170	19,217	37,076	14,202	5,757	2,609	-25	1,274	1,027	298			R0170	298	81,436
N-7	R0180	16,672	36,952	15,465	5,416	2,160	1,594	815	565				R0180	565	79,639
N-6	R0190	17,908	39,032	11,512	5,835	2,460	1,420	1,826					R0190	1,826	79,994
N-5	R0200	14,830	29,319	13,345	6,486	2,325	1,280						R0200	1,280	67,585
N-4	R0210	19,140	46,004	10,458	4,638	2,335							R0210	2,335	82,575
N-3	R0220	20,423	42,986	12,717	5,221								R0220	5,221	81,347
N-2	R0230	17,600	40,036	13,651									R0230	13,595	71,232
N-1	R0240	18,641	42,340										R0240	42,396	61,037
N	R0250	15,563											R0250	15,701	15,701
													R0260 Total	83,213	709,088

Gross undiscounted Best Estimate Claims Provisions

(absolute amount)

Development year											Year end
	Year	0	1	2	3	4	5	6	7	8	9	10 & +		(discounted data)
		C0200	C0210	C0220	C0230	C0240	C0250	C0260	C0270	C0280	C0290	C0300		C0360
Prior	R0100											9,196	R0100	8,911
N-9	R0160	0	0	0	0	0	0	3,409	2,604	1,849	2,249		R0160	2,138
N-8	R0170	0	0	0	0	0	5,017	3,771	2,965	3,361			R0170	3,138
N-7	R0180	0	0	0	0	5,111	3,844	3,104	3,544				R0180	3,264
N-6	R0190	0	0	0	7,047	4,948	5,121	3,047					R0190	2,794
N-5	R0200	0	0	17,363	8,040	5,378	5,247						R0200	4,979
N-4	R0210	0	28,087	10,912	6,595	5,586							R0210	5,241
N-3	R0220	46,577	28,857	14,399	9,219								R0220	8,755
N-2	R0230	60,818	29,078	16,829									R0230	16,146
N-1	R0240	66,657	33,019										R0240	31,896
N	R0250	50,227											R0250	48,637
												Total	R0260	135,900

S.23.01.01 Own funds

Basic own funds before deduction for participations in other financial sector as foreseen in article 68 of Delegated
Regulation 2015/35
Ordinary share capital (gross of own shares)	R0010	71,856	71,856		0
Share premium account related to ordinary share capital	R0030	54,240	54,240		0
Initial funds, members' contributions or the equivalent basic own-fund item for mutual and mutual-type undertakings	R0040	0	0		0
Subordinated mutual member accounts	R0050	0		0	0	0
Surplus funds	R0070	0	0
Preference shares	R0090	0		0	0	0
Share premium account related to preference shares	R0110	0		0	0	0
Reconciliation reserve	R0130	349,822	349,822
Subordinated liabilities	R0140	0		0	0	0
An amount equal to the value of net deferred tax assets	R0160	0				0
Other own fund items approved by the supervisory authority as basic own funds not specified above	R0180	0	0	0	0	0
Own funds from the financial statements that should not be represented by the reconciliation reserve and do not
meet the criteria to be classified as Solvency II own funds
Own funds from the financial statements that should not be represented by the reconciliation reserve and do not meet the criteria to be classified as Solvency II own funds	R0220	0
Deductions
Deductions for participations in financial and credit institutions	R0230	0	0	0	0	0
Total basic own funds after deductions	R0290	475,918	475,918	0	0	0
Ancillary own funds
Unpaid and uncalled ordinary share capital callable on demand	R0300	0			0
Unpaid and uncalled initial funds, members' contributions or the equivalent basic own fund item for mutual and mutual
type undertakings, callable on demand	R0310	0			0
Unpaid and uncalled preference shares callable on demand	R0320	0			0	0
A legally binding commitment to subscribe and pay for subordinated liabilities on demand	R0330	0			0	0
Letters of credit and guarantees under Article 96(2) of the Directive 2009/138/EC	R0340	0			0
Letters of credit and guarantees other than under Article 96(2) of the Directive 2009/138/EC	R0350	0			0	0
Supplementary members calls under first subparagraph of Article 96(3) of the Directive 2009/138/EC	R0360	0			0

Supplementary members calls – other than under first subparagraph of Article 96(3) of the Directive 2009/138/EC R0370 0 0 0 Other ancillary own funds R0390 0 0 0

Total ancillary own funds R0400 0 Available and eligible own funds SCR R0580 162,522 MCR R0600 40,630 Ratio of Eligible own funds to SCR R0620 293% Ratio of Eligible own funds to MCR R0640 1171%

Total Tier 1 – unrestricted Tier 1 – restricted Tier 2 Tier 3 C0010 C0020 C0030 C0040 C0050 Total available own funds to meet the SCR R0500 475,918 475,918 0 0 0 Total available own funds to meet the MCR R0510 475,918 475,918 0 0 Total eligible own funds to meet the SCR R0540 475,918 475,918 0 0 0 Total eligible own funds to meet the MCR R0550 475,918 475,918 0 0

		C0060
Reconciliation reserve
Excess of assets over liabilities	R0700	516,987
Own shares (held directly and indirectly)	R0710	26,346
Foreseeable dividends, distributions and charges	R0720	14,723
Other basic own fund items	R0730	126,096
Adjustment for restricted own fund items in respect of matching adjustment portfolios and ring-fenced funds	R0740	0
Reconciliation reserve	R0760	349,822
Expected profits
Expected profits included in future premiums (EPIFP) – Life business	R0770	675
Expected profits included in future premiums (EPIFP) – Non- life business	R0780	5,117

Total Expected profits included in future premiums (EPIFP) R0790 5,792

C0060

S.25.01.21 Solvency Capital Requirement – for undertakings on Standard Formula

		Gross solvency capital requirement	USP	Simplifications
		C0110	C0090	C0100
Market risk	R0010	113,799
Counterparty default risk	R0020	6,422
Life underwriting risk	R0030	444	None
Health underwriting risk	R0040	2,537	None
Non-life underwriting risk	R0050	85,708	None
Diversification	R0060	-46,687
Intangible asset risk	R0070	0
Basic Solvency Capital Requirement	R0100	162,223

Calculation of Solvency Capital Requirement C0100

Other information on SCR

Diversification effects due to RFF nSCR aggregation for Article 304 R0440 0

Calculation of Solvency Capital Requirement		C0100
Operational risk	R0130	4,568
Loss-absorbing capacity of technical provisions	R0140	0
Loss-absorbing capacity of deferred taxes	R0150	-4,269
Capital requirement for business operated in accordance with Art. 4 of Directive 2003/41/EC	R0160	0
Solvency capital requirement excluding capital add-on	R0200	162,522
Capital add-on already set	R0210	0
Solvency capital requirement	R0220	162,522
Other information on SCR
Capital requirement for duration-based equity risk sub-module	R0400	0
Total amount of Notional Solvency Capital Requirements for remaining part	R0410	0
Total amount of Notional Solvency Capital Requirements for ring-fenced funds	R0420	0
Total amount of Notional Solvency Capital Requirements for matching adjustment portfolios	R0430	0

S.28.01.01 Minimum Capital Requirement – Only life or only non-life insurance or reinsurance activity

Linear formula component for non-life insurance and reinsurance obligations

		C0010
MCRNL result	R0010	26,747

Medical expense insurance and proportional reinsurance
Income protection insurance and proportional reinsurance
Workers' compensation insurance and proportional reinsurance
Motor vehicle liability insurance and proportional reinsurance
Other motor insurance and proportional reinsurance
Marine, aviation and transport insurance and proportional reinsurance
Fire and other damage to property insurance and proportional reinsurance
General liability insurance and proportional reinsurance
Credit and suretyship insurance and proportional reinsurance
Legal expenses insurance and proportional reinsurance
Assistance and proportional reinsurance
Miscellaneous financial loss insurance and proportional reinsurance
Non-proportional health reinsurance
Non-proportional casualty reinsurance
Non-proportional marine, aviation and transport reinsurance
Non-proportional property reinsurance

		Net (of reinsurance/SPV) best	Net (of reinsurance) written
		estimate and TP calculated as a whole	premiums in the last 12 months
		C0020	C0030
Medical expense insurance and proportional reinsurance	R0020	22	107
Income protection insurance and proportional reinsurance	R0030	2,717	4,843
Workers' compensation insurance and proportional reinsurance	R0040	0	0
Motor vehicle liability insurance and proportional reinsurance	R0050	10,022	13,418
Other motor insurance and proportional reinsurance	R0060	6,300	16,750
Marine, aviation and transport insurance and proportional reinsurance	R0070	5,560	6,385
Fire and other damage to property insurance and proportional reinsurance	R0080	33,272	51,417
General liability insurance and proportional reinsurance	R0090	5,063	5,951
Credit and suretyship insurance and proportional reinsurance	R0100	882	807
Legal expenses insurance and proportional reinsurance	R0110	1	0
Assistance and proportional reinsurance	R0120	0	0
Miscellaneous financial loss insurance and proportional reinsurance	R0130	0	0
Non-proportional health reinsurance	R0140	323	335
Non-proportional casualty reinsurance	R0150	7,607	2,287
Non-proportional marine, aviation and transport reinsurance	R0160	5,550	5,570
Non-proportional property reinsurance	R0170	23,126	25,293

Linear formula component for life insurance and reinsurance obligations

		C0040
MCRL result	R0200	176

		Net (of reinsurance/SPV) best	Net (of reinsurance/SPV) total capital
		estimate and TP calculated as a whole	at risk
		C0050	C0060
Obligations with profit participation – guaranteed benefits	R0210	0
Obligations with profit participation – future discretionary benefits	R0220	0
Index-linked and unit-linked insurance obligations	R0230	0
Other life (re)insurance and health (re)insurance obligations	R0240	4,347
Total capital at risk for all life (re)insurance obligations	R0250		121,040

Overall MCR calculation

		C0070
Linear MCR	R0300	26,923
SCR	R0310	162,522
MCR cap	R0320	73,135
MCR floor	R0330	40,630
Combined MCR	R0340	40,630
Absolute floor of the MCR	R0350	3,600
		C0070
Minimum Capital Requirement	R0400	40,630

AI Terminal

Pozavarovalnica Sava

1987_rns_2019-04-23_9da01551-6031-4235-89d3-2babdd7d53bf.pdf

Solvency and financial condition report of Sava Re d.d. 2018

Management Board of Sava Re d.d.

General information

Summary

Company profile

Business and performance

System of governance

Sava Re Group strategy highlights

Risk profile

Valuation for solvency purposes

Capital management

A. Business and performance

A.1 Business

Name and legal form of the Company

Subsidiaries as at 31 December 2018

Holders of qualifying shares in the Company as at 31 December 2018

Material lines of business transacted by the Company and its main markets

Major markets that the Company operates in

Premiums by line of business

Significant events in 2018

Significant events after the reporting date

A.2 Underwriting performance

Gross premiums written by material line of business

Gross premiums written by geographical area

Gross claims paid by geographical area

Net operating expenses

Net operating expenses by material line of business1

Other technical income and other technical expenses

A.3 Investment performance

Net investment income by class of asset

A.4 Performance of other activities

Other income and expenses

A.5 Any other information

B. System of governance

B.1 General information on the system of governance

B.1.1 Governing bodies

General

General meeting of shareholders

Supervisory board

Terms of reference

Size and composition

Composition of the supervisory board in 2018

Supervisory board committees

Audit committee

Risk committee

Nominations and remuneration committee

Fit and proper committee

Management board

Terms of reference

Size and composition

Composition of the management board in 2018

Reporting

B.1.2 Risk management

B.1.3 Key functions of the risk management system

General

Role of individual key functions

Reporting by key function holders

B.1.4 Committees of the governance system

Risk management committee

B.1.5 Information about the remuneration policy

Principles of the remuneration policy

Remuneration structure

B.1.6 Material related-party transactions

B.2 Fit and proper requirements

B.2.1 General

B.2.2 Fitness requirements for relevant personnel

Supervisory board and its committees

Management board

Key function holders of the risk management system

Other relevant personnel

Personal reliability and reputation

Independence of relevant personnel

Time input

B.2.4 Assessment procedure

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

B.3.1 Risk management organisation

B.3.2 Components of the risk management system

Net operating expenses by material line of business¹