Solvency and financial condition report of the Sava Insurance Group 2019

Ljubljana, May 2020

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	6
A.	Business and performance13
A.1	Business13
A.2	Underwriting performance19
A.3	Investment performance 27
A.4	Performance of other activities31
A.5	Any other information 32
B.	System of governance33
B.1	General information on the system of governance33
B.2	Fit and proper requirements 44
B.3	Risk management system, including the own risk and solvency assessment 47
B.4	Internal control system55
B.5	Internal audit function57
B.6	Actuarial function59
B.7	Outsourcing61
B.8	Any other information 63
C.	Group risk profile 64
C.1	Underwriting risk 65
C.2	Market risk 76
C.3	Credit risk83
C.4	Liquidity risk86
C.5	Operational risk88
C.6	Other material risks 90
C.7	Any other information 93
D.	Valuation for solvency purposes94
D.1	Assets98
D.2	Technical provisions105
D.3	Other liabilities119
D.4	Alternative methods for valuation121
D.5	Any other information 122
E.	Capital management123
E.1	Own funds125
E.2	Solvency capital requirement and minimum capital requirement129
E.3	Use of the duration-based equity risk sub-module in the calculation of the solvency capital
	requirement (SCR)134
E.4	Difference between the standard formula and any internal model used135
E.5	Non-compliance with the minimum capital requirement (MCR) and non-compliance with
	the solvency capital requirement (SCR)136
E.6	Any other information 137
Appendix A –	Glossary of selected terms and calculation methodologies138
Appendix B –	Quantitative reporting templates140
	S.32.01.22 Undertakings in the scope of the Group 141
	S.02.01.02 Balance sheet 144
	S.05.01.02 Premiums, claims and expenses by line of business146
	S.05.02.01 Premiums, claims and expenses by country 150
	S.23.01.22 Own funds 152
	S.25.01.22 Solvency Capital Requirement – for undertakings on Standard Formula155

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

The Group's solvency and financial condition report has been reviewed by the auditing firm KPMG d.d., which has issued an independent auditor's assurance report.

The Group's audited 2019 report is available online, at https://www.sava re.si/en/investors/financial-information/financial-reports/.

Summary

Introduction

The purpose of this report is to provide information on the solvency position of the Sava Insurance Group as at 31 December 2019, as well as on its business and performance, system of governance, risk profile and valuation methods used for assets and liabilities. The report also includes key quantitative data as appended. The Sava Insurance Group prepares such a report on an annual basis. This document has been prepared in accordance with the Slovenian Insurance Act (ZZavar-1) and other legislative acts.

Profile of the Sava Insurance Group

The Sava Insurance Group (hereinafter: the "Group" or the "Sava Insurance Group") is one of the largest insurance groups in south-east Europe. As at 31 December 2019, the insurance part of the Group was composed of seven insurers based in Slovenia and in the countries of the Adriatic region: In addition to the (re)insurance companies, the Group is made up of seven non-insurance companies.

The Group employs over 2,700 people. it provides insurance and reinsurance coverage for all lines of business, offering:

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

Sava Re has been operating in international reinsurance markets for over 40 years, and in the Slovenian insurance market, through its former subsidiary Zavarovalnica Tilia, since 1998. The Group expanded to some other markets of the former Yugoslavia through the acquisition of six insurance companies between 2006 and 2009 and greenfield investments in two life insurance companies in 2008. The Group entered the Slovenian and Macedonian pension markets in 2015 and 2018, respectively. In 2019, Sava Re also acquired an 85% stake in Sava Infond, an investment fund management company.

In 2019, the Group's consolidated operating revenues totalled EUR 584.2 million.

The Sava Insurance Group's core strengths lie in its regional knowledge, reliability, responsiveness, flexibility and financial strength. We exceed client expectations by seeking continual improvement, building relationships in a responsible, frank and respectful manner, and playing an active role in our environment.

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

Business and performance ¹

In 2019, the Sava Insurance Group wrote nearly EUR 600 million in gross premiums and generated a net profit of EUR 50.2 million. Performance exceeded targets set for 2019, also thanks to a successful acquisition in the Croatia market. Return on equity was 13.8% in 2019.

Gross premiums written up 9.6% and operating revenues up 9.9%

Gross premium growth was mainly contributed by the Slovenian non-life insurance business (12.2% growth) and the non-life insurance business from abroad (20.3% growth). Part of this came from an acquisition in Croatia – Zavarovalnica Sava acquired 100% of the shares in the companies Ergo Osiguranje and Ergo Životno Osiguranje.

The Group's operating revenues grew by 9.9% in 2019, which was driven by higher gross premiums written by existing and new companies, but also contributed to by the full-year operations of the companies Sava Penzisko Društvo from North Macedonia, the insurance business of Energoprojekt Garant from Serbia and the assistance business of TBS Team 24 from Slovenia, which all joined the Group in 2018. At the end of June 2019, the investment fund manager Sava Infond became part of the Group.

Net profit 16.7% above target

The Sava Insurance Group generated a net profit of EUR 50.2 million in 2019, which is a 16.7% increase over both the previous year's figure and the target for the full year. The increase was driven by the non-life insurance, life insurance and pensions operating segments, partly reduced by the challenging claims experience in the Croatian non-life insurance segment and reinsurance business in international markets. Profitability was additionally supported by the acquisitions in Croatia, in which the Group produced a one-off profit of EUR 7.5 million from the reversal of badwill due to the difference between the purchase price and the fair value of the acquired net assets.

Return on equity was 13.8% In 2019, the parent company paid out a dividend of EUR 0.95 per share, providing shareholders with a dividend yield of over 5%. The share price rose by 17.6% in 2019, resulting in a 23.2% increase in shareholder value in 2019 when adding the dividend yield.

Better cost-efficiency

The Group's performance was also bolstered by better cost-efficiency, with a 1.5-point year-on-year improvement in the expense ratio, primarily reflecting faster growth in premiums over expenses.

Larger claims burden

Primary insurance mainly saw an increased claims burden in Croatia, where claims rose in motor third-party liability and in motor casco business, as well as owing to the integration of the Croatian Ergo non-life insurer into the Group. The reinsurance segment also experienced a large claims volume in 2019, primarily because of an increased number of catastrophic events – two typhoons in Japan, a hurricane in the Bahamas and certain large fire losses. The claims incurred by the reinsurance segment exceeded planned figures.

Subordinated bond issue to support the Group's expansion and optimisation of capital structure

¹ This section provides information on the performance of the Sava Insurance Group based on IFRS accounts; therefore, figures do not equal those calculated based on Solvency II.

In order to support its development activities and the optimisation of its capital structure, in October 2019, Sava Re issued 20-year subordinated bonds with an issue size of EUR 75 million and a prepayment option after 10 years. Having integrated all previously acquired companies into the Group (ERGO Osiguranje d.d., Ergo Životno Osiguranje d.d., KBM Infond, Družba za Upravljanje d.o.o.) , two more deals were signed in 2019: the acquisition of the health service provider Diagnostic Centre Bled d.o.o. in August, and in December the purchase of NLB Vita, the second-largest life insurer in Slovenia.

Credit standing

In 2019, Standard & Poor's and AM Best reaffirmed Sava Insurance Group's A-ratings, with a stable outlook, which makes it easier for the Group to obtain business in international reinsurance markets.

Strategic focus of the Sava Insurance Group

The strategy of the Sava Insurance Group is based on the pillars as shown below:

The key guidelines set out in the strategy are:

Digital transformation & placing the customer at the centre: We are working to make it easier for policyholders to take out and manage insurance and to file claims, which also includes adapting our services to the needs and wishes of our clients. The new generation of digital customers is accustomed to fast and easy online shopping with as few clicks as possible. The Sava Insurance Group is adapting to this reality; therefore, we have placed our core strategic focus on digital transformation and customer-centred orientation.
IT transformation: Developing a modern and flexible IT system will give us a competitive advantage in the future through the overhaul of our central systems, which includes replacements, upgrades and the introduction of new IT solutions.
Growth through acquisitions: In addition to effective organic growth during the strategic period, the Sava Insurance Group will continue its acquisition activities in the industries and markets where it is already present, and it will also look for growth opportunities in the insurance industry in other EU countries.

Long-term strategic targets:

The long-term objective is to achieve a return on equity of at least 11% at both the Group level and as a 3-year average. The internal calculation of the weighted average cost of capital (WACC) of the Sava Insurance Group as at 31 December 2019, which includes the subordinated debt, totals 7.6%, with a cost of equity of 8.5%.
In the period 2020–2022, a solvency ratio of 180% to 220% is expected at the Sava Insurance Group level.
The combined ratio of non-life business in Slovenia will not exceed 94%, while the combined ratio abroad will not exceed 95%, with the exception of the Croatian market, where the combined ratio will not exceed 100%. The five-year average combined ratio of reinsurance business (total Group and non-Group business) will not exceed 93%.
With regard to life insurance in Slovenia, profitability (the ratio of the value of new policies to the present value of the expected premiums of such new policies) of the portfolio of new life policies will be at least 9%, and in Croatia and on other markets at least 5% and 7.5%, respectively.
The return on the Group's investment portfolio will average at least 1.0% over three years.

System of governance

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

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

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

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

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

In 2019 there were no changes in the composition of the parent company's management board.

Risk profile

The Group calculates its capital requirement in accordance with the Solvency II standard formula as defined in Delegated Regulation (EU) 2015/35 ² (hereinafter: "Solvency II standard formula" or "standard formula"). The Group's risk profile is dominated by non-life underwriting risk and is exposed to a significant level of market risk. The Group is less exposed to other categories of risk. life underwriting risk, health underwriting risk, counterparty default risk and operational risk. Apart from the above risks, which are captured by the standard formula, the Group is also exposed to liquidity risk, managed primarily by following a strategy for ensuring sufficient liquidity. Because of the

² Commission Delegated Regulation (EU) 2015/35, dated 10 October 2014 amending Directive 2009/138/EC of the European Parliament and of the Council on the taking up and pursuit of the business of Insurance and Reinsurance (Solvency II).

complex internal and external environment in which it operates, the Group also has significant exposure to various strategic risks.

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

Group solvency capital requirement by risk module³

EUR thousand	31 Dec 2019	31 Dec 2018
Group SCR	237,652	216,735
Capital requirements for other financial sectors	7,165	5,532
Capital requirements for other undertakings	8,846	17,380
Consolidated SCR at Group level	221,641	193,823
Adjustments for the loss-absorbing capacity of provisions and deferred taxes	-19,021	-17,840
Operational risk	18,135	16,358
Basic solvency capital requirement (BSCR)	222,527	195,304
Sum of risk components	322,071	293,212
Diversification effect	-99,544	-97,907
Market risk	76,396	60,439
Counterparty default risk	25,373	21,819
Life underwriting risk	28,785	43,695
Health underwriting risk	27,885	25,859
Non-life underwriting risk	163,632	141,399

Valuation for solvency purposes

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

The Group uses the full consolidation method in accordance with the International Financial Reporting Standards (IFRS) for all its companies in its preparation of the IFRS consolidated financial statements, except for the associates ZTSR and G2I, which have been consolidated using the equity method. For the purpose of valuation of the Solvency II balance sheet, however, all Group (re)insurance undertakings and all ancillary services undertakings are consolidated in accordance with article 335 1(a) of Commission Delegated Regulation (EU) (2015/35) (hereinafter "Delegated Regulation"), the Sava Pokojninska pension company and Sava Infond are included in the consolidation in accordance with article 335 1(e), and Sava Penzisko Društvo and the associates ZTSR and G2I are included in accordance with article 335 1(f).

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

³ Capital requirements for other financial sectors include the companies Sava Pokojninska and Sava Infond, the capital requirements for other companies G2I, ZTSR and Sava Penzisko.

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

EUR thousand	31 Dec 2019	31 Dec 2018
IFRS equity	382,981	339,675
Difference in the valuation of assets	-170,943	-135,221
Difference in the valuation of technical provisions	260,298	301,791
Difference in the valuation of other liabilities	-7,858	-19,380
Foreseeable dividends, distributions and charges	-16,195	-14,723
Adjustment for minority interests	-154	-195
Deduction for participations in other financial undertakings	-9,130	-6,943
Subordinated liabilities in basic own funds	73,847	0
Total basic own funds after deductions	512,845	465,004
Total own funds in other financial sectors	9,130	6,943
Eligible own funds to meet the Group SCR	521,975	471,947

Capital management

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

When allocating own funds to business segments, the Group needs to ensure that an adequate return on equity is achieved.

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

EUR thousand	31 Dec 2019	31 Dec 2018
Group SCR	237,652	216,735
Eligible own funds to meet the Group SCR	521,975	471,947
Of which tier 1	448,129	471,947
Of which tier 2	73,847	0
Of which tier 3	0	0
Group solvency ratio	220%	218%
Minimum capital requirement (MCR) of Group	112,920	102,730
Eligible own funds to meet the Group MCR	461,582	465,004
Of which tier 1	438,999	465,004
Of which tier 2	22,584	0
Of which tier 3	-	-
Group MCR	409%	453%

Capital adequacy of the Group

As at 31 December 2019, most eligible own funds to cover the Group SCR were tier one funds. As evident from the table, the Group has a strong solvency ratio and, as at 31 December 2019, complied with statutory requirements on the amount and quality of capital for covering the SCR and MCR.

The Group also tested the adequacy of eligible own funds several times during the year, demonstrating compliance throughout the year.

According to the Group's risk strategy applicable at 31 December 2019, a Group solvency ratio of 140% is still considered adequate, albeit suboptimal, while the optimal level of capitalisation starts at 170%. This demonstrates that the Group is well capitalised, also by its own criteria.

A. Business and performance

A.1 Business

Name and legal form of the parent company

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

Composition of the Group

Sava Re, the parent company of the Sava Insurance Group, transacts reinsurance business. The insurance part of the Group is composed of seven insurers based in Slovenia and in the countries of the Adriatic region: the composite insurer Zavarovalnica Sava, the non-life insurers Sava Neživotno Osiguranje (Serbia), Sava Osiguruvanje (North Macedonia), Illyria and Sava Osiguranje (Montenegro), and the two life insurers Sava Životno Osiguranje (Serbia) and Illyria Life.

In addition to these (re)insurers, the Group consists of:

Sava Pokojninska: a Slovenian pension company;
Sava Penzisko Društvo: a pension fund manager based in North Macedonia managing secondand third-pillar pension funds;
Sava Infond. a Slovenia-based subsidiary managing investment funds;
TBS Team 24: a Slovenia-based company providing assistance services relating to motor, health and homeowners insurance;
ZTSR: an associate company offering market research services;
G2I: an associate company marketing on-line motor polices;
Illyria Hospital: a company based in Kosovo that owns some real property but is currently dormant.

Composition of the Group as at 31 December 2019

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

Subsidiaries and associates as at 31 December 2019
----------------------------------------------------	--	--	--	--	--

	Zavarovalnica Sava	Sava Pokojninska	Sava Neživotno Osiguranje (Serbia)	Sava Životno Osiguranje (Serbia)
Registered office	Cankarjeva ulica 3,	Ulica Vita Kraigherja	Bulevar vojvode	Bulevar vojvode
	2000 Maribor,	5, 2103 Maribor,	Mišića 51, 11040	Mišića 51, 11040
	Slovenia	Slovenia	Beograd, Serbia	Beograd, Serbia
Business activity	composite insurer	pension company	non-life insurer	life insurer
Share capital (EUR)	68,417,377	6,301,109	10,570,373	4,496,544
Book value of equity interest (EUR)	68,417,377	6,301,109	10,570,373	4,496,544
% equity interest (voting rights) held by Group members	Sava Re: 100.0%	Sava Re: 100.0%	Sava Re: 100.0%	Sava Re: 100.0%
Profit or loss for 2019 (EUR)	38,477,268	735,098	1,079,603	16,199
Position in the Group	subsidiary insurance	subsidiary pension	subsidiary insurance	subsidiary insurance
	company	company	company	company

	Illyria	Illyria Life	Sava Osiguruvanje (North Macedonia)	Sava Osiguranje (Montenegro)	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	Ulica Svetlane Kane Radević br. 1, 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	3,285,893	3,820,077	4,033,303	1,800,000
Book value of equity interest (EUR)	5,428,040	3,285,893	3,536,245	4,033,303	1,800,000
% equity interest (voting rights) held by Group members	Sava Re: 100.0%	Sava Re: 100.0%	Sava Re: 92.57%	Sava Re: 100.0%	Sava Re: 100.0%
Profit or loss for 2019 (EUR)	-2,267,470	290,251	201,857	1,233,918	-1,790,246
	subsidiary	subsidiary	subsidiary	subsidiary
Position in the Group	insurance	insurance	insurance	insurance	subsidiary
	company	company	company	company

	Sava Penzisko Društvo	TBS Team 24	ZTSR	G2I	Sava Infond
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	Ulica Vita Kraigherja 5, 2000 Maribor, Slovenia
Business activity	pension fund management	organisation of assistance services and customer care	market research	insurance	investment fund asset management
Share capital (EUR)	2,110,791	8,902	250,000	121,300	1,460,524
Book value of equity interest (EUR)	2,110,791	6,677	125,000	21,228	1,460,524
% equity interest (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: 84.00 % / 84.85 % Zavarovalnica Sava: 15.00%/15.15%
Profit or loss for 2019 (EUR)	1,343,277	858,888	-122,515	37,405	1,359,735
Position in the Group	subsidiary pension company	subsidiary	associate company	associate company	subsidiary

Following are details of the parent company Sava Re, as its supervisory board also oversees the operations of the Sava Insurance Group and its auditor audits the Group's financial statements with notes and solvency and financial condition reports.

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

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

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

KPMG SLOVENIJA, Podjetje za Revidiranje, d.o.o. Železna cesta 8A 1000 Ljubljana Slovenia Telephone: +386 1 420 11 70 Telefax: +386 1 420 11 58 Email: [email protected]

The financial statements have been audited by KPMG Slovenija, Podjetje za Revidiranje, d.o.o., who were tasked with the auditing of the 2019 financial statements of Sava Re and the Sava Insurance Group for the first year. In 2019, most of the Group's subsidiary companies were audited by the local auditing staff of the same auditing firm. The 2019 financial statements of three Group member were audited by another audit firm. A contract for the auditing of the financial statements was signed with KPMG in 2019, covering the period 2019-2021. Sava Re complies with the Slovenian Insurance Companies Act provision on auditor rotation.

Holders of qualifying shares in the Company as at 31/12/2019

Shareholder	Number of shares	Holding	% voting rights
SDH d.d.	3,043,883	17.7%	19.6%
Zagrebačka Banka d.d., fiduciary account	2,439,852	14.2%	15.7%

Source: 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.

Major lines of business transacted and major markets of the Group ⁴

In 2019, the main lines of business were:

motor vehicle liability insurance and proportional reinsurance,
other motor insurance and proportional reinsurance and
fire and other damage to property insurance and proportional reinsurance.

These lines of business accounted for 62.0% of the total gross premiums written (2018: 61.3%).

The Group operates in the market of the Republic of Slovenia and globally. The following table shows the most important markets of the Group in terms of premiums written in 2019. Listed are countries where the Group wrote over EUR 11 million in gross premiums⁵ . The Sava Insurance Group sourced most of its business from Slovenia, other countries of the Adriatic region and South Korea.

⁴ This subsection presents consolidated data based on SII calculations that do not include Sava Pokojninska and Sava Penzisko Društvo; therefore, figures do not equal IFRS calculations.

⁵ The materiality threshold is a Group-internal measure linked to the level of the Group's eligible own funds and solvency capital requirement. As at 31 December 2019, it was set at EUR 11 million at the Group level.

EUR thousand	Gross premiums written in 2019	Gross premiums written in 2018	Index
Slovenia	440,586	395,768	111.3
Serbia	27,047	23,788	113.7
Macedonia	14,397	13,038	110.4
Montenegro	13,777	12,832	107.4
South Korea	12,907	14,219	90.8
Kosovo	12,678	11,489	110.3

Major countries in which the Group operates⁶

Significant events in 2019

On 27 February 2019, Zavarovalnica Sava satisfied all suspensive conditions, becoming the sole owner of the Croatia-based companies ERGO Osiguranje d.d. and ERGO Životno Osiguranje d.d.
In May 2019, the 35th general meeting of shareholders was held.
On 7 June 2019, having met all the suspensive conditions under the sales agreement of 24 December 2018, Sava Re d.d. acquired a 77% stake in the share capital of Infond d.o.o. and an additional 7% stake under the sales agreement of 15 January 2019, totalling an 84% stake in the share capital, and, taking into account own shares, 85% of the voting rights. With the subsidiary Zavarovalnica Sava already holding a 15% stake in the company, the members of the Sava Insurance Group now hold 100% of the voting rights in Infond d.o.o.
Following its regular annual rating review in July 2019, the rating agency Standard & Poor's affirmed the "A" insurer financial strength rating on Sava Re and Zavarovalnica Sava. The outlook was stable.
In August 2019, Sava Re as the buyer and Cinxro Holdings Ltd. as the seller signed a contract for the sale of 80% of the share capital of Diagnostični Center Bled d.o.o. (Diagnostic Centre Bled), representing 100% of the voting rights. In addition, Sava Re signed an agreement with Zavarovalnica Triglav d.d. on the manner of cooperation in the acquisition of interests in the Diagnostic Centre Bled. In the agreement, the parties set out the key steps that will guide their joint control over the Diagnostic Centre Bled through their ZTSR d.o.o. joint venture. In March 2020, ZTSR d.o.o, a 50-50 joint venture of Sava Re d.d. and Zavarovalnica Triglav d.d., completed the acquisition of the health-care provider Diagnostic Centre Bled d.o.o. (Diagnostični center Bled, d.o.o.).
Following its regular annual rating review in October 2019, the rating agency AM Best affirmed the "A" (excellent) insurer financial strength rating of Sava Re. The outlook was stable.
In October 2019, Sava Re issued subordinated bonds with a scheduled maturity of 2039 and with an early recall option for 7 November 2029. The capital raised is Tier 2 eligible and Solvency II compliant. Sava Re intends to use the net proceeds for general corporate purposes of the Sava Insurance Group and for the optimisation of its capital structure. The total issue size is EUR 75 million. The bond issue is intended for qualified investors and is listed on the regulated market of the Luxembourg Stock Exchange.
In October 2019, Japan was hit by Typhoon Hagibis, one of the worst storms in the region in decades. The negative impact of the loss event on the Group's result in 2019 exceeded EUR 5 million.
At its meeting in December, the supervisory board of Sava Re took note of the notice of Srečko Čebron on his early termination of his term of office as Sava Re management board member and accepted his proposal for a consensual termination of employment contract as management board member as of 31 May 2020. At the same meeting, the supervisory board unanimously supported the proposal of Chairman of the Management Board Marko Jazbec and

⁶ Premiums include premium estimates.

appointed Peter Skvarča, who comes from within the ranks of the Sava Insurance Group, as a new member of the management board.

In December 2019, Sava Re as the buyer, and NLB d.d. and KBC Insurance NV as the sellers signed a sale, purchase and transfer agreement regarding 100% of the share capital in NLB Vita d.d. The acquisition of NLB Vita represents an important step for the Sava Insurance Group in the consolidation of its position in Slovenia's life insurance market. The bancassurance partnership between NLB Vita and NLB will continue to develop, as the bank remains the primary sales channel. The strengthening of partnerships with banks and the development of the bancassurance sales channel are important strategic objectives for the Sava Insurance Group. The transaction's completion depends on the satisfaction of certain suspensive conditions and regulatory approval. The transaction is expected to close by mid-2020.
All procedures for the acquisition of Sava Terra by Zavarovalnica Sava were conducted in December 2019. The acquisition was completed on 13 February 2020.

Significant events after the reporting date

On 11 March 2020, the World Health Organisation declared the coronavirus outbreak a pandemic. In Slovenia, the government declared an epidemic on 12 March 2020. Sava Re and other companies of the Sava Insurance Group are working to contain the effects of realised operational risk by following their business continuity protocols because the health of their staff and customers is paramount. The Sava Insurance Group prepared a preliminary assessment of the impacts of Covid-19 on the operations of the Group and its solvency position. The assessment and its findings were posted on the Company's website on 17 April 2020.

The Group uses the full consolidation method for all its companies in the preparation of the IFRS consolidated financial statements, except for ZTSR and G2I, which have been consolidated using the equity method. For the purpose of valuation of the Solvency II balance sheet, however, all Group (re)insurance undertakings and all ancillary services undertakings are consolidated in accordance with article 335 1(a) of the Delegated Regulation, Sava Pokojninska and Sava Infond are included in the consolidation in accordance with article 335 1(e), and Sava Penzisko Društvo and the associates ZTSR and G2I are included in accordance with article 335 1(f).

A.2 Underwriting performance⁷

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

Premiums

Consolidated gross premiums written and net premiums earned

EUR thousand	2019	2018	Index
Gross premiums written	596,200	544,080	109.6
Net premiums earned	545,714	502,451	108.6

Consolidated gross premiums written by region

EUR thousand	2019	2018	Index
Slovenia	440,586	395,768	111.3
International	155,614	148,312	104.9
Total	596,200	544,080	109.6

Consolidated gross premiums written by material line of business

EUR thousand	2019	2018	Index
Motor vehicle liability insurance and proportional reinsurance	136,390	117,350	116.2
Other motor insurance and proportional reinsurance	119,777	107,093	111.8
Fire and other damage to property insurance and proportional reinsurance	113,570	109,076	104.1
Life insurance	68,869	68,551	100.5
Income protection insurance and proportional reinsurance	48,824	46,739	104.5
Other lines of business	108,770	95,271	114.2
Total	596,200	544,080	109.6

In 2019, gross premiums written grew by 9.6%, with a largely unchanged breakdown by line of business compared to 2018. Non-life premiums accounted for 88.4% (2018: 87.4%) of total premiums, life premiums for 11.6% (2018: 12.6%). Gross premiums written are dominated by the lines of business: motor vehicle liability insurance and proportional reinsurance, and other motor insurance and proportional reinsurance, which together account for 43.0% of total premiums (2018: 41.3%).

Below we set out the movements in gross premiums written by operating segment as analysed by the Group.

Gross premiums written in the reinsurance segment in 2019 were up by 1.0% from the previous year. Premium growth was achieved in non-proportional reinsurance business, especially in Asian markets (through organic growth and new contracts). In 2019, net premiums earned were lower than in 2018 by 3.1% due to the higher change in net unearned premiums (in 2018, a decline in gross premiums and consequently a decrease in net unearned premiums was recorded, while in 2019, an increase in gross premiums and consequently an increase in net unearned premiums was recorded).

Gross non-life insurance premiums grew by 13.7% in 2019 as a result of the growth in gross non-life premiums of all non-life insurance companies in the Group. Accordingly, net premiums earned also

⁷ This section presents consolidated data based on Solvency II calculations that do not include the pension companies Sava Pokojninska and Sava Penzisko Društvo, which is why figures do not equal IFRS calculations.

grew, by 13.8% in total. Slovenia-sourced gross non-life premiums grew by 12.2%. To this, EUR 13.7 million was contributed by FOS (freedom of service) business written by the Group's Slovenian non-life insurer in cooperation with various companies within the EU Member States. This chiefly includes motor and general liability policies. Growth in the amount of EUR 22.9 million refers to Slovenian non-life business without FOS business. In the aforementioned period, the Slovenian insurance market registered 7.5% growth in non-life gross premiums, excluding FOS business and accepted co-insurance, while the Slovenian part of the Group achieved 7.7% premium growth, largely generated by motor business. A large part of the growth relates to private motor insurance business, where the number of policies is increasing. In addition, favourable economic conditions with rising sales of motor vehicles boosted the sale of upmarket motor insurance packages. There was also a rise in gross premiums written in property business, due to an increase in insured property value of a large client. Net non-life insurance premiums earned in Slovenia grew by 12.4% in 2019. Gross nonlife insurance premiums written abroad rose by 20.3%. The growth was chiefly driven by the inclusion of the Croatian non-life insurer ERGO into the Sava Insurance Group. The largest jump in absolute terms was in motor premiums, chiefly as the result of higher sales in Croatia. Gross motor premiums also rose for the other non-Slovenian non-life insurers of the Group as a result of a range of promotional activities (opening of new branches and roadworthiness tests) and the joining of new policyholders.

In 2019, gross life premiums written in Slovenia remained at approximately the same level as in the previous year. The company managed to offset the entire shortfall in premiums related to maturities, deaths and surrenders with new insurance contracts. In 2019, gross premiums written by the non-Slovenian life insurers grew by 9.1% year on year, with the largest growth recorded in Serbia, reflecting greater efficiency of the own sales network, as was the case also in Kosovo; however, the Croatian part of Zavarovalnica Sava experienced a decline in gross premiums written as the result of expiring policies (due to maturities, deaths, surrenders) that the company did not manage to compensate by writing new business.

EUR thousand	2019	2018	Index
Motor vehicle liability insurance and proportional reinsurance	125,909	110,811	113.6
Other motor insurance and proportional reinsurance	112,447	100,813	111.5
Fire and other damage to property insurance and proportional reinsurance	97,286	95,443	101.9
Life insurance	68,059	67,670	100.6
Income protection insurance and proportional reinsurance	48,628	46,513	104.5
Other lines of business	93,385	81,202	115.0
Total	545,714	502,451	108.6

Consolidated net premiums earned by material line of business

Consolidated net premiums earned by operating segment

The life operating segment also includes income from supplementary accident policies.

Claims

Consolidated gross claims paid and net claims incurred

EUR thousand	2019	2018	Index
Gross claims paid	392,032	342,557	114.4
Net claims incurred	396,377	321,862	110.9

Consolidated gross claims paid by region

EUR thousand	2019	2018	Index
Slovenia	285,772	255,798	111.7
International	106,260	86,758	122.5
Total	392,032	342,557	114.4

Consolidated gross claims paid and net claims incurred rose in 2019 compared to 2018. Below we set out the movements in gross claims paid and claims incurred by operating segment as analysed by the Sava Insurance Group.

In 2019, exchange differences had a negative impact on net claims incurred of the reinsurance segment in the amount of EUR 1.6 million (positive impact of EUR 0.3 million in 2018). In 2019, net claims incurred, excluding the effect of exchange differences, rose by 17.1% compared to 2018 as there were more catastrophic events in 2019 than in the previous year (2018: a typhoon in Japan and floods in India; 2019: two typhoons in Japan, a hurricane in the Bahamas, fires in the United Kingdom and a fire in Qatar). The net incurred loss ratio relating to the reinsurance segment (excluding the effect of exchange differences) deteriorated by 13.4 p.p. year on year, to 74.8% (2018: 61.4%).

Consolidated gross non-life claims grew by 8.2% in 2019, chiefly as the result of growth in gross nonlife claims of the Group's non-Slovenian non-life insurers. Consolidated gross claims paid relating to Slovenian business rose by 4.0% in 2019 over the previous year. The increase in consolidated gross claims of the Slovenian business was mostly due to the change in the ownership of a subsidiary assistance service provider. In 2018, the costs of services of the assistance service provider concerning the performance of activities for the other Group companies were recognised in operating expenses, while in 2019 a part of these expenses, which the assistance service provider performs for the Group companies, was transferred to the gross claims item. Without this change, the consolidated gross claims related to Slovenian business would remain at the same level as the previous year. In 2019 compared to the same period in the previous year, Zavarovalnica Sava incurred higher claims concerning motor insurance due to the increase in the average incurred claims. Two large claims also contributed to the increase in the level of claims. On the other hand, in the property insurance segment gross claims decreased, since 2018 saw higher claims paid due to weather-related disasters. Consolidated gross claims paid relating to non-Slovenian business rose by 31.5%. In absolute terms, growth was mainly driven by the inclusion of the non-life insurer ERGO into the Sava Insurance Group. The largest rise in claims was registered by the Croatian branch of Zavarovalnica Sava, specifically in motor liability business followed by motor casco claims. The main reason for the rise in motor claims is a rise in the number of reported claims and several larger claims, which is related to the high growth in the sale of these policies, stronger external distribution channels and online sales. In 2019, the Group's Kosovan non-life insurer also paid out one significant claim in the fire segment.

In 2019, gross life insurance claims paid in Slovenia rose by 34.7% year on year as the result of a large number of policies reaching maturity. The bulk of the maturity benefits incurred in the period related to traditional life policies, specifically EUR 65.5 million, an increase of EUR 29.3 million year on year. Life policies where policyholders bear the investment risk registered EUR 16.7 million in surrenders and policy loans, up EUR 8.6 million from 2018, whereas this class of insurance incurred lower maturity benefits in 2019 than in the previous year. Of the non-Slovenian insurers, Sava Životno Osiguranje (Serbia) recorded the largest increase in gross claims paid (from maturities and deaths), at 46.5%. The Croatian branch of Zavarovalnica Sava had an increase in gross claims of 25.3% due to the merger with the ERGO life insurer (approximately EUR 0.7 million in gross claims). Without the ERGO portfolio, the gross claims in the Croatian branch of the Zavarovalnica Sava would have decreased by approximately 12%. Illyria Life's gross claims paid grew by 18.1% in 2019 (driven by maturities and surrenders).

EUR thousand	2019	2018	Index
Life insurance	108,484	80,534	134.7
Motor vehicle liability insurance and proportional reinsurance	80,141	63,422	126.4
Other motor insurance and proportional reinsurance	79,774	74,557	107.0
Fire and other damage to property insurance and proportional reinsurance	56,774	50,966	111.4
Non-proportional property reinsurance	26,681	9,370	284.7
Other lines of business	44,523	43,012	103.5
Total	396,377	321,862	123.2

Consolidated net claims incurred by material line of business

Expenses

Consolidated net operating expenses by material line of business

EUR thousand	2019	2018	Index
Fire and other damage to property insurance and proportional reinsurance	46,287	47,366	97.7
Motor vehicle liability insurance and proportional reinsurance	37,825	33,794	111.9
Other motor insurance and proportional reinsurance	29,738	26,740	111.2
Life insurance	17,354	17,168	101.1
Income protection insurance and proportional reinsurance	16,249	14,560	111.6
Other lines of business	30,459	31,491	96.7
Total	177,912	171,120	104.0

Net operating expenses rose by 4.0% in 2019. In absolute terms, the largest increase was in expenses for motor vehicle liability insurance and proportional reinsurance and other motor insurance and proportional reinsurance (likewise, there was an increase in the gross premiums written of these lines). The 2019 split of net operating expenses by line of business did not change materially compared to 2018. Below we set out the movements in operating expenses by operating segment as analysed by the Group. The commentary covers all elements used in the calculation of net operating expenses (acquisition costs, change in deferred acquisition costs, other operating expenses).

Acquisition costs (commissions) of the reinsurance segment were lower, despite higher gross premiums. Acquisition costs accounted for 22.1% of gross premiums written in 2019, which is 1.6 p.p. less than in 2018. The lower increase in commissions compared to gross premiums written is the result of a relative decline in proportional business, which earns higher commission rates than nonproportional business. The change in deferred acquisition costs in 2019 is lower than in 2018, reflecting developments in unearned premiums. Other operating expenses increased by 2.2%, primarily on account of IT services. In 2019, the net expense ratio dropped by 1.1 p.p. to 28.2% year on year, due to lower acquisition costs.

Consolidated acquisition costs of the non-life segment were up by 29.7%. The rise in acquisition costs was driven by the growth in premiums written, specifically Slovenian business, FOS business and the inclusion of ERGO into the Sava Insurance Group. Consolidated other operating expenses were up by merely 0.2%. This was mostly due to the change in ownership of the subsidiary assistance service provider. This is because in 2018 operating expenses of the assistance service provider incurred in its activities on behalf of other Group companies were reallocated from the "other" segment to the Slovenian and international non-life segments. In 2019, a part of these expenses was reallocated to the gross claims paid item. The increased change in deferred acquisition costs arose our of portfolio growth resulting in more deferred acquisition costs. The consolidated gross expense ratio of the nonlife segment dropped by 1.7 p.p. due to the increase in gross premiums written of the Slovenian nonlife insurer (a decrease in the gross expense ratio of 2.1 p.p.) and an increase in gross premiums written for foreign non-life insurers (a decrease in the gross expense ratio of 1.5 p.p.).

In 2019, acquisition costs of the life segment fell by 4.6% year on year; specifically, they fell in the life business of Slovenia, Croatia and Kosovo, but rose in Serbian business. The difference in the change in deferred acquisition costs between the years chiefly relates to Slovenian life business. Other operating expenses grew year on year by 5.3%, namely in the life business of Slovenia, Croatia (due to the merger with the company ERGO Životno Osiguranje), Kosovo and Serbia. The consolidated gross expense ratio rose by 0.4 p.p. year on year. The Slovenian insurer saw an increase in the gross expense ratio by 0.5 p.p. (higher other operating expenses, mostly regarding information technology, while policy acquisition costs were lower and gross premiums remained roughly the same), while the gross expense ratio fell significantly with foreign companies, namely by 1.9 p.p. (significantly higher

gross premiums and lower policy acquisition costs, while the other operating expenses were higher due to the merger with ERGO Životno Osiguranje).

Consolidated gross profit or loss

Composition of the consolidated gross income statement by operating segment8,9,10

⁸ The chart does not include the gross profit of the pensions segment, comprising both Sava Pokojninska and Sava Penzisko Društvo, as the companies are not included in the Solvency II consolidation.

⁹ The "other" segment includes profit or loss of the companies TBS Team24, Sava Infond and Illyria Hospital.

¹⁰ The result of the life segment also includes the net investment income of the life insurance portfolio.

Composition of the consolidated gross income statement11,12,13

The Group's gross result for 2019 (excluding Sava Pokojninska and Sava Penzisko Društvo) rose by 9.5% year on year. All operating segments, except the reinsurance segment, posted better gross results in 2019 compared to 2018. The 2019 underwriting result deteriorated year on year as the result of an adverse claims experience. The investment result, excluding the effect of exchange differences, improved chiefly due to the partial reversal of impairment losses recognised on a corporate bond. Besides, in 2018 the Group realised EUR 1.9 million impairments, which were not realised in 2019. The result for life business improved at the Slovenian insurer as well as at the non-

¹¹ The chart does not include the gross profit of the pensions segment, comprising both Sava Pokojninska and Sava Penzisko Društvo, as the companies are not included in the Solvency II consolidation.

¹² The "other" segment includes profit or loss of the companies TBS Team24, Sava Infond and Illyria Hospital.

¹³ The result of the life segment also includes the net investment income of the life insurance portfolio.

Slovenian life insurers. The "other" segment includes the profit or loss of the companies TBS Team 24, Sava Infond and Illyria Hospital. Sava Infond was not a member of the Group in 2018.

The result of the reinsurance segment in 2019 deteriorated year on year owing to the occurrence of more catastrophic losses (2018: a typhoon in Japan and floods in India; 2019: two typhoons in Japan, a hurricane in the Bahamas, fires in the United Kingdom and a fire in Qatar).

The non-life segment improved, largely as the result of the improved technical performance of Zavarovalnica Sava. All the non-Slovenian non-life insurers also improved their performance over 2018. Net investment income of the investment portfolio declined because of lower interest income.

In 2019, the life segment performed better than in 2018 although Zavarovalnica Sava paid out many maturity benefits both in Slovenia and in Croatia. In 2019, the net investment income of the investment portfolio of life insurance business declined compared to 2018 due to lower interest income.

A.3 Investment performance

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

Consolidated net inv. income of the investment portfolio

EUR thousand	2019	2018	Absolute difference
Net investment income relating to financial investments	18,817	17,198	1,620
Net investment income from investments in associates	2,584	-151	2,735
Net investment income relating to the investment property	899	722	177
Net investment income from the investment portfolio	22,300	17,768	4,532
Net investment income from the investment portfolio, excluding the effect of exchange differences	20,960	17,923	3,037

Net investment income relating to the Group's portfolio amounted to EUR 22.3 million in 2019, and EUR 21.0 million, excluding the effect of exchange differences.

Investment income and expenses by type

EUR thousand	1 Jan – 31 Dec
Type of income	2019	2018
Interest income	14,016	16,459
Change in fair value and gains on disposal of FVPL assets	1,719	214
Gains on disposal of other IFRS asset categories	787	2,252
Income from associate company	2,718	0
Income from dividends and shares – other investments	1,623	1,378
Exchange gains	1,340	0
Diverse other income	2,137	1,316
Income relating to the investment portfolio	24,340	21,619
Net unrealised gains on investments of life insurance policyholders who bear
the investment risk	23,279	0
Type of expense	2019	2018
Interest expenses	510	28
Change in fair value and losses on disposal of FVPL assets	626	637
Losses on disposal of other IFRS asset categories	243	305
Impairment losses on associates	55	151
Impairment losses on other investments	0	1,944
Exchange losses	0	154
Other	605	631
Expenses relating to the investment portfolio	2,040	3,851
Net unrealised losses on investments of life insurance policyholders who bear the investment risk	0	6,631

In 2019, investment income totalled EUR 24.3 million, up EUR 2.7 million year on year; excluding exchange differences, investment income increased by EUR 1.4 million. In 2019, the largest part of income was interest income of EUR 14.0 million (accounting for 57.6% of total finance income), down EUR 2.4 million year on year.

In 2019, expenses relating to the investment portfolio dropped by EUR 1.8 million year on year, and were down EUR 1.7 million if the effect of exchange differences is excluded. The lion's share of expenses relates to expenses arising from investments measured at fair value through profit or loss and interest expenses.

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

Net investment income by class of asset

EUR thousand	Interest income/expenses	Change in fair value and gains/losses on disposal of FVPL assets	Gains/losses on disposal of other IFRS asset categories	Income from dividends and shares – other investments	Foreign exchange gains/losses	Other income/expenses	Total	Net unrealised gains/losses on investments of life insurance that bears the investment	Income/ expenses relating to associates and goodwill impairment losses
2019								risk
Held to maturity	2,238	0	43	0	0	0	2,282	221	0
Debt instruments	2,238	0	43	0	0	0	2,282	221	0
At fair value through P/L	566	1,093	0	29	-12	-80	1,596	22,624	0
Debt instruments Equity instruments	566 0	901 192	0 0	0 29	-12 0	-46 34	1,408 255	85 22,462	0 0
Other investments	0	0	0	0	0	-68	-68	78	0
Available for sale	10,597	0	500	1,594	1,372	653	14,715	432	2,663
Debt instruments	10,597	0	666	0	1,372	664	13,299	424	0
Equity instruments	0	0	-109	1,024	0	0	915	8	2,663
Other investments	0	0	0	0	0	-11	-11	0	0
Investments in infrastructure funds	0	0	-57	532	0	0	475	0	0
Investments in property funds	0	0	0	37	0	0	37	0	0
Loans and receivables	405	0	0	0	-21	60	444	1	0
Debt instruments	580	0	0	0	-15	60	625	1	0
Other investments	-175	0	0	0	-6	0	-181	0	0
Financial investments of
reinsurers i.r.o. reinsurance	23	0	0	0	0	0	23	0	0
contracts with cedants
Subordinated liabilities	-495	0	0	0	0	0	-495	0	0
Total	13,334	1,093	544	1,623	1,340	632	18,566	23,279	2,663

Group net investment income totalled EUR 18.6 million in 2019. The largest items of the Group's net investment income are interest income of EUR 13.3 million, and income from dividends and participating interests of EUR 1.6 million. The large share of interest income is consistent with the composition of the Group's investment portfolio, which is dominated by debt instruments.

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

Fair value reserve

EUR thousand	2019	2018
As at 1 January	11,613	18,332
Change in fair value	11,354	-5,901
Transfer of the negative fair value reserve to the IS due to impairment	0	-1,944
Transfer from fair value reserve to the IS due to disposal	-479	-578
Deferred tax	-1,769	1,704
Total fair value reserve	20,719	11,613

The Group held no securitised assets.

A.4 Performance of other activities

Lease contracts

The Group earns a small part of its income from leases. It has operating lease arrangements for its real property. Leases are included in the investment property asset item, and rental income is recognised evenly over the lease term.

In 2019, the Group generated EUR 1.3 million in rental income from its investment property (2018: EUR 1.1 million). Maintenance costs associated with investment property are either included in the rent or charged to the lessee; in 2019, a total of EUR 88 thousand (2018: EUR 201 thousand).

Material intra-Group business

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

Income and expenses relating to Group companies

EUR thousand	2019	2018
Gross premiums written	76,278	62,319
Gross claims payments	-34,001	-32,563
Dividend income	36,948	33,558
Acquisition costs	-15,754	-13,611
Total	63,471	49,703

Investments in and amounts due from Group companies

EUR thousand	31 Dec 2019	31 Dec 2018
Debt securities and loans granted to Group companies	3,638	2,532
Receivables for premiums arising from accepted reinsurance	21,228	15,107
Total	24,866	17,639

Payables to Group companies

EUR thousand	31 Dec 2019	31 Dec 2018
Payables for shares in reinsurance claims due to Group companies	8,659	9,801
Other payables from coinsurance and reinsurance	4,483	3,766
Total (excl. provisions)	13,142	13,567

A.5 Any other information

The Group has no other material information relating to its performance.

B. System of governance

B.1 General information on the system of governance

B.1.1 Governance of the Sava Insurance Group

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

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

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

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

Supervision of individual Sava Insurance Group members

In order to ensure transparent and effective governance of Sava Insurance Group subsidiaries, the parent's supervision of its subsidiaries is divided into the following three parts:

governance supervision (through governing bodies),
business function supervision (through heads of business functions),
additional supervision (through key function holders).

Communication between Sava Insurance Group members

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

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

B.1.2 Governing bodies

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

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

General meeting of shareholders

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

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

personnel decisions (appointment and removal of members of the supervisory board, board of directors, supervisory board, granting of discharge to members of the management and supervisory bodies, vote of no confidence, appointment of the external auditor);
business decisions (adoption of the annual report unless approved by the management or supervisory bodies, appropriation of distributable profit, consenting business decisions if specifically required by the management);
fundamental decisions concerning the company (adoption and amendment of the articles of association, increase and reduction of share capital, winding up and transformation in terms of status).

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

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

Supervisory body (supervisory board, board of directors, supervisory committee and similar)

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

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

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

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

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

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

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

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.

The following table shows the composition of the Sava Re supervisory board in 2019.

Member	Title	Beginning of term of office	Duration of term of office
Mateja Lovšin Herič	chair	16/07/2017	16/07/2021
Keith William Morris	deputy chair	16/07/2017	16/07/2021
Davor Ivan Gjivoje	member	07/03/2017	07/03/2021
Andrej Kren	member	16/07/2017	16/07/2021
Andrej Gorazd Kunstek	member, employee representative	12/06/2019	12/06/2023
Mateja Živec	member, employee representative	12/06/2019	12/06/2023

Composition of the supervisory board of Sava Re in 2019

Supervisory board committees

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

Sava Re has established the following supervisory board committees:

the audit committee,

the risk committee,

the nominations and remuneration committee,

the fit and proper committee.

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

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

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

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

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

The management board provides leadership to 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 leadership and risk management. The management board defines the company's goals, values, mission, vision and business strategy. Business operations are optimised through an adequate composition of human resources and prudent use of financial resources. This is done in compliance with local law and the company's articles of association and other acts.

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

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

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

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

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

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

Sava Re management board in 2019

In 2019, the Sava Re management board was composed of the following members: Marko Jazbec, chairman, and members Srečko Čebron, Jošt Dolničar and Polona Pirš Zupančič.

At its meeting of 19 December 2019, the supervisory board of Sava Re took note of the notice of Srečko Čebron on his early termination of his term of office as Sava Re management board member and accepted his proposal for a consensual termination of employment contract as management board member as of 31 May 2020. At the same meeting, the supervisory board unanimously supported the proposal of Chairman of the Management Board Marko Jazbec and appointed Peter Skvarča, who comes from within the ranks of the Sava Insurance Group, as a new member of the management board. Peter Skvarča, who will be responsible for reinsurance operations after the retirement of Srečko Čebron, has been appointed for a five-year term, beginning on the next business day following the receipt of the Insurance Supervision Agency's decision to issue a licence to Peter Skvarča to act as a member of the management board.

	Marko Jazbec	Srečko Čebron	Jošt Dolničar	Polona Pirš Zupančič
Function	chair	member	member	member
Area of responsibility at management board level	- coordination of the work of the management board - finance - general, human resources, organisational and legal affairs - public relations - compliance - internal audit - management of mutual funds - health business - projects and innovation - modelling	- Company operations in reinsurance underwriting - facultative reinsurance underwriting - actuarial affairs	- management of strategic investments in direct insurance subsidiaries, including pension insurance - process and information technology - oversight and development of non life, life and pension insurance - sales and customer relations	- corporate finance and controlling - accounting - investor relations - risk management
First	12/05/2017	09/02/2009	31/12/2008	14/01/2018
appointed
End of term of office	12/05/2022	31/05/2020	01/06/2023	14/01/2023

Composition of the Sava Re management board in 2019

B.1.3 Selection of management system and the proportionality principle

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

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

The Group parent and Zavarovalnica Sava operate on a two-tier management system.

B.1.4 Risk management

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

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

The basis for an effective risk management system is an appropriate organisational structure at both the Group and individual Group company levels.

More details on risk management are provided in section B.3. "Risk management system, including the own risk and solvency assessment" of this report.

B.1.5 Key functions of the risk management system

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

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

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

coordinating the development of a uniform methodology for the relevant key function at all the Group's insurers;
ensuring the development of appropriate framework policies for the relevant key function, and professional guidelines for the adoption of area-specific operational rules for the parent company and its subsidiaries;
ensuring strict application Group-wide of uniform standards by the relevant key function;
coordinating and implementing joint tasks and projects;
providing guidance and overseeing the operations of the relevant key function at all Group companies (coordinating planning activities and reviewing reports of Group companies);
arranging professional development and the exchange of good practices among the relevant key functions in the Group.

With due regard for the proportionality principle, the risk management system of individual Group insurance companies has key functions integrated into the organisational structure and decisionmaking processes. The key functions discharge their duties independently from each other and from other organisational units of the company. The key functions directly report to the management board. Where any key function is carried out by an independent organisational unit, the key function holder must be ensured direct access to the management board.

The key functions are integrated into the organisational structure and decision-making processes to strengthen the three-lines-of-defence framework of the Sava Insurance Group's risk management system, as described in section B.3.1 "Risk management organisation". All four key functions cooperate closely with each other, regularly exchanging information they need for their functioning.

As a rule, key function holders must not both perform and oversee the same tasks. Processes must be organised so as to allow separate operation of individual lines of defence. Key function holders must not be members of the supervisory board or of any of its committees of any Sava Insurance Group company in order to minimise potential conflicts of interest. Key function holders must immediately report any potential conflict of interest to the management board.

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

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

Role of individual key functions

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

The chief duties of the risk management function are:

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

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

The chief duties of the actuarial function are:

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

Details on duties, terms of reference, responsibilities and powers of the actuarial function holder, procedures, obligations, time limits and reporting distribution lists are governed by the actuarial function policy of the Group and that of each individual company.

The chief duties of the compliance function are:

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

identifying and assessing compliance risks, and assisting in their management.

Details on 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 Group's compliance policy and that of each individual company.

The chief duties of the internal audit function are:

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, the conclusions of the audit reviews carried out and the proposal of recommendations for their improvement.

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

Reporting by key function holders

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

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

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

B.1.6 Committees in the governance system

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

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

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

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

the risk management committee and
the actuarial committee.

B.1.7 Information about the remuneration policy

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

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

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

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

The chief principles of the remuneration policy are:

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

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

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

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

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

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

Variable pay 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. Variable pay is intended to motivate and reward the most successful employees who significantly contribute to the achievement of sustainable performance, meet or exceed the agreed objectives, strengthen longterm relationships with clients and generate income. Individual performance-based pay depends on the attainment of predefined individual goals and other tasks in a manner consistent with expected behaviours and competencies. Business performance-based pay depends on a performance indicator or a combination of performance indicators of the company and/or the Group. As a rule, variable pay may range from 0% to 30% of total annual remuneration, except for direct sales jobs, where the major part of remuneration is linked to sales performance. However, in order for variable pay to be paid out, a company's financial position must not fall below a certain threshold. The system is flexible and includes the option of not paying out any variable pay.

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

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

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

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

As a rule, Group companies grant loans to neither their employees nor members of the management or supervisory boards; accordingly, there were no such transactions in 2019.

The Group companies run no share option schemes.

The Group companies run no additional pension schemes.

B.1.8 Related-party transactions

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

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

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

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

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

Material related-party transactions

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

owners and related enterprises;
the management and supervisory boards, audit committee and employees not subject to the tariff section of the collective bargaining agreement;
subsidiary companies.

In 2019, large transactions included:

total remuneration of the members of the management board and the supervisory board, including its committees, and employees not subject to the tariff part of the collective agreement of EUR 7.0 million (2018: EUR 5.7 million),
loans granted to subsidiaries of EUR 3.6 million as at 31 December 2019 (2018: EUR 2.5 million),
Sava Re dividend distribution of EUR 16.3 million (31 December 2018: EUR 14.7 million).

All third-party transactions are set out in detail in the Sava Insurance Group's 2019 annual report, section 17.10 "Related-party disclosures," and are available on the Sava Re website.

B.2 Fit and proper requirements

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

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

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

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

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

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

In 2019, the EU-based Group companies carried out full fit and proper assessment procedures for their new relevant personnel as well as an annual review based on annual statements for persons already assessed.

B.2.1 Fitness requirements for relevant personnel

Supervisory body and its committees

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

qualifications,
sufficient professional experience,
general knowledge and experience.

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

The management body

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

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

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

Key function holders of the risk management system

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

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

Other relevant personnel (other key management and persons overseeing outsourced activities)

The knowledge acquired through education and work experience is to be considered in assessing the fitness of the members of the Company's other relevant personnel. Based on this, the fitness assessment is made considering assigned responsibilities for certain areas. The following requirements are considered in the fitness assessment:

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

B.2.2 Suitability requirements for relevant personnel

Personal reliability and reputation

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

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

Independence of relevant personnel

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

Time input

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

B.2.3 Procedure for fit and proper assessment

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

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

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

The Sava Insurance Group management is aware that risk management is key to achieving operational and strategic objectives and to ensuring the long-term solvency of the Group. Therefore, the Group is continuously upgrading its risk management system at both the Group company and Group levels.

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

The Sava Insurance Group has in place a risk strategy that defines the Group's risk appetite and policies covering the entire framework of risk management, own risk and solvency assessments (hereinafter: "ORSA") and risk management for each individual risk category. Based on the Group's risk strategy and policies, individual Group companies set up their own risk strategies and policies, taking into account their specificities and the local legislation. The adequacy of the risk strategy and the policy is regularly reviewed.

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

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

B.3.1 Risk management organisation

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

The first line of defence constitutes all organisational units with operational responsibilities (development, sales, marketing and insurance management, provision of insurance 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, if set up in the company.
The third line of defence is provided by the internal audit function.

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

The supervisory board of each individual company approves the risk strategy, 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 within the parent company's supervisory board to provide expertise, in particular with regard to risk management in the company and the Sava Insurance Group.

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

designing a risk strategy and approving risk tolerance limits and operational limits,
adopting policies governing the risk management system,
responsibility for risk management processes,
monitoring of operations in terms of risk and ensuring that risks are considered in decisionmaking,
appointing of key function holders

The first line of defence of each individual Group company involves all company employees responsible for ensuring that operational tasks are performed in order to reduce or eliminate risks. Additionally, risk owners are responsible for individual risks listed in the risk register. Directors of business centres and directors of departments are tasked with ensuring that the operational performance of the processes for which they are responsible is conducted so as to minimise risk and that limits set in the risk strategy are complied with. 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 Group's and each individual company's second line of defence comprises three key functions: the actuarial function, risk management function and compliance function. In addition, the Group's large members have in place a risk management committee. The members of the risk management committee and key function holders are appointed by the management board; key function holder appointments also require the consent of the supervisory board. Each individual company ensures the independence of the key functions, which are organised as services of the risk management system and report directly to the management board. Their roles and responsibilities are defined in the policy of each key function or in the risk management policy that defines the risk management function. The responsibilities of the risk management function are summarised below; those of the other key functions constituting the risk management system are set out in sections B.4.2 "Compliance function", B.5 "Internal audit function" and B.6 "Actuarial function" of this report.

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

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

The third line of defence consists of the internal audit function. The internal audit function of Zavarovalnica Sava, Sava Pokojninska and, since 1 January 2020, at Sava Infond has been outsourced to Sava Re, whereas the other companies have their own internal audit functions. The internal audit function operates at the individual company and Group levels completely independently of business operations and other functions. In the risk management system, the internal audit function is responsible for the independent analysis and verification of the effectiveness of risk management processes and internal controls in place.

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

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
the ORSA process.

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

Risk strategy

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

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

The key areas that risk appetite is based on are:

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

In December 2019, the Sava Re supervisory board approved, along with the strategic plan of the Sava Insurance Group 2020–2022, the risk strategy for the same period, setting new levels of risk appetite, indicators and approved risk tolerance limits.

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

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

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

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

Risk management processes

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

The main risk management processes are:

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

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

Risk identification

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

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

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

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

Risk assessment

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

The Group thus measures risk by:

using the Solvency II standard formula,
calculating overall solvency needs as part of its own risk and solvency assessment (ORSA),
an analysis of 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 management board of each Group company is responsible for risk management and the use of various risk management techniques and actions. In its decisions, the management board takes into account the cost benefit aspect of actions as well as recommendations, if any, issued by the risk management committee or key functions.

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

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

Risk monitoring

Risk monitoring is conducted at several levels: at the level of individual organisational units and risk owners, the risk management department, the risk management committee (if set up), and the management and supervisory boards. In addition, each Group company's risk profile is monitored at the Group level in terms of impact on the Group's risk profile. A standard set of risk measures is defined for risk monitoring and is regularly monitored by Group companies. Both risks and risk management measures are subject to monitoring and control.

Risk reporting

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

Own Risk and Solvency Assessment (ORSA)

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

In 2019, the Sava Insurance Group implemented a comprehensive ORSA process, which takes into account risks at both the Group and individual company levels. Furthermore, the Sava Insurance Group was granted permission from the Insurance Supervision Agency to prepare a joint ORSA report covering Zavarovalnica Sava, Sava Re and the Group.

The ORSA report has been prepared based on the Group's business and strategic plans, taking into account the current risk profile as well as any changes planned therein. 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.

The ORSA results are taken into account by other processes, especially capital management and risk management processes. ORSA is an integral part of the decision-making process conducted to ensure that the key decisions and the business strategy are adopted with consideration of risks and associated capital requirements. Based on ORSE results, we also check the compliance of the business strategy with the risk strategy. This establishes the links between the business strategy, the risks taken in the short, medium and longer term, the capital requirements arising from those risks and capital management.

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

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

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

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

Based on the ORSA conducted, a joint report for the Sava Insurance Group is prepared and considered on several levels: it is first discussed by the risk management committee, followed by the management board, risk committee and supervisory board of the parent company. 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 results are taken into account by the management in its decision-making, capital management and insurance product development.

The ORSA is subject to continuous improvement with regard to both risk assessment and ORSA integration into the Group's ongoing processes, especially into business decision-making.

B.4 Internal control system

B.4.1 Internal control system

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

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

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

In 2019, the parent company carried out the regular annual mapping of all internal controls and quarterly or annual (depending on individual risks) assessments of internal controls for risk mitigation within the framework of the risk register (at the individual company and Group levels). In addition, a register of incidents is used for improving the internal control system.

B.4.2 Compliance function

The compliance function at the Group and individual company levels is one of the four key functions constituting the risk management system. As a rule, it is an independent organisational unit, functionally and organisationally separate from other business functions of the company and reports directly to the management board. The parent company's compliance function is organised within the "Office of the management board and compliance" department. 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, and subject to consent by the individual company's supervisory board.

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

The chief duties of the compliance function are to:

monitor and periodically assess the adequacy and effectiveness of regular procedures and measures to address any deficiencies in compliance with regulations and other commitments;
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, 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 the 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 parent company level and between the parent company and Group subsidiaries;
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);
draft an annual compliance monitoring plan covering the identification and assessment of the main compliance risks that the company faces, coordinate it with the compliance function holder at the Group level, and submit it to the management and supervisory bodies;
prepare periodic reports for submission to the company's management and supervisory bodies, as well as to the compliance function holder at the Group level.
draw up reports on findings related to individual compliance audits, submitting them to the company's management body,
monitors the implementation of the compliance policy, reviewing it periodically and proposing amendments if necessary.

B.5 Internal audit function

Internal auditing in the Group companies is carried out by independent organisational units, which report to the management board and are functionally and organisationally separate from other organisational units. Their organisational position ensures autonomy and independence of operation.

Pursuant to the Insurance Act (ZZavar-1) and based on outsourcing agreements Sava Re has been performing, since 1 February 2018 and for an indefinite duration, the key functions of the internal audit of Zavarovalnica Sava and Sava Pokojninska Družba. In 2019, Sava Re signed a contract – in accordance with the Investment Funds and Management Companies Act (ZISDU-3) – with Sava Infond, under which the latter transferred the performance of the internal audit key function to Sava Re as of 1 January 2020, for an indefinite period.

The internal audit is part of the internal control system of the Company and the Group that ensures independent, regular and comprehensive review and assessment of the adequacy of the Company's and the Group'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 risk management 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 the safeguarding of 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 information technology of the Company or the Group supports and furthers their strategies and goals;
assess fraud risk and the procedures for its management in the Company or Group (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 of Sava Re and the Group has been appointed by the Sava Re management board with the consent of the supervisory board upon the prior opinion of the audit committee, and also serves as the director of the internal audit department.

The 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.

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

The internal audit department of the parent company provides guidance for a unified methodology for all the Group's internal audit departments, coordinates their work and drives the development of a unified methodology of work, supervising the quality of work of internal audit departments across the Sava Insurance Group. Internal audit in the Group follows uniform procedures as laid down by the standards set out in the internal methodologic instructions on the operation of internal audit departments.

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

The parent company's internal audit department performs its function at the Group level in several ways:

keeping up with novelties and changes in the legislation and standards, and ensuring that changes are incorporated into internal acts governing internal audit;
providing expert assistance for amending the methodology and other policies in the field of internal auditing;
coordinating the preparation of internal audit department annual work plans and strategies of operation in the form of joint workshops;
performing internal audits in subsidiaries based on assessed key risks of the Group;
collaborating in complex audit engagements in subsidiaries if so agreed with the subsidiary;
providing joint training to the Group's internal auditors;
organising periodic meetings of the Group's internal auditors;
implementing quality assessments of subsidiary internal audit departments.

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

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

B.6 Actuarial function

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

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

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

The chief tasks of the actuarial function of each individual Group company 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 the calculation of technical provisions so that they reflect key risks and are sufficiently stable;
assess the sufficiency and quality of the data used in the calculation of technical provisions and provide recommendations on how to best 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;
oversee the use of approximations in the calculation of best estimate Solvency II 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 the introduction and implementation of the risk-management system, in particular with respect to the development, use and monitoring of adequacy of the models underlying the calculation of capital requirements and the conduct of the ORSA;
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 and providing recommendations for their elimination;

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

carry out the above tasks as appropriate at the Group level, summarising and coordinating the findings of individual companies' actuarial functions;
express an opinion on the adequacy of the reinsurance arrangements of the Group as a whole;
prepare and submit, at least annually, a written report for the management and supervisory boards of the parent company; the report documents the implementation of the above tasks

and their results, clearly identifying any weaknesses and providing recommendations for their elimination;

coordinate the activities of individual companies' actuarial functions in order to enable the overall functioning of the Group's actuarial function;
provide support to individual Group companies' actuarial functions;
harmonise the underwriting and reserving risk guidelines laid down in the Group's underwriting and reserving risk policy;
organise meetings of the Group's actuarial committee;
serve on the Group's risk management committee.

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

B.7 Outsourcing

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

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

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

In 2019, individual Group companies had some outsourcing arrangements with non-Group contractors. These included Zavarovalnica Sava with two outsourcing arrangements relating to claims settlement, and some other companies with IT outsourcing arrangements.

In 2019, the Group entered into three intra-Group outsourcing arrangements, all relating to IT.

Outsourcing of business or functions to intra-Group contractors

Implementation of the internal audit function

As of 1 February 2018, the performance of the internal audit key function of Zavarovalnica Sava and Sava Pokojninska Družba was transferred to Sava Re indefinitely. As of 1 January 2020, the performance of the internal audit function of Sava Infond was also transferred to Sava Re indefinitely.

Implementation of the information technology function

As of 1 February 2019, the information technology function of Sava Pokojninska Družba has been outsourced to Zavarovalnica Sava for an indefinite period.

Outsourcing of business or functions to extra-Group contractors

As of 1 March 2019, Zavarovalnica Sava has outsourced activities relating to the handling of claims to occur during the permitted direct conduct of insurance business in the United Kingdom to the company WNS ASSISTANCE LIMITED, Acre House, 11/15 William Road, London, NW1 3ER, UK.

B.8 Any other information

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

The Group's governance policy sets out the main guidelines for the governance of individual Group companies, as well as the control and supervision of Group companies, taking into account the Group's goals, mission, vision and values. The purpose of the policy is to define the foundation of the Group's system of governance, the basic management rules, rules of corporate governance and a transparent organisational structure with transparent and clear allocation and segregation of roles and responsibilities. Corporate governance is a combination of processes and frameworks used by the management and supervisory boards, including supervisory board committees, for communicating, directing, controlling and monitoring a company's operations in order to achieve the company's goals. The policy was last reviewed and amended in March 2019.

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

The report of the internal audit department on the audit review of corporate governance carried out in December 2017 and January 2018 also supports the position that the Group has in place an adequate system of governance. The internal audit department assessed the corporate governance system as good, concluding that the corporate governance system, to the extent reviewed, was largely compliant with the Slovenian Companies Act (ZGD-1), the Insurance Act (ZZavar-1), relevant implementing acts and other Solvency II requirements. The system provides for clear segregation of duties in all areas of governance of the Group and its individual companies. In 2019, two subsidiaries had their corporate governance systems audited. Thus, all large subsidiaries completed corporate governance audits within a three-year cycle.

C. Group risk profile

In the course of its operation, the Group is exposed to various risks. These are identified, measured, managed, monitored, and reported on in accordance with the processes described in section B.3 "Risk management system including the own risk and solvency assessment". The main risk categories that the Group is exposed to are:

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

The following subsections discuss individual risk categories one by one. The Group regularly measures underwriting, market, credit and operational risks using the Solvency II standard formula, whereas other risks, including operational risk, that are not readily quantifiable are measured using the methods described in the below sections.

The chart below shows the Group's risk profile in accordance with the standard formula.

The Group's risk profile in accordance with the standard formula is dominated by non-life underwriting risk, followed by market risk. In 2019, non-life underwriting risk chiefly increased on account of business growth and legal changes relating to the valuation of catastrophe risk, whereas market risk on account of portfolio growth and a somewhat changed asset allocation of the investment portfolio. Life underwriting risk decreased in 2019 reflecting policy maturities.

¹⁴ Percentages in the chart relate to the sum total of all risks (including operational risk), while percentages in the text below relate to the sum total of all risks, excluding operational risk (i.e. the sum total of the undiversified basic solvency capital requirement).

C.1 Underwriting risk

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

Underwriting risk is generally divided into:

non-life underwriting risk,
life underwriting risk, including annuities stemming from non-life insurance business, and
health underwriting risk (including accident reinsurance).

The Group markets all three types of (re)insurance and is consequently exposed to all three risk categories. Accepted life reinsurance business of non-Group cedants, including accident reinsurance business, is grouped with health 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 the structure of gross premiums written by line of business, separately for EU-based and non-EU based Group companies. The composition of gross premiums written did not change materially in 2019.

C.1.1 Non-life underwriting risk

Risk exposure

The chart below shows net non-life premiums earned by material line of business. The breakdown of the Group's net non-life premiums earned in 2019 did not change significantly.

Non-life underwriting risk is divided into:

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

Given the Group's portfolio composition, motor vehicle insurance and property (re)insurance contribute the most to premium risk.

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

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

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 in the case of extreme events or a large number of catastrophic events in a short period. The risk also includes an excessive geographical accumulation of risks. The Group's portfolio is geographically relatively well diversified, with risks being slightly more concentrated in Slovenia, which is further addressed by means of the retrocession programme. The capital requirement is relatively high for non-life catastrophe risk because of the aggregation of a large number of such requirements for various smaller natural perils and regions and various man-made catastrophic events.

Lapse risk is the risk of loss or adverse change in the value of insurance liabilities resulting from changes in the level or volatility of lapse rates. The Group is not materially exposed to this type of risk.

Other 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 underwriting risk.

Risk measurement

For the quantitative assessment of non-life underwriting risk, the Group uses the Solvency II standard formula. It does not apply Group-specific parameters. According to the standard formula, the Group was exposed to non-life underwriting risk in the amount of EUR 163.6 million as at 31 December 2019 (31 December 2018: EUR 141.4 million). The capital requirement for non-life underwriting risk represented 50.8% of the undiversified basic solvency capital requirement of the Group (31 December 2018: 48.2%). Premium and reserve risks, followed by catastrophe risk, represented the largest portion of the undiversified non-life underwriting risk. Lapse risk for non-life business was relatively low.

Undiversified non-life underwriting risk by risk sub-module

The Group measures non-life underwriting risk quantitatively, also as part of the ORSA. Premium and reserve risks are estimated using undertaking-specific parameters (hereinafter: "USP") the calculation for the Group uses weighted USP averages of individual Group companies.

In addition to this quantitative risk measurement, individual Group companies monitor their exposures to non-life underwriting risk quarterly, using various risk indicators. This information allows Group companies and the Group to promptly detect any changes, which in turn allows management to take action in a timely manner.

Risk concentration

The chart below shows a breakdown of net premiums earned relating to fire and other damage to property insurance and proportional reinsurance, and to proportional and non-proportional property reinsurance business by region. It shows that the Group sources more premiums from southern Europe, where the Group's direct insurance companies operate; Exposure to Slovenia is predominant. The diversification remains similar as in the previous year.

³¹ Dec 2018 31 Dec 2019

In terms of exposure in Slovenia, the Group has highest portfolio concentration in Styria (north-east Slovenia) and in Lower Carniola (south-east Slovenia).