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CITY INSURANCE SA Insurance – Reinsurance Company

ANNUAL REPORT

for the year ended on 31 December 2016

General information:

a) Insurer’s name and the legal form

CITY INSURANCE S.A. Insurance – Reinsurance Company was founded in 1998 in compliance with

Act no. 32/03.04.2000, by the Decision no. 9/31.10.2001 and is incorporated in the Trade Register under

number J40/3150/1998 and single registration number 10392742.

b) The serial number in the Insurers’ Register

The Company is registered in the Insurers’ Register with registration number RA – 008 of 07.04.2003.

c) Address of insurer’s registered office

The Company has its registered office in Bucharest, 5-7 Constantin Aricescu St, ground floor-semi-

basement, district 1, Bucharest.

d) Presentation of insurer’s shareholders structure and management accompanied by the directors’

brief report

The share capital of the Company on the date of 31.12.2016 was made of 93,284,350 shares, with a nimnal

value of 1 Ron. The shareholders structure on the date of 31 December 2016 was the following:

Shareholder No. of shares Percentage Shares value

% RON

S.C. VIVENDI INTERNATIONAL S.R.L. 79,506,465 85.23023 79,506,465

MUSAT NICOLAE 8,303,308 8.90107 8,303,308

COPPOLA FORTUNA 2,209,689 2.36877 2,209,689

PASCALE CRISTIAN 1,783,709 1.91212 1,783,709

Other shareholders (natural persons and

legal entities) 1,481,179 1.58781 1,481,179

TOTAL 93,284,350 100 93,284,350

The executive management of the company is ensured by Mr. Dan Odobescu as General Manager, Mr.

Epameinondas Papanikolaou as Deputy General Manager.

The Board of Directors of the company was made of 3 members, as follows:

- Dan Odobescu – President

- Pascale Cristian – member

- Ivanov Bogdan – member

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DIRECTORS’ BRIEF REPORT

on the economico-financial results achieved

in the period 01.01.2016 - 31.12.2016

The Management of CITY INSURANCE SA Insurance-Reinsurance Company is convinced that in the

year 2016 pursued and achieved the targets set by the Shareholders General Assembly, offered quality

products and services to all the partners and all the activities carried out were in line with the responsibilities

towards the shareholders, employees and public opinion.

In the period 01.01.2016 – 31.12.2016, the Insurance-Reinsurance Company CITY INSURANCE SA, in

accordance with the resolutions of the Shareholders General Assembly carried out its activity throughout

the territory of Romania, having agencies opened in all the county capital-cities. Given the fact that the

company is not allowed to underwrite new risks in the freedom to provide services regime on the Italian

territory, the weight of the insurance policies isused in freedom to provide services in Italy, in total policies

issued at the company level was 0.49%. In 2016, the Company underwrote also policies in freedom to

provide services in Greece, their weight in the total underwritten insurance premiums being 6.71 %.

The Company revenues from gross premiums are obtained in a proportion of 92.80% on the Romanian

territory, 0.49 % in Italy in freedom to provide services and 6.71% in Greece in freedom to provide services.

Hereunder we are synthetically presenting the financial results of the exercise ended on 31.12.2016:

Indicator 31 December

2015

31 December

2016

Total revenues from gross premiums 522,876,767 789,520,548

Other revenues 277,422,378 416,828,035

Acquisition costs 127,065,489 184,902,385

Administrative costs 49,470,357 68,480,085

Costs regarding damages paid 242,046,396 346,517,936

Net variation of technical reserves 225,161,198 261,292,280

Other costs 161,630,213 379,084,777

The net accounting result at 31.12.2016 = - 37,839,466 Ron

The gross technical reserves of the company are created in accordance with the legal rules in force:

31 December 2015 31 December 2016

Technical reserves for direct insurances 503,916,927 765,209,207

Technical reserve ceded in reinsurance 362,440,127 614,352,381

Financial indicators

In terms of liquidity, on the date of 31.12.2016, CITY INSURANCE SA Insurance-Reinsurance Company

records a liquidity ratio of 0.73. According to the rules in force, issued by the Financial Supervisory

Authority, the liquidity ratio the insurer must have at any time is at least 1.

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The Company complied with the legislative rules that regulate the asset categories accepted to cover the technical reserves, as well as the asset valuation conditions and criteria. The total technical reserves for the activity of general insurances amounts to Ron 765,209,207, and the total assets accepted to cover the technical reserves according to the legal rules amount to Ron 869,763,383.

According to the financial statements, to the balance sheet and to the profit and loss account, on 31.12.2016 the company records a loss amounting to Ron 37,839,466, which is going to be covered from the profit of the next years, according to the Shareholders General Assembly. We specify that the loss recorded is mainly due to the underwriting in a large proportion of RCA (MTPL) policies and to the ban on exercising the class 15 - sureties insurances, as of the date of 18.04.2016, in addition to a high cost of reinsurance for this insurance type, as well as to the recording of some adjustments for the company assets (real estates and receivables). On 18.04.2016, the Financial Supervisory Authority issued the Decision no. 901 dated 18.04.2016, by which the company financial recovery procedure was opened. Consequently to this decision, CITY INSURANCE S.A. conceived a Financial Recovery Plan that was approved by the F.S.A. Decision no. 1458/21.07.2016. On 29.09.2016 the subordinate loan contract between VIVENDI INTERNATIONAL and CITY INSURANCE was concluded, in the amont of Eur 30,000,000. The company invested the funds this way acquired in pass-through corporate bonds issued by Mandarin Fixed Income SARL, secured with a portfolio of rights over some government bonds issued by the governments of Netherlands and Germany, both having AAA rating. Upon the request of FSA, the Company entrusted to the statutory auditor the mission to check the compliance of the financing arrangement with the requirements of Solvency II regime. Following this checking procedure, the auditor found the following: the financing arrangement complies with Solvency II regime requirements, and the assets acquired have the quality of liquid assets, available to be converted in cash at the request of the Company. On 15.03.2017, CITY INSURANCE S.A. submitted to F.S.A. the REPORT ON THE FULFILMENT OF THE FINANCIAL RECOVERY PLAN as at the date of 31.12.2016 for the month of December 2016, requesting the cessation of the recovery procedure based on a plan, given that the measures ordered have been fulfiled, and the external auditor confirmed both the compliance of the financing arrangement with the requirements of Solvency II regime, as well as the performance of balance sheet adjustments. FSA did not express its specific consent with respect to the status of the Loan, circumstance which created a situation of uncertainty in the economic outlook of the Company. Given this situation, the Company requested the Creditor to restructure and supplement the subordinate liability through deposits in cash into the account indicated by the Company, this way changing the form of the Loan from investment in Bonds to liquid cash. Thus, on 31.03.2017 the Company concluded an addendum and a novation of the subordinate loan contract dated 29.09.2016, concluded with the majority shareholder Vivendi International. By this agreement, the parties agreed to amend and comprehensively restructure their agreement with respect to the constitution of a subordinate liability, by changing the form of the loan from investment in bonds to liquid cash and by supplementing the total amount of the loan up to the total amount of Eur 50,000,000, a loan granted in the form of liquid cash, the funds being transferred into the account of the Company. The Company has drawn the financing arrangement by activating the „write-down” clause, so that, from the total amount of the loan of Eur 50,000,000, the amount of Eur 30,000,000 has been acknowledged as own basic ordinary funds, entirely eligible to cover the capital requirements.

We express our conviction that the commitments made in the Shareholders General Assembly by the company management and the Board of Directors have been fulfiled according to the shareholders’wishes to hold a sound company from the economic point of view.

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e) An overview of the insurance categories and classes practised

CITY INSURANCE SA Insurance – Reinsurance Company is authorized to practise insurance and

reinsurance activities by the decision no. 9/31.10.2001 and by the subsequent approvals.

On the Romanian territory, the company practises the following types of products of the classes of general

insurances mentioned below:

Class 1 – Accidents and sickness insurances (work and professional diseases included);

Insurance for personal accidents

Insurance for accidents of persons in the vehicles and their luggage

Sportsmen’optional insurance for accidents

Insurance for accidents and civil liability for sporting hunters and anglers

Class 3 – Insurances for land means of transport (others than the railway ones);

Vehicles optional insurance - CASCO

Class 7 - Insurances of goods/cargo in transit;

Goods/cargo insurance during transport – CARGO

Class 8 - Insurances for fire and natural disasters;

Optional insurance for goods and properties

Optional insurance for houses and goods

Insurance against natural disasters PAD

„All risks” type insurance for the construction-assembly works and constructor’s liability (CAR/EAR)

Insurance for machinery, construction equipment and other special machinery and installations not

subject to registration (CPM)

Insurance for money and other valuables

Insurance of art exhibitions and the participation in exhibiting events

Class 9 - Other insurances of goods;

Agricultural insurances;

Class 10 – Car civil liability

RCA (MTPL) insurances (according to the ISC Order no. 14/2011 – the civil liability mandatory

insurance for prejudices caused by vehicle accidents)

Insurance for transporter’s liability as carrier for the goods transported (CMR)

Class 13 – Civil liability insurances;

Legal civil liability insurance

Insurances for civil professional liability for: insurance agents, insurance brokers, managers for

football players, lawyers, notaries, forwarding agents, accountants/auditors/tax consultants, assessors

and technical experts, judicial receivers, lawcourt experts, liquidators, managers, medical staff

(Malpraxis), security guard companies, car service shops, public nutrition companies, tourism and

hotels companies, services provision, policemen, architects.

Insurance for tenant’s liability towards the landlord

Insurance for landlord’s liability towards the tenant

Insurance for the legal contractual liability of road transport operators (ROTR)

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Tourists’ insurance in case of the insolvency or bankrupty of the tourism agency

Insurance for employer’s liability towards the employees

Class 14 - Insurances for credits/loans;

Commercial credits insurance

Class 15 – Surety insurances;

Guarantee-deposit for the participation in tender

Good performance guarantee

Guarantee for advance reimbursement

Maintenance guarantee

Class 18 – Assistance insurances for persons in need during travels or during absences from home or from

the place of permanent residence.

the complex insurance for trips abroad

Travel Insurance Classic Card

Travel Insurance Corporate Card

Medical assistance insurances for the Romanian workers in E.U.

In accordance with the approval issued by the Insurance Supervisory Commission no. 706/02.10.2007 and

with the approval no. 404/16.05.2008, the Company is authorized to carry out insurance activities on the

basis of the free circulation services principle on the Italian teritory.

Effective from the month of June 2014, the Company underwrites policies also on the Greek territory, in

freedom to provide services regime, on the basis of the FSA Decision no. 392/23.07.2013.

f) General information regarding the insurance products and the deductions provided for by the tax

legislation that apply to the insurance contracts

In 2016 the revenues from premiums (diminished with the insurance premiums cancelled) are represented

by gross underwritten premiums from direct insurance and gross underwritten premiums received in

reinsurance.

Revenues from insurances 31 December

2015

31 December

2016

Personal accidents insurance 2,025,542 1,672,424

CASCO insurances 11,549,904 9,089,994

Optional goods insurances 8,033,108 13,836,175

CAR insurance 3,672,621 1,909,773

Agricultural insurances 0 2,664,316

Luggage insurances 218,875 183,257

RCA (MTPL) insurances 323,571,998 650,397,744

CMR insurances 1,748,882 4,454,109

Civil general liability insurances 3,337,962 5,797,141

Surety insurances 27,419,443 9,353,205

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Touristic assistance insurances 3,233,357 4,316,791

Underwritings in freedom to provide services in

Italy

5,837,954 3,899,947

Underwritings in freedom to provide services in

Greece

72,712,987 52,968,472

Revenues-acceptances reinsurance 59,514,134 28,977,200

Total revenues from gross premiums 522,876,767 789,520,548

The revenues of the Company from gross premiums are obtained in proportion of 92.80 % on the

Romanian territory, 0.49 % in Italy in freedom to provide services and 6.71 % in Greece in freedom to

provide services.

In 2016, the amount of premiums underwritten in total at company level increased by 266,643,781 Lei

compared to year 2015. The increase was recorded on the following insurance lines: RCA(MTPL)

Romania, goods, agricultural, CMR and touristic assistance. Decreases were recorded compared to year

2015 in underwritings in freedom to provide services, both on the Italian territory, as well as on the Greek

territory. The weight of insurance premiums relative to RCA(MTPL) in Romania within the total premiums

underwritten amounts to 82.39 % compared to 61.88 % in 2015. The weight of acceptances in reinsurance

within total premiums underwritten amounts to 3.67 % compared to 13.85 % in 2015.

Tax deductions

According to the tax legislation, the deductibile expenses are the following:

- expenses with health insurance premiums within the limit of the amount of Eur 400 in lei equivalent in

a fiscal year;

- expenses with insurance premiums incurred for assets in the business patrimony;

- assets that serve as a bank guarantee for the credits used in the performance of the activity for which a

tax payer is authorized or used within some renting or leasing contracts;

- persons who obtain revenues from salaries, provided that the amount that represents the insurance

premium is taxed at its beneficiary, at the time of payment by the bearer.

Beside the above, are not taxable revenues in the area of income tax on the income of natural persons, the

amounts collected from insurances of any kind that represent damages, insured amounts, as well as any

other rights, except for the earnings obtained by the insurance companies as a result of the insurance

contract concluded between the parties, on the occasion of depreciation drawdowns.

Insurance and/or reinsurance operations and the provisions of services related to them performed by the

persons that mediate them are VAT exempt.

g) Overview of the network and of the distribution channels of insurance products practised

On 31.12.2016, CITY INSURANCE S.A. Insurance – Reinsurance Company had a number of 41 agencies

located in all the counties. All the information regarding the contact data of territorial agencies are

mentioned on the web address of our company www.cityinsurance.ro.

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Currently, the sales network consists of over 50 agencies spread throughout the entire territory of Romania

and in cooperation with most of the insurance brokers on the market for the mediation of the insurance

products of the Company.

As to the activity in freedom to provide services on the Italian and Greek territory, the insurance products

are distributed through brokers.

h) Overview of agencies in charge with compensations, of the assistance network and of the annual

statements regularized in accordance with the balance sheetl

As to the insurance class 10, the company grants assistance for finding and liquidating the claim files

through the territorial agencies opened in each county of the country.

For class 18 - Assistance insurances for persons in need during travels or absences from home or from the

place of permanent residence, the company has a contract concluded with April International, a company

in charge with taking over the cases 24/24 hours, that haa a network of medical services in all the countries

of the world.

i) General information

On 31.12.2016, CITY INSURANCE S.A. Insurance-Reinsurance Company recorded the following

financial data:

Srl.

No. Indicator name

Value

(RON)

1 Total assets 908,504,140

2 Total liabilities (technical reserves) 765,209,207

3 Total revenues (gross) 1,206,348,583

4 Total expenses 1,240,277,463

5 Total gross underwritten premium 789,520,548

6 Number of contracts in force 1,714,604

7 Gross indemnities paid 346,517,936

j) Investments and their yield

In the previous year, in order to cover the risks assumed and to ensure the liquid cash, CITY INSURANCE

S.A. Insurance – Reinsurance Company invested with caution so that to ensure the company safety. The

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structure of the asset portfolio is correlated with the liabilities assumed, both from the point of view of the

currencies in which they are expressed, as well as from the point of view of the due dates.

In the previous year the company made investments the structure of which represented mostly fixed yield

bank deposits and real estate investments in accordance with the resolutions of the Shareholders General

Assembly.

As a result of the conclusion of the Subordinate Loan Contract dated 29.09.2016, concluded with Vivendi

International SRL and of the Subscription Agreement dated 29.09.2016, on 31.12.2016 the Company held

300 corporate bonds, by the pass-through mechanism, issued by Mandarin Fixed Income SARL. The investment is structured as an issue of pass-through type secured bonds of the asset management company, in accordance with the international practice for holding sovereign rights in terms of securities. These corporate securities (pass-through) are secured by the rights over the government bonds issued by the German state (nominal value of the issue of Eur 20,000,000) and the Dutch government (nominal value of the issue of Eur 10,000,000).

k) The short form of the annual financial statements

Summarized Balance sheet Insurers on the date of: 31.12.2016

Indicator

Line No. Balance on:

01.01.2015

(lei)

31.12.2016

(lei)

B 1 2

ASSET

INTANGIBLE ASSETS 01 805,255 885,462

PLACEMENTS 02 177,819,740 256,452,915

SHARE OF THE TECHNICAL RESERVES

RELATIVE TO CONTRACTS CEDED IN

REINSURANCE

03 362,440,127 614,352,381

RECEIVABLES 04 260,985,102 263,674,895

TANGIBLE FIXED ASSETS 05 2,678,805 1,784,509

STOCKS 06 277,858 138,228

CASH AND ACCOUNTS AT BANKS 07 51,643,053 94,140,622

EXPENSES IN ADVANCE 08 51,882,577 71,228,239

TOTAL ASSET (line 01+02+03+04+05+06+07+08) 908,504,140 1,302,657,251

LIABILITY

SHARE CAPITAL 09 93,284,350 93,284,350

RESERVES FROM REASSESSMENT 10 17,485,942 7,933,012

REZERVES 11 5,486,832 141,719,832

1. Carried forward result that represents

the loss uncovered

Balance C 12 0 0

Balance D 13 30,428,678 35,503,186

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3. The carried forward result from the

switch to the implementation of the

accounting regulations according to the

European Directives

Balance C 14 0 2,762,728

Balance D 15 0 0

RESULT OF THE EXERCISE Balance C 16 0 0

Balance D 17 5,074,508 37,839,466

PROFIT DISTRIBUTION 18 0 0

SUBORDINATE LOAN 19 3,798,318 3,812,253

TECHNICAL RESERVES 20 503,916,927 765,209,207

PROVISIONS 21 121,862 754,208

DEBTS 22 258,947,205 334,659,204

REVENUES IN ADVACE 23 60,965,890 25,865,109

TOTAL LIABILITY 24 908,504,140 1,302,657,251

Summarized technical account of the General Insurance on the date of: 31.12.2016

(lei)

Indicators name Line

No.

Achievements relative to the reporting

period

previous Current

A B 1 2

1.Revenues from premiums, net from reinsurance 01 172,494,965 190,838,842

2. Share of the net revenue (the difference

between the revenues and expenses from

placements) from placements transferred from the

non-technical account (+)

02 0 0

3. Other technical revenues, net from reinsurance

(+)

03 23,779,214 35,100,802

4. Expenses with damages, net from reinsurance 04 103,797,849 76,014,976

5.Variation of other technical reserves, net from

reinsurance

05 5,215,734 -5,698,275

6. Net operating costs 06 88,976,262 91,747,434

7. Other technical costs, net from reinsurance 07 1,048,766 22,512,966

8. Variation of the equalization reserve (+/-) 08 540,036 0

9. Technical result of the general insurance

Profit 09 0 41,362,543

Loss 10 3,304,468 0

Summarized Non-technical Account in: 31.12.2016 (lei)

Indicator name

Line

No.

Achievements relative to the reporting

period

previous current

A B 1 2

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1. Technical result of the general insurance

Profit 01 0 41,362,543

Loss 02 3,304,468 0

2. Revenues from placements 03 23,411,423 3,995,756

3. Costs for placements 04 19,585,670 1,479,571

4. Share of the placement net revenue transferred

in the technical account of general insurances

05 0

5. Other non-technical revenues 06 11,397,667 23,073,354

6. Other non-technical costs, including the

provisions and value adjustments

07 16,993,460 100,880,962

7. Current result

Profit 08 0 0

Loss 09 5,074,508 33,928,880

8. Gross result – profit

Profit 10 0 0

Loss 11 5,074,508 33,928,880

9. Profit tax 12 0 3,910,586

10. Exercise net result

Profit 13 0 0

Loss 14 5,074,508 37,839,466

l) The law applicable to the insurance contract

The laws applicable to the insurance contract are: the Civil Code, Act no. 136/1995 and Act no. 32/2000,

as subsequently amended and supplemented and the rules issued by the Financial Supervisory Authority.

m) Strategies and perspectives for the development of insurer’s business

In 2016 the company continued to diversify the insurance portfolio and adapted its insurance products to

the requirements and needs of its current and potential customers.

The Company intends not only to evolve, but also to inject a constant pace to its evolution. Thus, the main

development directions for 2016 are maintained and consist in: the turnover increase by 15-20%, getting

into Top 5 Insurers on the Romanian market, expanding the involvement in the social area and insurance

portfolio diversification, by underwriting new types of insurance policies.

The Company Management disclosed the plan of the majority shareholder, Vivendi International, to

alienate a part of the shares held to a new investitor. In this respect, Vivendi International signed on

16.12.2016 a Memorandum of Understanding with Dr. Max Roessler, regarding the intention of taking

over a part of the shares representing around 70% of the Company capital. At the time of approval for

issuance of these financial statements, the Company is subjected to a due-diligence process, stage required

to complete the sale of shares transaction.

On 15.03.2017, the Company shareholders decided to change the form of administration of the Company,

by shifting from the one-tier system to the two-tier one and appointed the members of the two statutory

administration bodies, namely the members of the Supervisory Board and the members of the

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Directorate/Managing Board. The shareholders resolution was submitted to the Financial Supervisory

Authority to get approval.

On 31.03.2017, the Company concluded an Addendum and a Novation to the Subordinate Loan Agreement

dated 29.09.2016, concluded with the majority shareholder Vivendi International. By the Subordinate Loan

Agreement amended by the Addendum of the date of 10.03.2017, of a value of Eur 30,000,000 Euro, a

subordinate liability was constituted by the payment by the majority shareholder Vivendi International

SRL, as creditor, to the Company benefit, of the subscription price of 300 «pass-through» corporate bonds

issued by the Luxembourg company Mandarin Fixed Income SARL to Vivendi si secured by an investment

having sovereign securities as underlying asset in the amount of Eur 30,000,000.

By the Agreement dated 31.03.2017, the parties agreed to change and comprehensively restructurate their

agreement with respect to the constitution of the subordinate liability by transferring the 295 bonds issued

by Mandarin Fixed Income SARL to Vivendi International SRL and the constitution of a subordinate

liability in cash, supplementing the value of the loan up to the total amount of Eur 50,000,000.

The Company appealed the financing arrangement by activating the „write-down” clause, so that, out of the total amount of the loan of Eur 50,000,000, the amount of Eur 30,000,000 was acknowledged as own basic ordinary funds, entirely eligible to cover the capital requirements. The solvency indicators on 31.12.2016 stated by the Company are the following:

Indicator on 31 December 2016: Thousand Lei

SCR 118,853

MCR 35,236

Total own basic funds 130,805

Own basic funds eligible to cover MCR 130,805

Own basic funds eligible to cover SCR 130,805

MCR coverage ratio (%) 371.23%

SCR coverage ratio (%) 110.06%

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The brief form of the external financial auditor’s report

See the appendix

3B EXPERT AUDIT

INDENPENDENT AUDITOR’S REPORT

To: the shareholders of CITY INSURANCE SA

Opinion

We have audited the Financial Statements on the date of December 31, 2016 attached that belong to the

Insurance-Reinsurance Company CITY INSURANCE S.A. (referred to as “the Company”), with

registered office in Bucharest, 14 Constantin Aricescu St., 1st district, incorporated in the Trade Register

under no. J40/3150/1998, tax registration number: 10392742, registered in the Insurer’s Register under no.

RA-008/07.04.2013, which comprise the Balance sheet (code 01), the Technical Account of the general

insurances (code 02), the Non-technical Account (code 04), the Statement of changes in equity, the

Statement of Cash Flows related to the exercise ended on this date and the notes to the financial statements,

including a summary of the significant accounting policies.

In our opinion, the attached financial statements fairly present, under all the significant aspects, the

Company financial standing on the date of December 31, 2016 and its financial performance and its cash

flows related to the exercise ended on that date, in accordance with the Rule of the Financial Supervisory

Authority no. 41/2015 for the approval of the Accounting Regulations regarding the annual individual

financial statements and the annual consolidated financial statements of the entities that perform insurance

activity and/or, as subsequently amended and supplemented.

The basis for the opinion

We carried out our audit in accordance with the International Standards of Audit (ISAs). Our

responsibilities based on these standards are described in detail in the section Auditor’s responsibilities in

an audit of the financial statements in our report. We are independent of the Company, in accordance with

the ethical requirements relevant for the financial statements and have fulfilled the other ethical

responsibilities according to these requirements. We believe that the audit samples that we obtained are

sufficient and adequate to provide a basis for our opinion.

Significant uncertainty regarding the continuity principle

We draw the attention on the 19th Note “Business continuity” to the financial statements, that describes that

the financial statements have been drawn up in accordance with the business continuity principle, even if,

on December 31, 2016 the Company was in the financial recovery procedure. The measures taken by the

Company management, in the financial recovery procedure, described in the 19th Note, were not completed

on December 31, 2016. These issues indicate the existence of a significant uncertainty which could generate

significant doubt with respect to the Company’s ability to continue its business activity. Our opinion is not

changed with respect to this issue.

Audit key issues

The audit key issues are those issues which, based on our professional reasoning, had the greatest

importance in our performance of the financial statements audit in the current period. These issues have

been tackled in the context of the financial statements as a whole and in forming our opinion on these

financial statements. We do not offer a separate opinion with respect to these audit key issues.

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Significant issue How we tackled this issue during the audit

Calculation of the technical reserve We considered this key issue because of the significant weight of the technical reserves value in the Company Balance Sheet, as it is described in the Explanatory Note 2(r) and the Explanatory Note 11.1. The reserves cannot be accurately assessed, but only estimated, considering reasoning based on the most recent credible information made available to us. The Company creates and maintains the technical reserves in accordance with the FSA (Financial Supervisory Authority) Rule no. 38/2015 on the technical reserves created for the insurance activity, the way of their calculation for the purpose of drawing up the annual financial statements and the special register for assets recording that cover them (FSA Rule no. 38/2015). The premiums reserve, amounting to Lei 378,564,630, is calculated every month by aggregating the shares of the gross premiums underwritten pertaining to the unexpired periods of the insurance contracts. Their value at the end of the financial year represents the share of the gross premiums underwritten for which the risk is reported in the next financial exercise. The reported loss reserve, amounting to Lei 239,771,412 is the estimated fund, created so that to be sufficient to cover the payments for the reported claims and which are pending liquidation. The not reported loss reserve, amounting to Lei 145,220,474 represents the fund created to honour the Insurer’s future obligations arising as a result of the accidents occurred, but not reported up to the reference date of reserves calculation. The unexpired risk reserve, amounting to Lei 484,815, is calculated on the basis of the estimation of claims that will occur after the end of the financial exercise, in the event it is found that the estimated claims in the future exceed the premiums reserves created and, therefore, in the future periods the calculated premium reserve will not be sufficient to cover the claims that will occur in the next financial exercises.

Our audit procedures included among others: We evaluated the internal methodologies established by the Company in accordance with the principles for the determination of the technical reserves value in the FSA Rule no. 38/2015. We evaluated and tested (based on a sample) the way the internal controls on the technical reserves value estimation process are designed and their effectiveness. We involved our actuarial specialists to evaluate and test: - Evaluation of the compliance of the estimation

methodology used for the determination of the technical

reserves value

- Reconciliation of the databases that contain details

regarding the determination of the reported and not reported

loss reserve with the data in the accounting records of the

Company

- Evaluation based on our professional reasoning if the

estimates of the Company management have been

adequate

- - The critical evaluation of the assumptions used by the

Company management for the estimation of the value of the

technical reserves by comparing our knowledge regarding

the legal regulations in force, the Company specific

circumstances and by testing the accuracy of the process

by which the Company has prepared future forecasts.

- The actuarial methodology for the determination of the value

of the technical reserves has been adjusted during the audit

mission as a result of the audit procedures applied.

-

Assessment of investments in fixed tangible assets (lands and buildings) As it is described in the Note 3.B, investments in fixed tangible assets – lands and buildings are assessed on the date of the balance sheet at the market value of Lei

Our audit procedures included among others: We involved our assessment specialists to assist us in: - The evaluation of the professional skills and

qualifications of the assessment experts who prepared

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108,068,379. This market value was determined by an independent assessor. The assessment techniques, the entry data used by the independent assessor for the determination of the market value are described in the Note 3.B to the attached financial statements.

the reports for the assessment of the buildings and lands

held by the Company on December 31, 2016

- The evaluation of the compliance of the assessment

methods used with the relevant accounting standards

- The critical evaluation of the assumptions (entry data)

used by the assessors in the assessment reports. We

re-examined the policy regarding “Guarantee

Insurances for loss of value” in the event of the sale of

property located in 5-7 Constantin Aricescu St.

Adjustments of receivables impairment As it is described in the Note 4.4 “Other receivables” to the attached financial statements, for other receivables in the gross amount of Lei 83,618,114, adjustments for the impairment amount to Lei 10,932,849. We took this key issue into consideration because of the level of professional reasoning required to determined the impairment and because some receivables are unconventionally insured.

Our audit procedures included among others: We have audited the management estimates regarding the impairment of these receivables and evaluated their compliance to the accounting regulations applicable. We have audited the insurance policies (the bonds) used to reduce the exposure to the impairment risk.

Receivables from the subsidiary City Invest SRL As it is described in the Note 4.1 “Receivables from affiliated entities” to the attached financial statements, the gross value of receivables from City Invest SRL on the date of the balance sheet is Lei 90,504,207 and the adjustments for the impairment amount to Lei 9,401,555. We took this key issue into consideration because of the significant amount of the receivable and the high level of professional reasoning regarding the risks associated to the receivables appraisal on the date of the balance sheet.

Our audit procedures included among others: We have audited the management estimates regarding the impairment of these receivables and evaluated their compliance to the accounting regulations applicable. We have examined the insurance policies (the bonds) used to reduce the exposure to the impairment risk. We have appraised whether the disclosures made in the explanatory notes to the financial statements are exhaustive to ensure the full understanding of these transactions and receivables.

Other information – The management report

Other information includes the Management report. The management is responsible for the drafting and

submission fo the the Management report in accordance with the FSA Rule no. 41/2015 Chapter 7, items

480 – 481 and for that internal control the management deems necessary to enable the preparation and

submission of the Management report without significant distortions due to fraud and error.

The Management report is presented from the 1st page to page 14 and is not part of the financial statements.

Our opinion with respect to the financial statements does not refer to the Management report.

In connection with the audit of the financial statements for the financial exercise ended on December 31,

2016, our responsibility is to read the Management Report and, in this approach, to judge whether there are

any significant inconsistencies between the Management Report and the financial statements, whether the

Management Report includes, in all its significant issues, the information requested by the FSA Rule no.

41/2015 Chapter 7, items 480-481 and whether the information included in the Management Report is

16

significantly erroneous. We are requested to report with respect to these issues. Based on the activity carried

out, we report that:

a) In the management report we have not identified information that is not consistent, in all the

significant issues, with the information in the attached financial statements;

b) The Management report identified above includes, in all the significant issues, the information

requested by the FSA no. 41/2015 Chapter 7, items 480-481.

Based on the knowledge and understanding acquired during the audit of the financial statements for the

financial exercise ended on December 31, 2016, with respect to the Company and its environment, we have

not identified any significantly erroneous information in the Management Report.

Responsibilities of the management and of the persons in charge with the governance for the financial

statements

The Management is responsible for the preparation and accurate presentation of the financial statements in

accordance with the Rule no. 41/2015 for the approval of the Accounting Regulations regarding the annual

individual financial statements and the annual consolidated financial statements of the entities that perform

insurance activity and/or, as subsequently amended and supplemented and for that internal control the

management deems necessary to enable the preparation of financial statements without any significant

distortions caused either by fraud, or by error.

In preparing the financial statements, the management is responsible for the evaluation of the Company

ability to continue its business activity, setting forth, if required, the issues regarding the activity continuity

and using the accounting based on the business continuity, except for the case when the management either

intends to liquidate the Company or to stop the operations, or it has no other realistic option beside these

variants.

The persons in charge with the governance are responsible for the supervision of the financial reporting

process of the Company.

Auditor’s responsibilities in an audit of the financial statements

Our goals are to obtain a reasonable assurance regarding the extent to which the financial statements as a

whole are free from significant distortions, caused either by fraud, or by error, as well as to issue an

auditor’s report that includes our opinion. The reasonable assurance means a high level of assurance, but

is not a guarantee of the fact that an audit performed in accordance with the ISAs will always detect a

significant distortion, if such distortion exists. Distortions may be caused either by fraud, or by error and

are deemed significant if it is possible to forecast that they, jointly or severely, will influence the economic

decisions of the users, made on the basis of these financial statements.

As a part of an audit in accordance with ISA, we exercise the professional reasoning and maintain the

professional skepticism throughout the audit. As well:

We identify and assess the risks of significant distorsion of the financial statements, caused either

by fraud, or by error, we design and carry out audit procedures in response to the said risks and

obtain sufficient and adequate audit samples in order to provide a basis for our opinion. The risk of

non-detection of a significant distortion caused by fraud is higher than the one of non-detection of

a significant distorsion caused by error, because fraud may imply secret agreeements, forgery,

deliberate omissions, misrepresentation and avoiding the internal audit.

We understand the internal control relevant for the audit, with a view to designing audit procedures

adequate to circumstances, but without having the purpose to express an opinion on the

effectiveness of the internal control of the Bank.

17

We evaluate the degree of adequacy of the accounting policies used and the reasonable nature of

the accounting estimates and of the related presentations of information performed by the

management.

We express a conclusion with respect to the degree of adequacy of the use by the management of

accountancy based on the business continuity and we determine, based on the audit samples

obtained, whether there is a significant uncertainty with respect to the events or conditions that may

generate significant doubts regarding the Bank’s ability to continue its business activity. In the

event we conclude that there is a significant uncertainty, we must draw the attention in the auditor’s

report on the related presentations in the financial statements or, in the event such presentations are

inadequate, we must amend our opinion. Our conclusions are based on the audit samples obtained

up to the date of auditor’s report. Nevertheless, future events or conditions may cause the Company

to stop carrying out its business activity based on the business continuity principle.

We evaluate the presentation, the structure and the content of the financial statements as a whole,

including the information presentations, and the extent to which the financial statements reflect the

transactions and events at their foundation in such a manner to result in a fair, accurate presentation.

We obtain sufficient and adequate audit samples to issue our opinion on the financial statements.

We convey to the persons in charge with the governance, among other issues, the planned area and the time

scheduling of the audit, as well as the main findings of the audit, including any significant deficiencies of

the internal control, which we identify throughout the audit.

Moreover, we offer to the persons in charge with the governance a declaration by which we acknowledge

that we have complied with the ethical requirements with respect to the independence, and convey all the

information and other issues that may be reasonably deemed to affect our independence and, if required,

related safety measures.

Taking into consideration the issues communicated with the persons in charge with the governance, we

determine those issues that had the greatest importance in auditing the financial statements of the current

period and the key issues of the audit respectively. We will describe these issues in our audit report, except

for the case where the law or the regulation makes the public disclosure impossible with respect to the

given issue or when, in extremely rare events, we determine that an issue should not be conveyed in our

report because its negative consequences might exceed the benefits of public interest of this conveyance.

Mamas Koutsoyiannis illegible signature/stamp affixed

Registered with the Chamber of the Romanian Financial Auditors with number 1515/2003

For and on behalf of :

3B EXPERT AUDIT

Registered with the Chamber of the Romanian Financial Auditors with number 073/2001

Stamp affixed

Bucharest, Romania

April 28, 2017