jsc ic allianzgroup+ifrs+fs+2016+… · jsc ic allianz consolidated statement of financial position...

JSC IC Allianz

Consolidated Financial Statements For the Year Ended 31 December 2016

And Independent Auditors’ Report

JSC IC Allianz

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Contents

Independent Auditors’ Report ........................................................................................................ 3-5

Consolidated Financial Statements

Consolidated Statement of Financial Position .................................................................................. 6

Consolidated Statement of Profit or Loss and Other Comprehensive Income ................................ 7

Consolidated Statement of Cash Flows ........................................................................................... 8

Consolidated Statement of Changes in Equity ................................................................................. 9

Notes to the Consolidated Financial Statements 1. Background ............................................................................................................................ 10

2. Basis of Preparation ............................................................................................................... 11

3. Significant Accounting Policies .............................................................................................. 12

4. Cash and Cash Equivalents .................................................................................................. 22

5. Deposits with Banks ............................................................................................................... 22

6. Available-for-Sale Financial Instruments ............................................................................... 23

7. Receivables ........................................................................................................................... 24

8. Property, Equipment, Intangible Assets and Investment Property ........................................ 25

9. Provision for Unearned Premiums ......................................................................................... 26

10. Loss Provision ........................................................................................................................ 26

11. Claims Development Analysis ............................................................................................... 29

12. Payables ................................................................................................................................ 30

13. Other Liabilities ...................................................................................................................... 30

14. Share Capital and Additional Paid-in Capital ......................................................................... 30

15. Analysis of Premiums and Claims by Lines of Business and Analysis of Operating Profit ... 31

16. Interest Income ...................................................................................................................... 32

17. Acquisition Costs ................................................................................................................... 33

18. Operating Expenses .............................................................................................................. 34

19. Income Tax ............................................................................................................................ 35

20. Risk Management and Internal Controls ............................................................................... 37

21. Capital Management .............................................................................................................. 46

22. Contingencies and Commitments .......................................................................................... 47

23. Fair Value of Financial Instruments ....................................................................................... 48

24. Related Party Transactions.................................................................................................... 50

25. Principal Subsidiaries and Associates ................................................................................... 51

26. Disposals of subsidiaries and discontinued operaitons ......................................................... 52

JSC “KPMG” 10 Presnenskaya Naberezhnaya Moscow, Russia 123112 Telephone +7 (495) 937 4477 Fax +7 (495) 937 4400/99 Internet www.kpmg.ru

Audited entity: JSC IC Allianz.

Registration No. in the Unified State Register of Legal Entities 1027739095438.

Moscow, Russia

Independent auditor: JSC “KPMG”, a company incorporated under the Laws of the Russian Federation, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.

Registration No. in the Unified State Register of Legal Entities 1027700125628.

Member of the Self-regulated organization of auditors “Russian Union of auditors” (Association). The Principal Registration Number of the Entry in the Register of Auditors and Audit Organizations: No. 11603053203.

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Independent Auditors’ Report

To the Shareholders and Board of Directors of JSC IC Allianz

Opinion We have audited the consolidated financial statements of JSC IC Allianz (the “Company”) and its subsidiaries (the “Group”), which comprise the consolidated statement of financial position as at 31 December 2016, the consolidated statements of profit or loss and other comprehensive income, changes in equity and cash flows for the year then ended, and notes, comprising significant accounting policies and other explanatory information.

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at 31 December 2016, and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRS).

Basis for Opinion We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditors’ Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Group in accordance with the independence requirements that are relevant to our audit of the consolidated financial statements in the Russian Federation and with the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (IESBA Code), and we have fulfilled our other ethical responsibilities in accordance with the requirements in the Russian Federation and the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRS, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, management is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Group’s financial reporting process.

JSC IC Allianz Independent Auditors’ Report Page 2

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Auditors’ Responsibilities for the Audit of the Consolidated Financial Statements

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.

As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

— Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

— Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control.

— Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.

— Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors’ report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors’ report. However, future events or conditions may cause the Group to cease to continue as a going concern.

— Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

— Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.

JSC IC Allianz Independent Auditors’ Report Page 3

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We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

The engagement partner on the audit resulting in this independent auditors’ report is: Shevarenkov Evgeny Victorovich

JSC “KPMG”

Moscow, Russia

28 February 2017

JSC IC Allianz Consolidated Statement of Financial Position as at 31 December 2016 (in thousands of Russian Roubles)

The consolidated statement of financial position is to be read in conjunction with the notes to, and forming part of, the consolidated financial statements.

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Note 2016 2015 Assets Cash and cash equivalents 4 1 690 876 3 964 666 Deposits with banks 5 4 741 145 4 171 971 Promissory notes and originated loans 38 046 5 735 Available-for-sale financial instruments 6 3 649 741 5 066 385 Receivables 7 2 042 441 2 654 139 Prepayments 26 38 100 9 926 880 Reinsurers' share of provision for unearned premiums 9 1 130 770 1 108 555 Reinsurers' share of loss provision 10 2 097 560 5 025 138 Deferred acquisition costs 17 932 137 2 044 244 Goodwill 26 130 082 213 819 Deferred tax asset 19 15 797 120 593 Other assets 105 917 217 073 Investments in associated undertakings 68 411 1 374 Investment property 8 594 911 - Property, equipment and intangible assets 8 517 779 1 512 729

17 793 713 36 033 301 Assets of disposal group held for distribution 26 - 2 748 257

Total assets 17 793 713 38 781 558

Liabilities Provision for unearned premiums 9 3 302 257 5 099 664 Loss provision 10 6 075 139 11 503 205 Payables 12 3 414 875 4 308 719 Obligatory medical insurance liability 26 - 12 301 623 Other liabilities 13 495 945 885 583

13 288 216 34 098 794 Liabilities of disposal group held for distribution 26 - 2 683 098

Total liabilities 13 288 216 36 781 892

Equity Share capital 14 3 432 631 7 041 294 Share premium 933 361 933 361 Additional paid-in capital 9 866 487 9 866 487 Fair value reserve for available-for-sale financial instruments 151 400 (3 551) Cumulative currency translation differences (523) (59 705) Accumulated deficit (9 877 859) (15 778 220)

Total equity 4 505 497 1 999 666

Total liabilities and equity 17 793 713 38 781 558

Authorized for issue by the Management Board and signed on its behalf on 28 February 2017.

JSC IC Allianz Consolidated Statement of Profit or Loss and Other Comprehensive Income for the Year Ended 31 December 2016 (in thousands of Russian Roubles)

The consolidated statement of profit or loss and other comprehensive income is to be read in conjunction with the notes to, and forming part of, the consolidated financial statements.

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Note 2016 2015* INSURANCE Gross premiums written 15 5 550 280 6 578 964 Premiums ceded 15 (3 684 832) (3 726 069) Net premiums written 1 865 448 2 852 895 Change in provision for unearned premiums, net 9, 15 1 782 801 5 052 775 Net premiums earned 15 3 648 249 7 905 670 Gross claims paid 15 (2 884 241) (9 137 449) Claims ceded 15 997 644 2 817 318 Net claims paid (1 886 597) (6 320 131) Claims handling expenses 15 (638 597) (1 825 451) Change in loss provision, net 10, 15 2 077 221 3 015 403 Net claims incurred 15 (447 973) (5 130 179) Acquisition costs 17 (1 799 703) (3 392 926) Insurance operating expenses 18 (1 360 162) (1 441 457) Change in allowance for impairment of insurance receivables 7 (37 180) 627 531 Insurance activity result 3 231 (1 431 361) INVESTMENT Interest income 16 484 056 786 644 Net realized loss arising from investment securities available-for-sale (92 096) (165 252) Impairment of available-for-sale financial instruments 6 (15 186) (11 272) Other investment income 948 507 Investment operating expenses 18 (16 904) (27 623) Investment activity result 360 818 583 004 OTHER Other income 496 463 234 859 Net foreign exchange (loss) gain (350 941) 284 143 Other operating expenses 18 (189 929) (215 943) Other activity result (44 407) 303 059 Profit before other provisions charge and tax 319 642 (545 298) Gain on disposals of subsidiaries 26 1 761 609 - Other provisions recoveries (charges) 13 61 488 (430 486) Profit (loss) before tax from continued operations 2 142 739 (975 784) Income tax (expense) benefit 19 (195 229) 13 381

Profit (loss) for the year from continued operations 1 947 510 (962 403) Profit for the year from discontinued operations 26 475 152 259 533 Profit (loss) for the year 2 422 662 (702 870)

Other comprehensive income Items that are or may be reclassified subsequently to profit or loss: Fair value reserve for available-for-sale financial instruments: net change in fair value 109 245 1 071 864 net change in fair value transferred to profit or loss from continued operations 92 096 165 252 net change in fair value transferred to profit or loss from discontinued operations (7 652) 23 029 Income tax relating to components of other comprehensive income (38 738) (252 029) Transfer of disposed subsidiary’s cumulative currency translation reserve 26 75 571 - Currency translation differences (16 389) (31 495) Other comprehensive income, net of tax 214 133 976 621 Total comprehensive income for the year 2 636 795 273 751

* The comparative information has been restated to show the discontinued operations separately from continuedoperations (note 26) and presentation of subrogation income was changed (note 2).

JSC IC Allianz Consolidated Statement of Cash Flows for the Year Ended 31 December 2016 (in thousands of Russian Roubles)

The consolidated statement of cash flows is to be read in conjunction with the notes to, and forming part of, the consolidated financial statements.

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Note 2016 2015 Cash flows from operating activities Gross premiums received 5 366 539 14 923 785 Ceded premiums paid (3 917 475) (4 835 486) Gross claims paid (3 431 982) (14 099 070) Claims ceded received 1 963 332 3 804 313 Claims handling expenses paid (545 638) (1 973 235) Acquisition costs paid (1 422 038) (2 865 436) Commission income on reinsurance outwards received 674 928 585 448 Interest income received 594 920 1 116 973 Operating expenses paid (3 275 713) (3 589 908) Other commission income received 2 104 462 2 435 763 Other income received 255 662 223 065 Income tax paid (100 035) (167 363)

Cash flows used in operating activities before changes in operating assets and liabilities (1 733 038) (4 441 151)

(Increase) decrease in operating assets Deposits with banks (1 349 512) 1 775 323 Promissory notes and originated loans 4 390 9 402 Receivables (184 696) (934 900) Prepayments 2 570 975 (4 561 066) Other assets 8 892 (3 705) Increase (decrease) in operating liabilities Payables (30 955) (76 736) Obligatory medical insurance liability (4 288 004) 4 597 591 Other liabilities (105 725) 45 596

Net cash outflow from operating activities (5 107 673) (3 589 646)

Cash flows from investing activities Acquisition of available-for-sale financial instruments (1 422 907) (1 673 669) Disposal of available-for-sale financial instruments 2 174 194 4 298 224 Acquisition of property, equipment and intangible assets (207 234) (125 518) Proceeds from disposal of property and equipment 28 980 181 108 Acquisition of non-controlling interests - (12 137) Proceeds from disposal of subsidiaries, net of cash disposed 26 2 296 214 -

Net cash provided from investing activities 2 869 247 2 668 008

Cash flows from financing activities Increase in additional paid-in capital 14 - 1 231 322 Decrease in additional paid-in capital 14 - (413 182)

Net cash inflow from financing activities - 818 140

Effect of exchange rate changes on cash and cash equivalents (35 364) 84 738

Net decrease in cash and cash equivalents (2 273 790) (18 760)

Cash and cash equivalents as at the beginning of the year 4 3 964 666 4 156 356 Cash and cash equivalents included into disposal group 26 - (172 930)

Cash and cash equivalents as at the end of the year 4 1 690 876 3 964 666

JSC IC Allianz Consolidated Statement of Changes in Equity for the Year Ended 31 December 2016 (in thousands of Russian Roubles)

The consolidated statement of changes in equity is to be read in conjunction with the notes to, and forming part of, the consolidated financial statements.

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Share capital

Share premium

Additional paid-in capital

Fair value reserve for available-

for-sale financial instruments

Cumulative currency

translation differences

Accumulated deficit

Total equity

Balance as at 1 January 2015 7 041 294 933 361 9 048 347 (1 011 667) (28 210) (15 075 350) 907 775

Total comprehensive income for the yearLoss for the year - - - - - (702 870) (702 870)

Other comprehensive incomeItems that are or may be reclassified subsequently to profit or loss Net change in fair value of available-for-sale financial instruments, net of income tax of RUB 214 373 thousand - - - 857 491 - - 857 491 Net change in fair value of available-for-sale financial instruments transferred to profit or loss from continued operations, net of income tax of RUB 33 050 thousand - - - 132 202 - - 132 202 Net change in fair value of available-for-sale financial instruments transferred to profit or loss from discontinued operations, net of income tax of RUB 4 606 thousand - - - 18 423 - - 18 423 Currency translation differences - - - - (31 495) - (31 495)

Total comprehensive income for the year - - - 1 008 116 (31 495) (702 870) 273 751

Additional paid-in capital (note 14) - - 818 140 - - - 818 140

Balance as at 31 December 2015 7 041 294 933 361 9 866 487 (3 551) (59 705) (15 778 220) 1 999 666

Total comprehensive income for the yearProfit for the year - - - - - 2 422 662 2 422 662

Other comprehensive incomeItems that are or may be reclassified subsequently to profit or loss Net change in fair value of available-for-sale financial instruments, net of income tax of RUB 21 849 thousand - - - 87 396 - - 87 396 Net change in fair value of available-for-sale financial instruments transferred to profit or loss from continued operations, net of income tax of RUB 18 419 thousand - - - 73 677 - - 73 677 Net change in fair value of available-for-sale financial instruments transferred to profit or loss from discontinued operations, net of income tax of RUB 1 530 thousand - - - (6 122) - - (6 122) Currency translation differences - - - - (16 389) - (16 389) Transfer of disposed subsidiary’s foreign currency translation reserve (note 26) - - - - 75 571 - 75 571

Total comprehensive income for the year - - - 154 951 59 182 2 422 662 2 636 795

Transactions with owners of the Company

Transfer of voluntary medical insurance portfolio (note 26) - - - - - (162 355) (162 355)

Transfer of life insurance portfolio (note 24) - - - - - 31 391 31 391 Reduction of share capital (note 14) (3 608 663) - - - - 3 608 663 -

Balance at 31 December 2016 3 432 631 933 361 9 866 487 151 400 (523) (9 877 859) 4 505 497

JSC IC Allianz Notes to the Consolidated Financial Statements for the Year Ended 31 December 2016 (in thousands of Russian Roubles)

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1. Background

Organization and operations

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

The Company was registered in the Russian Federation in 1992. In 2011, the Company changed its name from OJSC IC “Rosno” to OJSC IC Allianz and on 18 April 2016 to JSC IC Allianz. The principal activity of the Group is the provision of insurance. The Group operates under insurance and reinsurance license №0290 dated 10 November 2014 issued by the Central Bank of the Russian Federation.

In accordance with the new strategy adopted in 2014, the Group stopped writing retail insurance business, such as auto-transport and other private property and liability insurance, and focused on corporate insurance business, such as property and casualty insurance and reinsurance.

The insurance license for obligatory motor third party liability insurance was restricted in 2015 and the Company was not allowed to write new obligatory motor third party liability business up until 15 January 2016, when the license was renewed. On 28 November 2016, the Company surrendered the license for obligatory motor third party liability insurance.

Effective 1 January 2016, the Company transferred voluntary medical insurance business to Allianz Life Insurance Company, Ltd., an entity under common shareholders’ control, following a strategic decision to place greater focus on the Group’s key competencies.

On 17 November 2016, the Group sold its 100% share in OJSC IC Rosno-MS to a third party and discontinued obligatory medical insurance (note 26).

Insurance business written by the Company includes property, casualty and reinsurance. Medexpress, a subsidiary of the Group, offers medical insurance, auto-transport and casualty insurance. As at 31 December 2016, the Company has 2 branches (2015: 5 branches) within the Russian Federation and its subsidiaries have 9 branches (2015: 42 branches).

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

As at 31 December 2016 and 2015, the Company is 100% ultimately owned and controlled by Allianz SE, a worldwide insurance company, which has publicly available financial statements. A list of principal consolidated subsidiaries and associates is disclosed in note 25.

Business environment

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

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

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


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2. Basis of Preparation

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

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

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

Going concern basis of accounting. The consolidated financial statements have been prepared on a going concern basis, which assumes that the Group will be able to meet its obligations. Management has a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. The Group has a plan for achieving self-sustainability through capital generation and optimization of product structure and business strategy, therefore, management believes that there is no significant uncertainty regarding the ability of the Group to continue as a going concern.

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

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

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

▪ loss provision estimate - note 10; ▪ impairment allowance for insurance and reinsurance receivables estimate - note 7; ▪ tax loss carry forward recoverability - note 19.

Restatement and reclassifications. Claims paid are presented net of subrogation income. Because of changes in the business of the Group, a significant portion of subrogations is not collected and impairment allowance is set against the related subrogation receivables. Starting 2016, impairment charge for subrogation receivables is presented within claims paid and decreased the amount of subrogation income. Previously, changes in impairment allowances for subrogations receivables were reported as “Change in allowance for impairment of insurance receivables”. The Management believes that new presentation provides for a more reliable and transparent economic substance of operations compared to the previous presentation, and is more consistent with the best practice. The reclassification has the following effect on the consolidated statement of profit or loss and other comprehensive income for the year ended 31 December 2015:

As previously

reported* Effect of

reclassification Reclassified

Gross claims paid (8 719 611) (417 838) (9 137 449)

Change in allowance for impairment of insurance receivables 209 693 417 838 627 531

* The comparative information has also been restated to show the discontinued operations separately from continued operations (note 26).


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3. Significant Accounting Policies

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

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

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

Non-controlling interests is that part of the net results and of the net assets of a subsidiary attributable to interests which are not owned, directly or indirectly, by the Group. Non-controlling interests are recorded within equity. In translating the financial statements of a foreign operation into the Group’s presentation currency for incorporation in the consolidated financial statements, the Group applies IAS 21 The Effects of Changes in Foreign Exchange Rates as follows:

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

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

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

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

Associates. Associates (note 25) are entities over which the Group has between 20% and 50% of the voting rights, or over which the Group has an ability to exercise significant influence, but which it does not control. Investments in associates are accounted for using the equity method of accounting. Under this method, the Group’s share of the post-acquisition profits or losses of associates is recognized in profit or loss, and its share of the post-acquisition other comprehensive income is recorded in other comprehensive income. The cumulative post-acquisition movements are adjusted against the cost of the investment. Unrealized gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates; unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. When the Group’s share of losses in an associate equals or exceeds its interest in the associate, the Group does not recognize further losses unless the Group has incurred obligations or made payments on behalf of the associate. Where necessary, accounting policies used by associates have been changed to ensure consistency with the policies adopted by the Group.


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

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

At each reporting date, the Group estimates the recoverable amount of goodwill. A write down is made if the carrying amount exceeds the recoverable amount. On acquisition, fair values of the acquiree’s identifiable assets, liabilities and contingent liabilities are determined provisionally. Adjustments to those provisional values are recognized within twelve months of the acquisition date.

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

Discontinued operations. A discontinued operation is a component of the Group’s business, the operations and cash flows of which can be clearly distinguished from the rest of the Group and which:

▪ represents a separate major line of business or geographical area of operations; ▪ is part of a single co-ordinated plan to dispose of a separate major line of business or geographical

area of operations; or ▪ is a subsidiary acquired exclusively with a view to resale.

Classification as a discontinued operation occurs upon disposal or when the operation meets the criteria to be classified as held for sale, if earlier. When an operation is classified as a discontinued operation, the comparative statement of comprehensive income is re-presented as if the operation had been discontinued from the start of the comparative period. Non-current assets (or disposal groups) are classified as assets held for sale when their carrying amount is to be recovered principally through a sale transaction and a sale is considered highly probable. They are stated at the lower of carrying amount and fair value less costs to sell.

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

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

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

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

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


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

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

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

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

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

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

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

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

When available, the Group measures the fair value of an instrument using quoted prices in an active market for that instrument. A market is regarded as active if transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. When there is no quoted price in an active market, the Group uses valuation techniques that maximize the use of relevant observable inputs and minimize the use of unobservable inputs. The chosen valuation technique incorporates all the factors that market participants would take into account in these circumstances.

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


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

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

If an available-for-sale equity security is impaired based upon the qualitative or quantitative impairment criteria, any further declines in the fair value at subsequent reporting dates are recognized as impairment. Therefore, at each reporting period, for an equity security that is determined to be impaired based upon the impairment criteria, an impairment is recognized for the difference between the fair value and the original cost basis, less any previously recognized impairment. If, in a subsequent period, the fair value of an impaired available-for-sale debt security increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in profit or loss, the impairment loss is reversed, with the amount of the reversal recognized in profit or loss. However, any subsequent recovery in the fair value of an impaired available-for-sale equity security is recognized in other comprehensive income. Financial assets carried at amortized cost. Financial assets carried at amortized cost consist principally of promissory notes and originated loans (“loans”).The Group reviews its loans, to assess impairment on a regular basis. A loan is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the loan and that event (or events) has had an impact on the estimated future cash flows of the loan that can be reliably estimated.

The Group first assesses whether objective evidence of impairment exists individually for loans that are individually significant, and individually or collectively for loans that are not individually significant. If the Group determines that no objective evidence of impairment exists for an individually assessed loan, it includes the loan in a group of loans with similar credit risk characteristics and collectively assesses them for impairment. Loans that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment of impairment. If there is objective evidence that an impairment loss on a loan has been incurred, the amount of the loss is measured as the difference between the carrying amount of the loan and the present value of estimated future cash flows including amounts recoverable from guarantees and collateral discounted at the loan’s original effective interest rate. Contractual cash flows and historical loss experience adjusted on the basis of relevant observable data that reflect current economic conditions provide the basis for estimating expected cash flows.

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

All impairment losses in respect of loans are recognized in profit or loss and are only reversed if a subsequent increase in recoverable amount can be related objectively to an event occurring after the impairment loss was recognized. Financial assets carried at cost. Financial assets carried at cost include receivables and prepayments. If there is objective evidence of impairment, the impairment loss is calculated as the difference between the carrying amount and the present value of the estimated future cash flows discounted at the current market rate of return for a similar financial asset. All impairment losses in respect of these assets are recognized in profit or loss.


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

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

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

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

Construction in progress is carried at cost. Upon completion, assets are transferred to property, plant and equipment at their carrying amount. Construction in progress is not depreciated until the asset is available for use. Result on disposal of property and equipment is determined by reference to carrying amount and is recognized as profit or loss for the reporting period. Repairs and maintenance are recognized as expense in the period in which they are incurred.

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

2016 2015 Premises 2.0-2.5% per annum 2.5% per annum Office equipment 20% per annum 20% per annum Computer equipment 33% per annum 33% per annum

For separate classes of computer equipment depreciation is calculated using declining balance method at 60% per annum. Intangible assets. Intangible assets represent software licenses obtained by the Group and computer software development costs. Costs associated with maintaining computer software are recorded as an expense as incurred. Costs that are directly associated with identifiable and unique software products controlled by the Group and that will probably generate economic benefits exceeding costs beyond one year, are recognized as intangible assets.

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

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


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Investment property. Investment property is property held by the Group to earn rental income and for capital appreciation rather than for use in the supply of services or for administrative purposes in the ordinary course of business. Investment property is measured at cost (which includes transaction costs). Transfers between investment property and owner-occupied property do not change the carrying amount of the property transferred and they do not change the cost of that property for measurement. Earned rental income is recorded in profit or loss within other income. Direct operating expenses (including repairs and maintenance) arising from investment property are recorded as incurred within other operating expenses in profit or loss.

Borrowings. Borrowings are financial liabilities of the Group, where the contractual arrangement results in an obligation either to deliver cash or another financial asset to the creditor, or to otherwise settle an obligation. After initial recognition, borrowings are subsequently measured at amortized cost using the effective interest method. Gains and losses are recognized in profit or loss when borrowings are derecognized as well as through the amortization process. Share capital. Contributions to share capital, made before 1 January 2003 are recognized at their cost restated for inflation. Contributions to share capital made after 1 January 2003 are recognized at cost.

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

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

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

Non-life insurance operations

Premiums written. Upon inception of a contract, premiums are recognized when written and are earned primarily on a pro-rata basis over the term of the related policy coverage. Premiums are disclosed gross of commission payable to intermediaries and taxes and levies based on premiums. Premiums written include adjustments to estimates of premiums written in previous years. The earned portion of premiums written is recognized as revenue. Premiums are earned from the date of attachment of risk, over the indemnity period, based on the pattern of risks underwritten. Outward reinsurance premiums are recognized as an expense in accordance with the pattern of reinsurance service provided. The portion of outward reinsurance premiums not recognized as an expense is treated as a prepayment. Provision for unearned premiums. Provision for unearned premiums represents the proportion of premiums written in the period that relates to unexpired terms of policies in force at the reporting date, calculated on a time apportionment basis. Claims paid. Claims paid including claims handling expenses are charged to profit or loss as incurred.


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Loss provision. Loss provision represents outstanding claims provision (OCP), provision for losses incurred but not yet reported (IBNR) and estimates of claims handling expenses (loss adjustment expenses reserve). OCP is provided in respect of claims reported, but not settled as at the reporting date. The estimation is made on the basis of information received by the Group during investigation of insurance cases after the reporting date less regresses. IBNR is actuarially determined by the Group by line of business, and includes assumptions based on prior years’ claims. The methods of determining such estimates and establishing the resulting provisions are continually reviewed and updated. Resulting adjustments are recognized as profit or loss as they arise. The loss provision is estimated on an undiscounted basis due to the relatively quick pattern of claims notification and payment. Liability adequacy test. At each reporting date, liability adequacy tests are performed to ensure the adequacy of the insurance contract provisions net of deferred acquisition costs (DAC). In performing this test, current best estimates of future contractual cash flows and claims handling and administration expenses are used. When unearned premiums are insufficient to meet claims and expenses, which may be incurred after the reporting date the additional liability – unexpired risk reserve (URR) is recognized. To estimate the URR the Group uses historical experience and forward looking assumptions of ultimate loss ratios (including claims handling expenses) and the level of in-force portfolio maintenance expenses. URR is provided for unexpired risks arising from general insurance contracts where the expected value of claims and expenses attributable to the unexpired periods of contracts in force at the reporting date exceeds the provision for unearned premiums in relation to such contracts after the deduction of any deferred acquisition costs. URR is calculated by reference to individual line of business that are managed together.

The expected claims are calculated with regard to events that have occurred prior to the reporting date. Any changes in URR are immediately charged to profit or loss initially by writing off DAC and by subsequent establishing a provision for losses arising from liability adequacy tests. Reinsurance. The Group assumes and cedes reinsurance in the normal course of business. Ceded reinsurance contracts do not relieve the Group from its obligations to policyholders. Reinsurance assets include balances due from reinsurance companies for paid claims, including claims handling expenses, and premiums ceded to the Group. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. Reinsurance payables are obligations of the Group for the transfer of reinsurance premiums to reinsurers and of the Group’s share in claims in respect of insurance cases reinsured by the Group. Reinsurance receivables and payables are offset where the legal right for such offset exists. Deferred acquisition costs. Acquisition costs, representing commissions, salaries and certain other underwriting expenses, which vary with and are incurred in connection with the acquisition or renewal of insurance policies, are deferred and amortized over the period in which the related written premiums are earned. Deferred acquisition costs are calculated separately for each line of business and are reviewed by line of business at the time of the policy issue and at the end of each reporting period to ensure they are recoverable based on future estimates. Payables. All payables are accounted for on the accruals basis.

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

The Group receives advances from FOMI and makes payments to medical centers for services provided by these centers under the FOMI program. Funds received from FOMI by the Group, which are not paid out for medical services are retained within the Group, and treated as a liability for future medical expenses. The Group does not assume any insurance risk under this program. The Group receives a commission for performing this service. These commissions are recognized in profit or loss within other activity result.


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

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

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

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

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

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

The Group also provides customers with non-insurance related services, on which the Group does not assume insurance risk and earns commissions. These commissions are included in profit or loss within other activity result. Asset management fees related to investment funds are recorded in profit or loss proportionally over the period the service is provided. Foreign currency translation. Transactions in foreign currencies are translated to the functional currency of the relevant Group entity at the exchange rate at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated to the functional currency at the exchange rate at that date. The foreign currency gain or loss on monetary assets or liabilities is the difference between amortized cost in the functional currency at the beginning of the period, adjusted for interest accrued using the effective interest rate and payments during the period, and the amortized cost in foreign currency translated at the exchange rate at the end of the period. Non-monetary assets and liabilities denominated in foreign currencies, which are stated at historical cost, are translated to the functional currency at the exchange rate at the date of the transaction


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Foreign exchange differences arising on retranslation are recognized in profit or loss, except for differences arising on the retranslation of available-for-sale equity instruments unless the difference is due to impairment in which case foreign currency differences that have been recognized in other comprehensive income are reclassified to profit or loss. Operating leases. Where the Group is the lessee, the total lease payments, including those on expected termination, are charged by the Group to the profit or loss on a straight-line basis over the period of the lease.

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

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

Restructuring. A provision for restructuring is recognized when the Group has approved a detailed and formal restructuring plan, and the restructuring either has commenced or has been announced publicly. Future operating costs are not provided for. New standards and interpretations that will come into effect in the next reporting periods. The following new standards, amendments to standards and interpretations are not yet effective as at 31 December 2016, and are not applied in preparing these consolidated financial statements. The Group plans to adopt these pronouncements when they become effective. IFRS 9 Financial instruments IFRS 9 Financial instruments, published in July 2014, replaces the existing guidance in IAS 39 Financial Instruments: Recognition and Measurement, and includes requirements for classification and measurement of financial instruments, impairment of financial assets and hedge accounting. Classification and measurement

IFRS 9 contains three principal classification categories for financial assets: measured at amortised cost, fair value through other comprehensive income (FVOCI) and fair value through profit or loss (FVTPL). The classification of financial assets under IFRS 9 is generally based on the business model in which a financial asset is managed and its contractual cash flow characteristics. The standard eliminates the existing IAS 39 categories of held-to-maturity, loans and receivables and available-for-sale. Under IFRS 9, derivatives embedded in contracts where the host is a financial asset in the scope of the standard are not separated. Instead, the whole hybrid instrument is assessed for classification. Equity investments are measured at fair value.

IFRS 9 largely retains the existing requirements in IAS 39 for the classification of financial liabilities. Impairment

IFRS 9 replaces the ‘incurred loss’ model in IAS 39 with a forward-looking ‘expected credit loss’ (ECL) model. This will require considerable judgment as to how changes in economic factors affect ECLs, which will be determined on a probability-weighted basis.

The new impairment model will apply to financial assets measured at amortised cost or FVOCI, except for investments in equity instruments, and to contract assets.


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Under IFRS 9, loss allowances will be measured on either of the following bases:

▪ 12-month ECLs. These are ECLs that result from possible default events within the 12 months after the reporting date; and

▪ lifetime ECLs. These are ECLs that result from all possible default events over the expected life of a financial instrument.

Lifetime ECL measurement applies if the credit risk of a financial asset at the reporting date has increased significantly since initial recognition and 12-month ECL measurement applies if it has not. An entity may determine that a financial asset’s credit risk has not increased significantly if the asset has low credit risk at the reporting date. However, lifetime ECL measurement always applies for trade receivables and contract assets without a significant financing component; an entity may choose to apply this policy also for trade receivables and contract assets with a significant financing component.

The Group has made a preliminary assessment for assets in the scope of the IFRS 9 impairment model and does not expect significant increase in impairment allowances compared with impairment losses recognised under IAS 39. However, the Group has not yet finalized the impairment methodologies that it will apply under IFRS 9.

Hedge accounting

The general hedge accounting requirements aim to simplify hedge accounting, aligning the hedge accounting more closely with risk management strategies. The standard does not explicitly address macro hedge accounting, which is being considered in a separate project. IFRS 9 includes an accounting policy choice to continue to apply the hedge accounting requirements of IAS 39. Transition

The classification and measurement and impairment requirements are generally applied retrospectively (with some exemptions) by adjusting the opening retained earnings and reserves at the date of initial application, with no requirement to restate comparative periods.

IFRS 9 is effective for annual reporting periods beginning on or after 1 January 2018. Early adoption of the standard is permitted. There is an exception for implementation of IFRS 9 for companies predominantly connected with insurance. These companies will be permitted to continue to apply IAS 39 Financial Instruments: Recognition and Measurement until implementation of amendments to IFRS 4 Insurance contracts which will be effective for annual reporting periods beginning on or after 1 January 2021.

The Group has started formal assessment of potential impact on its consolidated financial statements resulting from the application of IFRS 9. The Group does not intend to adopt the standard earlier. Other amendments The following new or amended standards are not expected to have a significant impact of the Group’s consolidated financial statements.

▪ Disclosure Initiative (Amendments to IAS 7 Statement of Cash Flows) ▪ Recognition of Deferred Tax Assets for Unrealised Losses (Amendments to IAS 12 Income Taxes)


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4. Cash and Cash Equivalents

2016 2015

Cash on hand 1 125 1 840 Accounts with banks - Foreign currencies denominated accounts 1 428 615 997 562 - Russian Rouble denominated accounts other then held under FOMI program 261 136 480 806 - Russian Rouble denominated accounts held under FOMI program - 2 484 458

Total cash and cash equivalents 1 690 876 3 964 666

As at 31 December 2016, the concentration of cash and cash equivalents in one foreign bank constitutes 76% of total correspondent accounts with banks. As at 31 December 2015, the concentration of cash and cash equivalents in 3 Russian banks constitutes 96% of total cash and cash equivalents respectively.

As at 31 December 2016 and 2015, amounts on correspondent accounts with banks are neither impaired, nor overdue.

5. Deposits with Banks

2016 2015

Russian Rouble denominated - Less than 30 days maturity 979 281 1 093 049 - More than 30 days maturity 3 760 501 1 200 882 Foreign currencies denominated - More than 30 days maturity 1 363 1 878 040

Total deposits with banks 4 741 145 4 171 971

As at 31 December 2016, the largest five deposits with banks are balances with Russian banks totaling RUB 2 641 421 thousand or 56% of total deposits with banks. As at 31 December 2015, the largest five deposits with banks are balances with Russian banks totaling RUB 2 543 984 thousand or 61% of total deposits with banks.

As at 31 December 2016 and 2015, there are no overdue or impaired balances related to deposits with banks.

As at 31 December 2016, the average effective interest rate on deposits in Russian Rubles is 8.5% p.a. (2015: 8.5% p.a.), on deposits in USD is 1.3% (2015: no such deposits).

All deposits with banks have fixed interest rates.


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6. Available-for-Sale Financial Instruments

2016 2015

Russian Rouble denominated - Russian Government bonds 1 941 460 2 281 207 - Corporate bonds 637 831 1 087 497 - Municipal bonds 116 033 451 012 - Mutual investment funds 148 352 159 569 - Other 1 553 1 580

US dollar denominated - Russian Corporate and Government Eurobonds 440 050 692 669

Euro denominated - Russian Corporate and Government Eurobonds 364 462 392 851

Total available-for-sale financial instruments 3 649 741 5 066 385

In 2016 the Group recognized an impairment loss of RUB 15 186 thousand in respect of mutual investment funds (2015: RUB 25 057 thousand). As at 31 December 2016, Russian Rouble denominated corporate bonds have maturity dates ranging from 2017 to 2027 (2015: from 2016 to 2027), coupon rates of 7-12% p.a. (2015: 9-11% p.a.) and a market average effective yield to maturity of 8.6% p.a. (2015: 10% p.a.) depending on the type of bond issue.

As at 31 December 2016, Russian Rouble denominated government bonds have maturity dates ranging from 2017 to 2036 (2015: from 2016 to 2036), coupon rates of 6-8% p.a. (2015: 6-8% p.a.) and a market average effective yield to maturity of 8.2% p.a. (2015: 9% p.a.) depending on the type of bond issue. As at 31 December 2016, Russian Rouble denominated municipal bonds have maturity dates ranging from 2017 to 2021 (2015: from 2016 to 2021), coupon rates of 6-12% p.a. (2015: 8-10% p.a) and a market average effective yield to maturity of 9.2% p.a. (2015: 8% p.a.) depending on the type of bond issue.

As at 31 December 2016, US dollar denominated eurobonds are bonds issued by the Russian government and Russian companies that have maturity dates ranging from 2019 to 2034 (2015: from 2017 to 2034), coupon rates of 7-9% p.a. (2015: 7-9% p.a.) and a market average effective yield to maturity of 7% p.a. (2015: 7% p.a.) depending on the type of bond issue.

As at 31 December 2016, Euro denominated eurobonds are bonds issued by the Russian government and Russian companies that have maturity dates ranging from с 2018 to 2023 (2015: from 2018 to 2023), coupon rates of 4-6% p.a. (2015: 4-6% p.a.) and a market average effective yield to maturity of 7% p.a. (2015: 5% p.a.) depending on the type of bond issue.

As at 31 December 2016 and 2015, there are no overdue available-for-sale financial instruments.

All interest-bearing available-for-sale financial instruments have fixed interest rates.


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7. Receivables

2016 2015

Direct insurance operations 1 937 018 1 642 382 Claims ceded 708 984 1 349 963 Premiums assumed 105 241 162 746 Other 236 364 592 998

2 987 607 3 748 089

Less: Allowance for impairment (945 166) (1 093 950)

Total receivables 2 042 441 2 654 139

Receivables that are past due less than one month but are not impaired amount to RUB 24 298 thousand (2015: RUB 11 498 thousand). Receivables that are more than one month overdue of RUB 1 830 406 thousand (2015: RUB 1 849 929 thousand) are allocated an impairment allowance of RUB 907 418 thousand (2015: RUB 1 093 950 thousand). The Group is not subject to significant credit risk on receivables arising out of direct insurance operations as policies are cancelled and the unearned premium reserve relating to the policy is similarly cancelled when there is objective evidence that the policyholder is not willing or able to continue paying policy premiums. For other categories of receivables and receivables arising out of direct insurance operations, for which the amount of unearned premium reserve relating to the policy is insufficient, the Group estimates impairment allowance based on an analysis of the future cash flows for individually significant impaired receivables, and based on its past loss experience for collectively assessed receivables. Individually significant receivables are reviewed on an individual basis based on external ratings, when available, and other available information. Impairment allowance for collectively assessed receivables are estimated based on the Group’s past historical loss experience, credit quality of recent underwritten business and expected impact of changes in the economic environment. Movements in the allowance for impairment of receivables are as follows: 2016 2015

Allowance for impairment of receivables as at 1 January 1 093 950 2 152 414 Net charge 37 180 (627 531) Net charge on subrogations receivables included in claims paid (note 2) 193 349 417 838 Write-offs (379 313) (494 195) Change in receivables amount based on court decision - (639 434) Effect of foreign currency translation - 296 287 Net recovery allocated to discontinued operations - (4 428) Transferred to disposal group - (7 001)

Allowance for impairment of receivables as at 31 December 945 166 1 093 950

Information on related party balances is disclosed in note 24.


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8. Property, Equipment, Intangible Assets and Investment Property

Premises

Office and computer

equipment Intangible

assets Total Cost Balance as at 1 January 2015 1 782 570 1 143 597 998 078 3 924 245 Additions - 39 273 86 245 125 518 Disposals (98 612) (308 481) (28 993) (436 086) Effect of foreign currency translation - (97) (1 972) (2 069) Balance as at 31 December 2015 1 683 958 874 292 1 053 358 3 611 608 Additions - 103 248 103 986 207 234 Transfer to investment property (799 984) - - (799 984) Disposals (4 102) (248 898) (68 472) (321 472) Disposal of subsidiary (note 26) (314 639) (220 499) (142 848) (677 986) Effect of foreign currency translation - (765) (1 671) (2 436) Balance as at 31 December 2016 565 233 507 378 944 353 2 016 964

Accumulated depreciation Balance as at 1 January 2015 427 698 909 147 796 906 2 133 751 Depreciation and amortization charge 42 673 89 760 151 990 284 423 Disposals (16 291) (268 239) (28 993) (313 523) Effect of foreign currency translation - (2 314) (3 458) (5 772) Balance as at 31 December 2015 454 080 728 354 916 445 2 098 879 Depreciation and amortization charge 39 457 98 639 90 168 228 264 Transfer to investment property (205 073) - - (205 073) Disposals (1 804) (239 437) (54 189) (295 430) Disposal of subsidiary (note 26) (77 283) (155 084) (95 157) (327 524) Effect of foreign currency translation - 57 12 69 Balance as at 31 December 2016 209 377 432 529 857 279 1 499 185

Carrying amount as at 31 December 2015 1 229 878 145 938 136 913 1 512 729 Carrying amount as at 31 December 2016 355 856 74 849 87 074 517 779

As at 31 December 2016, net carrying amount of investment property is RUB 594 911 thousand, comprising cost of RUB 799 984 thousand and accumulated depreciation of RUB 205 073 thousand. Depreciation for investment property is applied on a straight-line basis using the rate of 2.0-2.5% per annum. Rental income for 2016 amounts to RUB 101 688 thousand and is included into other income.

As at 31 December 2016, fair value of the investment property amounts to RUB 1 199 260 thousand and is classified into Level 3 of the fair value hierarchy. The fair value was determined on the basis of a combination of income approach (discounted cash flow method) and market approach.


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9. Provision for Unearned Premiums

Movements in the provision for unearned premiums in 2016 and 2015 are as follows:

2016 2015

Gross Reinsurer’s

share Net Gross Reinsurer’s

share Net

Provision for unearned premiums as at 1 January 5 099 664 (1 108 555) 3 991 109 12 336 653 (1 233 129) 11 103 524 Change in provision for the year (1 569 337) (185 620) (1 754 957) (5 201 841) 101 571 (5 100 270) Provision of unexpired risk (27 844) - (27 844) 47 495 - 47 495 Effect of foreign currency translation (17 192) 14 773 (2 419) (49 408) 7 221 (42 187) Disposal of subsidiary (note 26) (174 698) 148 632 (26 066) - - - Transfer of insurance portfolios (20 469) - (20 469) - - - Net change in provision allocated to discontinued operations (note 26) 12 133 - 12 133 (87 598) (30 638) (118 236) Transferred to disposal group (note 26) - - - (1 945 637) 46 420 (1 899 217)

Provision for unearned premiums as at 31 December 3 302 257 (1 130 770) 2 171 487 5 099 664 (1 108 555) 3 991 109

10. Loss Provision

Analysis of loss provision as at 31 December 2016 and 2015 is as follows:

2016 2015

Outstanding claims

provision and IBNR

Loss adjustment

expense reserve Total

Outstanding claims

provision and IBNR

Loss adjustment

expense reserve

Future polices

benefits reserve Total

Gross loss provision 4 876 331 1 198 808 6 075 139 10 225 807 991 143 286 255 11 503 205 Reinsurers' share of loss provision (1 947 947) (149 613) (2 097 560) (4 929 948) (95 190) - (5 025 138) 2 928 384 1 049 195 3 977 579 5 295 859 895 953 286 255 6 478 067

Included in disposal group (note 26): Gross loss provision - - - 556 522 27 826 - 584 348 Reinsurers' share of loss provision - - - (17 417) (871) - (18 288)

Loss provision, net of reinsurance 2 928 384 1 049 195 3 977 579 5 834 964 922 908 286 255 7 044 127

As at 31 December 2016, the largest three occurred claims reserves ceded to reinsurance excluding parent company and its subsidiaries amounted to RUB 69 397 thousand or 5% of total occurred claims reserves ceded to reinsurance. As at 31 December 2015, the largest three occurred claims reserves ceded to reinsurance excluding parent company and subsidiaries amounted to RUB 657 606 thousand or 13% of total occurred claims reserves ceded to reinsurance.


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Movements in the loss provision during 2016 and 2015 are as follows:

2016 2015

Outstanding claims

provision and IBNR

Loss adjustment expense reserve

Future polices benefits reserve Total

Outstanding claims

provision and IBNR

Loss adjustment

expense reserve

Future polices

benefits reserve Total

Loss provision, net of reinsurance, as at 1 January 5 295 859 895 953 286 255 6 478 067 8 280 591 1 435 426 239 982 9 955 999 (Decrease) increase in provision, gross (3 042 644) 207 665 (18 866) (2 853 845) (1 042 334) (672 415) (20 614) (1 735 363) Decrease (increase) in reinsurer’s share in provision 831 047 (54 423) - 776 624 (1 443 203) 163 163 - (1 280 040) Effect of foreign currency translation (87 329) - - (87 329) 92 147 - 66 887 159 034 Net change due to disposal of subsidiary (note 26) (46 124) - - (46 124) - - - - Transfer of insurance portfolios (17 865) - (267 389) (285 254) - - - - Net change in provision allocated to discontinued operations (note 26) (4 560) - - (4 560) (52 237) (3 266) - (55 503) Transferred to disposal group (note 26) - - - - (539 105) (26 955) - (566 060)

Loss provision, net of reinsurance, as at 31 December 2 928 384 1 049 195 - 3 977 579 5 295 859 895 953 286 255 6 478 067

Assumptions and sensitivities used in estimating the loss provision

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

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

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

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

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


28

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

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

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

Consequently, the ultimate liability will vary as a result of subsequent developments. Differences resulting from reassessment of the ultimate liabilities are recognized in the period when reassessment is made. The table below indicates the effect of changes in the expected loss ratios as at 31 December 2016 of certain lines of business related to the period of claim, which conforms with the related reporting period, to the profit and loss before tax and equity:

Gross of reinsurance Net of reinsurance Impact on

profit or loss before tax

Impact on equity

Impact on profit or loss

before tax Impact on

equity

Property, liability, marine and financial risks insurance 10% increase in expected loss ratios (201 225) (160 980) (83 949) (67 159) 10% decrease in expected loss ratios 205 627 164 502 86 358 69 086

Personal insurance 10% increase in expected loss ratios (62 838) (50 270) 10% decrease in expected loss ratios 62 838 50 270

The table below indicates the effect of changes in the expected loss ratios as at 31 December 2015 of certain lines of business related to the period of claim, which conforms with the related reporting period, to the profit and loss before tax and equity before reinsurance. Reinsurance does not significantly affect profit and loss.

Impact on profit or loss before tax

Impact on equity

Autotransport insurance 10% increase in expected loss ratios (765 359) (612 287) 10% decrease in expected loss ratios 586 890 469 512

Voluntary medical insurance 10% increase in expected loss ratios (120 678) (96 542) 10% decrease in expected loss ratios 120 678 96 542


29

11. Claims Development Analysis

The claims development analysis is provided for the lines of business for which uncertainty about the amount and timing of claims payments is typically resolved within more than one year. The estimate of claims at the end of a particular underwriting year includes claims filed and paid during the year. The analysis doesn’t include loss adjustment expenses.

Property

Year of claim 2012 2013 2014 2015 2016 Total Estimate of cumulative claims: At end of underwriting year 1 229 488 1 404 669 2 689 242 1 450 976 581 175 581 175 One year later 1 391 867 1 144 314 2 457 320 1 601 004 - 1 601 004 Two years later 1 318 172 1 103 040 1 789 112 - - 1 789 112 Three years later 1 359 563 1 085 229 - - - 1 085 229 Four years later 1 319 548 - - - - 1 319 548 Estimate of cumulative claims 1 319 548 1 085 229 1 789 112 1 601 004 581 175 6 376 068 Cumulative payments (1 309 098) (1 005 873) (1 664 384) (1 063 814) (136 378) (5 179 547) Provision for claims incurred before 2012 - - - - - 157 544

Total provision for outstanding claims 10 450 79 356 124 728 537 190 444 797 1 354 065

Other material lines of business

Year of claim 2012 2013 2014 2015 2016 Total Estimate of cumulative claims: At end of underwriting year 729 907 1 398 088 1 526 961 1 140 771 1 062 582 1 062 582 One year later 871 753 1 626 962 3 639 980 1 051 977 - 1 051 977 Two years later 1 009 759 1 510 746 3 666 551 - - 3 666 551 Three years later 1 009 675 1 527 869 - - - 1 527 869 Four years later 964 824 - - - - 964 824 Estimate of cumulative claims 964 824 1 527 869 3 666 551 1 051 977 1 062 582 8 273 803 Cumulative payments (926 936) (1 235 201) (3 295 939) (577 762) (122 123) (6 157 961) Provision for claims incurred before 2012 - - - - - 232 519 Total provision for outstanding claims 37 888 292 668 370 612 474 215 940 459 2 348 361

A reconciliation of claims development analysis to gross carried loss provision as at 31 December 2016 and information about the related reinsurers’ share of loss provision is provided below:

Gross loss

provision

Reinsurers' share of loss

provision

Loss provision, net of

reinsurance

Property 1 354 065 (697 174) 656 891

Other material lines of business Personal accident 836 042 (64 508) 771 534 Finance 605 720 (162 897) 442 823 Other 906 599 (678 109) 228 490 Total other material lines of business 2 348 361 (905 514) 1 442 847

Other lines of business 1 173 905 (345 259) 828 646 Outstanding claims provision and IBNR 4 876 331 (1 947 947) 2 928 384

Loss adjustment expenses 1 198 808 (149 613) 1 049 195

Total reserves 6 075 139 (2 097 560) 3 977 579


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12. Payables

2016 2015 Premiums ceded 1 564 471 1 869 714 Insurance premiums received in advance 728 136 970 873 Payroll and social funds 552 513 846 261 Commissions payable to agents 353 333 403 429 Taxation 25 969 53 692 Payables arising out of claims assumed 17 802 21 460 Other payables 172 651 143 290

Total payables 3 414 875 4 308 719

Information on related party balances is disclosed in note 24.

13. Other Liabilities

2016 2015 Provision for guarantees and letters of credit issued 365 486 671 486 Accrued penalties 125 000 146 453 Other 5 459 67 644 Total other liabilities 495 945 885 583

In 2016 the Group paid RUB 120 883 thousand on one of the guarantees issued and the management expects that no further payments would be required. As at 31 December 2015, the amount of provision under this guarantee was estimated at RUB 306 000 thousand. The difference between the actual payment and recorded provision of RUB 185 117 thousand was released to profit and reported as a release of other provisions. In 2015 the Group increased provision for guarantees and letters of credit issued by RUB 430 486 thousand, which is recorded within other provisions charge.

14. Share Capital and Additional Paid-in Capital

On 10 November 2016, the Company decreased share capital by RUB 3 608 663 thousand to cover accumulated deficit within equity, comprising: ▪ a registered decrease of RUB 3 003 875 thousand arising out decrease of nominal value of ordinary

shares from RUB 40.0 to 19.5; ▪ a proportionate write off of related hyperinflation adjustment in the amount of RUB 604 788 thousand,

previously recognized in accordance with IAS 29 Financial Reporting in Hyperinflationary Economies for contributions to share capital, made prior to 1 January 2003.

As at 31 December 2016 and 2015, authorised, issued and outstanding share capital of the Company comprises 146 530 499 ordinary shares. All shares have a nominal value of RUB 19.5 (31 December 2015: RUB 40.0), rank equally and carry one vote per share at annual and extraordinary general meetings of the shareholders. As at 31 December 2016, share capital recognized in the financial statement prepared under Russian statutory requirements is RUB 2 857 345 thousand (2015: RUB 5 861 220 thousand). The difference in the accounting for Russian statutory purposes and IFRS results from the application of IAS 29 Financial Reporting in Hyperinflationary Economies under which contributions to share capital, made prior to 1 January 2003 have been increased by the amount of RUB 575 286 thousand (2015: RUB 1 180 074 thousand) to account for changes in the general purchasing power of the RUB. In 2015 the Company received financial aid of RUB 1 231 322 thousand from Allianz SE and returned financial aid of RUB 413 182 thousand to Allianz SE presented in these consolidated financial statements as an increase of additional paid-in capital. No dividends were declared or paid during 2016 and 2015.


31

15. Analysis of Premiums and Claims by Lines of Business and Analysis of Operating Profit

An analysis of premiums and claims by line of business for 2016 is provided in the following table:

Personal Accident

Voluntary Medical

Insurance Property

Insurance

Auto-transport Insurance Finance

Other Insurance Total

Gross premiums written 266 827 764 069 2 701 231 169 896 317 960 1 330 297 5 550 280 Premiums ceded (125 224) (10 514) (2 197 966) (24 525) (288 455) (1 038 148) (3 684 832) Net premiums written 141 603 753 555 503 265 145 371 29 505 292 149 1 865 448

Change in provision for unearned premiums, net 1 269 158 30 460 142 063 98 703 211 694 30 723 1 782 801

Net premiums earned 1 410 761 784 015 645 328 244 074 241 199 322 872 3 648 249

Gross claims paid (471 226) (543 014) (597 513) (328 724) (461 876) (481 888) (2 884 241) Claims ceded 28 992 23 066 319 602 5 297 401 949 218 738 997 644 Net claims paid (442 234) (519 948) (277 911) (323 427) (59 927) (263 150) (1 886 597)

Claims handling expenses (40 607) (44 865) (30 572) (389 825) (57 437) (75 291) (638 597) Change in loss provision, net 222 537 50 653 (125 703) 1 533 808 193 254 202 672 2 077 221

Net claims incurred (260 304) (514 160) (434 186) 820 556 75 890 (135 769) (447 973)

Net underwriting result 1 150 457 269 855 211 142 1 064 630 317 089 187 103 3 200 276

Gross claims paid for 2016 comprise subrogation income of RUB 1 069 460 thousand reduced for the amount of impairment allowance for subrogations receivables charge of RUB 193 349 thousand (note 7). An analysis of premiums and claims by line of business for 2015 is provided in the following table (including discontinued operations):

Personal accident

Voluntary medical

insurance Property

insurance

Auto-transport

insurance Finance Other

insurance Total

Gross premiums written 410 371 7 976 126 2 941 200 354 814 464 610 1 360 177 13 507 298 Premiums ceded (171 171) (2 711 701) (2 148 427) (45 958) (383 741) (907 738) (6 368 736) Net premiums written 239 200 5 264 425 792 773 308 856 80 869 452 439 7 138 562

Change in provision for unearned premiums, net 1 675 253 49 932 515 726 2 542 499 338 386 49 215 5 171 011 Net premiums earned 1 914 453 5 314 357 1 308 499 2 851 355 419 255 501 654 12 309 573

Gross claims paid (534 474) (6 012 151) (1 709 843) (4 820 902) (1 252 662) (92 380) (14 422 412) Claims ceded 38 229 1 675 991 1 363 255 25 279 1 221 241 147 800 4 471 795 Net claims paid (496 245) (4 336 160) (346 588) (4 795 623) (31 421) 55 420 (9 950 617)

Claims handling expenses (35 952) (334 863) (160 544) (1 365 932) (151 377) (33 964) (2 082 632) Change in loss provision, net (155 959) 78 200 54 061 3 705 485 (363 148) (247 733) 3 070 906 Net claims incurred (688 156) (4 592 823) (453 071) (2 456 070) (545 946) (226 277) (8 962 343)

Net underwriting result 1 226 297 721 534 855 428 395 285 (126 691) 275 377 3 347 230

Gross claims paid for 2015 comprise subrogation income of RUB 1 285 579 thousand reduced for the amount of impairment allowance for subrogations receivables charge of RUB 417 838 thousand (note 7).


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Management analyses the consolidated financial result in terms of Operational profit, which is calculated as follows:

2016 2015

Profit (loss) for the year 2 422 662 (702 870)

Less expenses excluded from calculation of Operational profit: Income tax expense (benefit) from continuing operations 195 229 (13 381) Income tax expense from discontinued operations 101 132 211 007 Other provisions (recoveries) charges (61 488) 430 486 Gain on disposals of subsidiaries (note 26) (1 761 609) - Net realized loss arising from investment securities available-for-sale from continuing operations 92 096 165 252 Net realized (gain) loss arising from investment securities available-for-sale from discontinued operations (1 377) 23 029 Impairment of available-for-sale financial instruments 15 186 11 272 Impairment of available-for-sale financial instruments from discontinued operations - 13 785

Operational profit 1 001 831 138 580

In accordance with the new strategy adopted in 2014, the Group stopped writing retail insurance business, such as auto-transport and other private property and liability insurance, and focused on corporate insurance business, such as property, medical and casualty insurance and reinsurance. In November 2015, the management committed to a plan to sell voluntary medical insurance business of the Company to Allianz Life Insurance Company, Ltd., an entity under common shareholders control, following a strategic decision to place greater focus on the Group’s key competencies (note 26).

A reconciliation of premiums and claims from continued and discontinued operations is provided below:

Continued operations Discontinued

operations (note 26) Total Gross premiums written 6 578 964 6 928 334 13 507 298 Premiums ceded (3 726 069) (2 642 667) (6 368 736) Net premiums written 2 852 895 4 285 667 7 138 562 Change in provision for unearned premiums, net 5 052 775 118 236 5 171 011 Net premiums earned 7 905 670 4 403 903 12 309 573 Gross claims paid (9 137 449) (5 284 963) (14 422 412) Claims ceded 2 817 318 1 654 477 4 471 795 Net claims paid (6 320 131) (3 630 486) (9 950 617) Claims handling expenses (1 825 451) (257 181) (2 082 632) Change in loss provision, net 3 015 403 55 503 3 070 906 Net claims incurred (5 130 179) (3 832 164) (8 962 343) Net underwriting result 2 775 491 571 739 3 347 230

16. Interest Income

2016 2015

Available-for-sale financial instruments 276 630 529 213 Deposits with banks 156 556 230 160 Cash and cash equivalents 49 673 26 308 Promissory notes and originated loans 1 197 963

Total interest income 484 056 786 644


33

17. Acquisition Costs

Acquisition costs comprise the following:

2016 2015

Deferrable costs Brokerage and agents commission 451 056 796 572 Salary costs 165 775 400 713 Social security and related employee costs 44 394 146 712 Other 7 700 12 907

Total deferrable costs 668 925 1 356 904

Non-deferrable costs Salary costs and social security 419 887 435 649 Administration expenses 81 471 53 551 Information and consulting 55 434 3 430 Advertising and marketing 28 497 14 338 Rent 26 426 55 593 Business trip expenses 9 160 5 272 Communication expenses 4 237 10 820 Transport 2 059 3 402 Depreciation 2 396 1 031 Other 38 538 48 540

Total non-deferrable costs 668 105 631 626

Total acquisition costs 1 337 030 1 988 530

Less: Commission income on reinsurance ceded (674 928) (526 423) Net change in deferred acquisition costs 1 137 601 1 930 819

Acquisition costs 1 799 703 3 392 926

Changes in deferred acquisition costs during 2016 and 2015 are presented below: 2016 2015

Deferred acquisition costs as at 1 January 2 044 244 4 142 391 Change in deferred acquisition costs (1 072 175) (1 923 949) Change in deferred acquisition costs related to deferred commission income on reinsurance outwards (25 851) 20 924 Provision of unexpired risk (39 575) (27 794) Net change in deferred acquisition costs (1 137 601) (1 930 819)

Disposal of subsidiary (note 26) 11 570 - Transfer of insurance portfolios (18 752) - Net change in deferred acquisition costs allocated to discontinued operations - (12 008) Transferred to disposal group - (141 417) Effect of changes in foreign currency translation 32 676 (13 903)

Deferred acquisition costs as at 31 December 932 137 2 044 244


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18. Operating Expenses

Insurance operating expenses comprise the following: 2016 2015

Salary costs and bonuses 502 008 538 431 Depreciation 171 231 232 650 Information and consulting 157 382 255 724 Social security and related employee costs 152 274 136 185 Administration expenses 104 037 116 545 Rent 76 660 40 358 Legal service fees 68 874 1 559 Communication expenses 32 272 46 803 Transport 22 870 18 783 Bank fees 21 200 15 631 Business trip expenses 12 080 8 323 Advertising and marketing 8 191 9 601 Repair 7 614 11 608 Other expenses 23 469 9 256

Total insurance operating expenses 1 360 162 1 441 457

Investment operating expenses comprise the following:

2016 2015

Salary costs and bonuses 11 619 3 616 Social security and related employee costs 2 905 904 Administration expenses 1 212 18 798 Information and consulting 1 038 4 126 Other expenses 130 179

Total investment operating expenses 16 904 27 623

Other operating expenses comprise the following:

2016 2015

Salary costs and bonuses 95 997 106 152 Social security and related employee costs 28 219 31 086 Low value items and materials 19 218 22 564 Administration expenses 12 114 16 409 Depreciation and amortization 11 103 13 178 Information and consulting 2 076 1 524 Transport 1 713 1 738 Other expenses 19 489 23 292

Total other operating expenses 189 929 215 943


35

19. Income Tax

Income tax expense is comprised of the following:

2016 2015

Continued operations

Discontinued operations Total

Continued operations

Discontinued operations Total

Current tax expense Current year 11 918 101 872 113 790 30 987 136 680 167 667 Changes in estimates related to prior years 125 000 - 125 000 - - -

Total current tax expense 136 918 101 872 238 790 30 987 136 680 167 667

Deferred tax expense Origination and reversal of temporary differences 678 899 (740) 678 159 (44 368) 74 327 29 959 Recognition of previously unrecognized tax losses (620 588) - (620 588) - - -

Total deferred tax expense (benefit) 58 311 (740) 57 571 (44 368) 74 327 29 959

Total income tax expense (benefit) 195 229 101 132 296 361 (13 381) 211 007 197 626

In 2016 and 2015 income tax rate applicable to the majority of the income of the Company and its subsidiaries is 20%. Reconciliation between the expected and the actual taxation charge is provided below.

2016 2015

Profit (loss) before tax from continued operations 2 142 739 (975 784) Profit before tax from discontinued operations 576 284 470 540

Profit (loss) before tax 2 719 023 (505 244)

Theoretical tax benefit at the applicable statutory rate of 20% (543 805) 101 049

Tax effect of items which are not deductible or assessable for taxation purposes: - Non-deductible expenses (234 151) (518 492) - Taxable decrease of share capital (note 14) (600 775) - - Income on government securities taxed at different rates 10 881 7 432 - Income taxed at different rate (102) (9 733) - Income exempt from taxation 254 779 36 003 Change in unrecognized deferred tax asset 941 812 177 115 Changes in estimates related to prior years (125 000) 9 000

Total income tax (expense) benefit (296 361) (197 626)

Differences between IFRS and statutory taxation regulations give rise to certain temporary differences between the carrying amount of certain assets and liabilities for financial reporting purposes and for profits tax purposes. In 2016 and 2015, the tax effect of the movement on these temporary differences is recorded at the rate of 20%, except for income on government and municipal securities that is taxed at 9-15%.

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

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


36

As at 31 December 2016, cumulative deferred tax assets that have not been recognised total RUB 1 011 147 thousand (2015: RUB 1 608 533 thousand), including unrecognized cumulative tax loss carry forwards totaling RUB 769 749 thousands (2015: RUB 1 367 084 thousand). Due to recent amendments to the Russian tax legislation, starting from 1 January 2017 tax losses do not expire (2015: tax losses expire in 2023-2025). Deferred tax assets have not been recognised because it is not probable that future taxable profit will be available against which the Group can utilise the benefits therefrom.

As at 1 January

2015

Recognized in profit or loss

Recognized in other compre-hensive income

As at 31 December

2015

Recognized in profit or loss

Recognized in other compre-hensive income

Disposal of subsidiaries

As at 31 December

2016

Tax effect of deductible temporary differences Receivables and payables 536 349 (413 409) - 122 940 (22 781) - (5 010) 95 149 Financial instruments 326 339 (74 310) (252 029) - - - - - Loss reserves 716 360 34 088 - 750 448 (385 965) - - 364 483 Other 219 173 42 240 - 261 413 (202 566) - (2 139) 56 708 Gross deferred tax asset before tax loss carried forward 1 798 221 (411 391) (252 029) 1 134 801 (611 312) - (7 149) 516 340 Tax loss carry forwards - - - - - - - - Gross deferred tax asset 1 798 221 (411 391) (252 029) 1 134 801 (611 312) - (7 149) 516 340 Tax effect of taxable temporary differences Deferred acquisition costs (814 648) 378 351 - (436 297) 249 870 - - (186 427) Provision for unearned premiums (368 168) 31 529 - (336 639) 188 256 - - (148 383) Financial instruments - (85 919) - (85 919) 103 908 (38 738) - (20 749) Property and equipment (212 824) 57 471 - (155 353) 11 707 - (1 338) (144 984) Gross deferred tax liability (1 395 640) 381 432 - (1 014 208) 553 741 (38 738) (1 338) (500 543) Net deferred tax asset (liability) 402 581 (29 959) (252 029) 120 593 (57 571) (38 738) (8 487) 15 797 Comprising of: Deferred tax asset 402 581 (29 959) (252 029) 120 593 (57 571) (38 738) (8 487) 15 797 Deferred tax liability - - - - - - - -


37

20. Risk Management and Internal Controls

Insurance risk

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

the policyholder, subject to any limits or excesses, against the loss or damage to their own tangible property. ▪ Voluntary medical insurance under which the Group pays benefits to policyholders for medical treatment

and hospital expenses. The portfolio consists predominantly of collective corporate policies. ▪ Finance insurance under which the Group indemnifies policyholders for losses resulting from business

interruption insured events and agricultural losses (e.g. loss of crops). ▪ Auto-transport insurance which includes fully comprehensive motor insurance (Casco), obligatory motor

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

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

The Group cedes insurance risk to limit exposure to underwriting losses under various agreements that cover individual and portfolio risks. These reinsurance agreements spread the risk and reduce the effect of losses. The amount of each risk retained depends on the Group’s evaluation of the specific risk. Under the terms of the reinsurance agreements, the reinsurer agrees to reimburse the ceded amount in the event the claim is incurred. However, the Group remains liable to its policyholders with respect to ceded insurance if any reinsurer fails to meet the obligations it assumes.

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

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

For a portfolio of insurance contracts where the theory of probability is applied to pricing and provisioning, the principal risk that the Group faces under its insurance contracts is that the actual claims and benefit payments exceed the carrying amount of the insurance liabilities. This could occur because the frequency or severity of claims and benefits are greater than estimated. Insurance events are random and the actual number of amount of claims and benefits will vary from year to year from the estimate established using statistical techniques. Experience shows that the larger the portfolio of similar insurance contracts, the smaller the relative variability about the expected outcome will be. In addition, a more diversified portfolio is less likely to be affected across the board by a change in any subset of the portfolio. The Group has developed its insurance underwriting strategy to diversify the type of insurance risks accepted and within each of these categories to achieve a sufficiently large population of risks to reduce the variability of the expected outcome.

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

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

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


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Financial risk

The financial risk management function within the Group is carried out in respect of credit, market (which includes foreign exchange, interest rate and equity price risks), currency and liquidity risks. The primary objectives of the financial risk management function are to establish risk limits, and then ensure that exposure to risks stays within these limits. The Board of Directors of the Group has overall responsibility for the oversight of the risk management framework, monitoring the management of key risks and reviewing the Group’s risk management policies and procedures as well as approving significant large exposures. The day-to-day financial risk management function is carried out primarily by the Risk Management department and Treasury.

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

Additional financial risk mitigation is imposed by Russian legislation (Directive of Bank of Russia №3445-U detailing requirements for types and structure of assets which are admitted for coverage of insurer’s equity). The Risk Management makes consolidated capital and assets forecast to ensure compliance with legislative requirements.

Credit risk

The Group takes on exposure to credit risk which is the risk that counterparty will be unable to pay amounts in full when due. The major credit risk exposure is through settlement accounts and deposits with banks, promissory notes and originated loans and available-for-sale financial instruments which form the majority of investment portfolio. Credit risk management procedures are primarily focused on setting counterparty limits and monitoring of compliance with these limits. Group counterparty credit limits are updated by the Risk Management department. The internal methodology for setting of limits is based on analysis of counterparties’ official financial reports and other non-financial information. Monitoring of compliance with existing credit limits is performed by the Risk Management department on a monthly basis.

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

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

2016 2015

Cash and cash equivalents - correspondent accounts with banks 1 689 751 3 962 826 Deposits with banks 4 741 145 4 171 971 Promissory notes and originated loans 38 046 5 735 Available-for-sale financial instruments 3 649 741 5 066 385 Receivables 2 042 441 2 654 139 Reinsurers' share of loss provision 2 097 560 5 025 138

Total maximum exposure to credit risk 14 258 684 20 886 194


39

The following table details geographical concentration of credit risk as at 31 December 2016. Included in Commonwealth of Independent States (CIS) countries are primarily balances of the Ukrainian subsidiary.

Russian

Federation Europe CIS Other

countries Total

Cash and cash equivalents - correspondent accounts with banks 411 045 1 278 706 - - 1 689 751 Deposits with banks 4 741 145 - - - 4 741 145 Promissory notes and originated loans 38 046 - - - 38 046 Available-for-sale financial instruments 3 649 741 - - 3 649 741 Receivables 1 414 019 623 733 1 957 2 732 2 042 441 Reinsurers' share of loss provision 212 842 1 876 460 - 8 258 2 097 560

Total maximum exposure to credit risk 10 466 838 3 778 899 1 957 10 990 14 258 684

The following table details geographical concentration of credit risk as at 31 December 2015:

Russian

Federation Europe CIS Other

countries Total

Cash and cash equivalents - correspondent accounts with banks 3 958 626 - 4 200 - 3 962 826 Deposits with banks 2 293 933 1 593 984 284 054 - 4 171 971 Promissory notes and originated loans 5 735 - - - 5 735 Available-for-sale financial instruments 5 066 385 - - - 5 066 385 Receivables 1 950 517 317 923 14 166 371 533 2 654 139 Reinsurers' share of loss provision 127 376 4 582 108 - 315 654 5 025 138

Total maximum exposure to credit risk 13 402 572 6 494 015 302 420 687 187 20 886 194

Financial assets that are neither past due nor impaired are graded according to the current international credit rating they have been awarded by an internationally regarded rating agencies. The Group uses the rating scale provided by Standard&Poors and Fitch depending on the availability of the rating for the respective counterparties. The following table details the credit ratings of financial assets held by the Group as at 31 December 2016:

AA A BBB BB Below BB Not rated Total

Cash and cash equivalents - correspondent accounts with banks - - 1 296 305 361 734 - 31 712 1 689 751 Deposits with banks - - 84 690 4 238 499 - 417 956 4 741 145 Promissory notes and originated loans - - - - - 38 046 38 046 Available-for-sale financial instruments - - 3 159 525 25 218 91 043 373 955 3 649 741 Receivables 529 993 23 470 49 221 26 680 758 1 412 319 2 042 441 Reinsurers' share of loss provision 993 721 380 284 420 946 74 871 - 227 738 2 097 560

Total 1 523 714 403 754 5 010 687 4 727 002 91 801 2 501 726 14 258 684

The following table details the credit ratings of financial assets held by the Group as at 31 December 2015:

AA A BBB BB Below BB Not rated Total

Cash and cash equivalents - correspondent accounts with banks - - 1 625 3 455 924 14 977 490 300 3 962 826 Deposits with banks - - 1 593 984 1 891 254 686 733 - 4 171 971 Promissory notes and originated loans - - - - - 5 735 5 735 Available-for-sale financial instruments - - 2 083 186 2 043 049 12 785 927 365 5 066 385 Receivables 211 656 105 336 290 154 318 887 45 019 1 683 087 2 654 139 Reinsurers' share of loss provision 2 536 683 1 589 192 - 772 048 - 127 215 5 025 138

Total 2 748 339 1 694 528 3 968 949 8 481 162 759 514 3 233 702 20 886 194


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Liquidity risk is the risk that the Group will encounter difficulty in meeting its commitments when they fall due. The Group is exposed to liquidity risk. The Group’s policy is to ensure, as far as possible, that it has sufficient liquidity to meet its liabilities when due, without risking damage to reputation or incurring unacceptable losses (e.g. investment losses due to urgent withdrawal of assets from investment portfolio). Liquidity risk management is the function of the Treasury Department. In order to ensure availability of sufficient funds for timely settlement of payables, the Treasury Department performs short term cash flow planning. To ensure maximum predictability of cash outflows, payments require cash reservation in advance. Also, the Group mitigates liquidity risk by fixing a statistically determined optimal share of cash in the investment portfolio as well as by diversifying deposits by maturity dates. Liquidity analysis is presented further within analysis of interest rate risk. Market risk is the risk that the value or future cash flows of financial instruments will fluctuate because of changes in market factors. Market risk comprises three types of risks: currency risk, interest rate risk and other price risk. Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Group is exposed to interest rate risk through its interest-bearing assets. Other assets and liabilities of the Group are mostly not interest-bearing. Interest rate risk is managed by means of volatility analysis of interest rates by instruments. Conclusions based on this analysis determine investment policy. The analysis of interest-bearing and non-interest-bearing assets and liabilities as at 31 December 2016 by their remaining contractual maturity is presented in the table below. The undiscounted cash flows on the financial liabilities on the basis of their earliest possible contractual maturity do not vary materially from this analysis.

Up to 1 month

1 month to 1 year

1 year to 5 years

Over 5 years

Maturity undefined Total

Assets Interest-bearing assets Cash and cash equivalents 1 690 876 - - - - 1 690 876 Deposits with banks 979 280 3 343 908 417 957 - - 4 741 145 Promissory notes and originated loans - 37 969 77 - - 38 046 Available-for-sale financial instruments 44 390 1 523 280 954 790 977 376 - 3 499 836 Total interest bearing assets 2 714 546 4 905 157 1 372 824 977 376 - 9 969 903

Non-interest bearing assets Available-for-sale financial instruments - - - - 149 905 149 905 Receivables - 2 032 749 - 9 692 - 2 042 441 Prepayments - 38 100 - - - 38 100 Reinsurers' share of provision for unearned premiums 3 492 849 774 259 387 18 117 - 1 130 770 Reinsurers' share of loss provision - 2 097 560 - - - 2 097 560 Deferred acquisition costs 2 748 169 768 753 231 6 390 - 932 137 Goodwill - - - - 130 082 130 082 Deferred tax asset - - - - 15 797 15 797 Other assets - 105 917 - - - 105 917 Investments in associated undertakings - - - - 68 411 68 411 Investment property - - - - 594 911 594 911 Property, equipment and intangible assets - - - - 517 779 517 779 Total non-interest bearing assets 6 240 5 293 868 1 012 618 34 199 1 476 885 7 823 810

Total assets 2 720 786 10 199 025 2 385 442 1 011 575 1 476 885 17 793 713

Non-interest bearing liabilities Provision for unearned premiums 9 135 1 765 820 1 493 998 33 304 - 3 302 257 Loss provision - 6 075 139 - - - 6 075 139 Payables 48 941 3 277 934 87 999 1 - 3 414 875 Other liabilities - 130 461 365 484 - - 495 945 Total non-interest bearing liabilities 58 076 11 249 354 1 947 481 33 305 - 13 288 216

Total liabilities 58 076 11 249 354 1 947 481 33 305 - 13 288 216

Net liquidity gap 2 662 710 (1 050 329) 437 961 978 270 1 476 885 4 505 497 Cumulative liquidity gap 2 662 710 1 612 381 2 050 342 3 028 612 4 505 497


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The following tables show assets and liabilities as at 31 December 2015 by separating interest-bearing and non-interest-bearing assets and liabilities and disclose their remaining contractual maturity. The undiscounted cash flows on the Group’s financial liabilities on the basis of their earliest possible contractual maturity do not vary materially from this analysis.

Up to 1 month

1 month to 1 year

1 year to 5 years

Over 5 years

Maturity undefined Total

Assets Interest-bearing assets Cash and cash equivalents 3 964 666 - - - - 3 964 666 Deposits with banks 1 093 049 2 660 968 417 954 - - 4 171 971 Promissory notes and originated loans - - 5 735 - - 5 735 Available-for-sale financial instruments 238 403 1 822 766 1 848 707 995 359 - 4 905 235

Total interest bearing assets 5 296 118 4 483 734 2 272 396 995 359 - 13 047 607

Non-interest bearing assets Available-for-sale financial instruments - - - - 161 150 161 150 Receivables 68 387 2 585 752 - - - 2 654 139 Prepayments - 9 926 880 - - - 9 926 880 Reinsurers' share of provision for unearned premiums 2 001 771 083 334 493 978 - 1 108 555 Reinsurers' share of loss provision - 5 025 138 - - - 5 025 138 Deferred acquisition costs 3 408 301 015 1 730 574 9 247 - 2 044 244 Goodwill - - - - 213 819 213 819 Deferred tax asset - - - - 120 593 120 593 Other assets - - 217 073 - - 217 073 Investments in associated undertakings - - - - 1 374 1 374 Property, equipment and intangible assets - - - - 1 512 729 1 512 729 Assets of disposal group held for distribution 2 748 257 - - - - 2 748 257

Total non-interest bearing assets 2 822 053 18 609 868 2 282 140 10 225 2 009 665 25 733 951

Total assets 8 118 171 23 093 602 4 554 536 1 005 584 2 009 665 38 781 558

Non-interest bearing liabilities Provision for unearned premiums 13 823 1 959 660 3 088 838 37 343 - 5 099 664 Loss provision - 11 503 205 - - - 11 503 205 Payables 184 618 4 124 101 - - - 4 308 719 Obligatory medical insurance liability - 12 301 623 - - - 12 301 623 Other liabilities - 214 097 671 486 - - 885 583 Liabilities of disposal group held for distribution 2 683 098 - - - - 2 683 098

Total non-interest bearing liabilities 2 881 539 30 102 686 3 760 324 37 343 - 36 781 892

Total liabilities 2 881 539 30 102 686 3 760 324 37 343 - 36 781 892

Net liquidity gap 5 236 632 (7 009 084) 794 212 968 241 2 009 665 1 999 666

Cumulative liquidity gap 5 236 632 (1 772 452) (978 240) (9 999) 1 999 666


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

2016 2015 -1.0% 1.0% -1.0% 1.0%

Available-for-sale financial instruments 54 160 (54 160) 103 432 (103 432)

Net impact on equity 43 328 (43 328) 82 746 (82 746)

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

2016 2015

Parallel shift by 1% towards interest rates growth 33 144 24 771

Parallel shift by 1% towards interest rates decline (33 144) (24 771)

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

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

2016 2015

-10% 10% -10% 10%

Available-for-sale financial instruments (14 991) 14 991 (16 115) 16 115

Net impact on equity (11 993) 11 993 (12 892) 12 892

The above table demonstrates the effect of a change in a key assumption while other assumptions remain unchanged. In reality, there is a correlation between the assumptions and other factors. It should also be noted that these sensitivities are non-linear, and larger or smaller impacts should not be interpolated or extrapolated from these results. Other limitations in the above sensitivity analyses include the use of hypothetical market movements to demonstrate potential risk that only represent the Group’s view of possible near-term market changes that cannot be predicted with any certainty; and the assumption that all interest rates, exchange rates or market prices move in an identical fashion. The financial position of the Group may vary at the time that any actual market movement occurs. For example, the Group’s financial risk management strategy aims to manage the exposure to market fluctuations. As investment markets move past various trigger levels, management actions could include selling investments, changing investment portfolio allocation and taking other protective action.


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

Asset Liability Matching methodology is used by the Group and provides appropriate currency structure to mitigate currency risk. This methodology allows the Group to calculate and manage the currency structure of the investment portfolio to minimize currency risk. The Group manages this currency risk by investing into US dollar and EURO instruments and maintaining US dollar cash balances to the extent allowed under Russian insurance regulations. The Group’s exposure to currency risk as at 31 December 2016 is presented below.

RUB USD EUR Other Total

Assets Cash and cash equivalents 262 261 53 322 1 375 293 - 1 690 876 Deposits with banks 4 739 782 1 350 13 - 4 741 145 Promissory notes and originated loans 38 046 - - - 38 046 Available-for-sale financial instruments 2 845 229 440 050 364 462 - 3 649 741 Receivables 1 668 148 216 375 157 520 398 2 042 441 Prepayments 31 844 5 911 345 - 38 100 Reinsurers' share of provision for unearned premiums 244 547 262 423 623 671 129 1 130 770 Reinsurers' share of loss provision 1 522 011 470 423 104 989 137 2 097 560 Deferred acquisition costs 793 304 144 893 (6 283) 223 932 137 Goodwill 130 082 - - - 130 082 Deferred tax asset 15 797 - - - 15 797 Other assets 9 363 - 96 554 - 105 917 Investments in associated undertakings 68 411 - - - 68 411 Investment property 594 911 - - - 594 911 Property, equipment and intangible assets 517 779 - - - 517 779

Total assets 13 481 515 1 594 747 2 716 564 887 17 793 713

Liabilities Provision for unearned premiums 2 545 199 516 499 239 877 682 3 302 257 Loss provision 5 000 408 929 726 141 054 3 951 6 075 139 Payables 2 407 196 338 552 668 854 273 3 414 875 Other liabilities 495 945 - - - 495 945

Total liabilities 10 448 748 1 784 777 1 049 785 4 906 13 288 216

Net position 3 032 767 (190 030) 1 666 779 (4 019) 4 505 497


44

The Group’s exposure to currency risk as at 31 December 2015 is presented below.

RUB USD EUR Other Total

Assets

Cash and cash equivalents 2 967 104 70 099 924 151 3 312 3 964 666 Deposits with banks 2 293 920 - 1 593 996 284 055 4 171 971 Promissory notes and originated loans 5 735 - - - 5 735 Available-for-sale financial instruments 3 980 865 692 669 392 851 - 5 066 385 Receivables 1 886 637 552 158 185 846 29 498 2 654 139 Prepayments 9 900 361 10 160 553 15 806 9 926 880 Reinsurers' share of provision for unearned premiums 356 942 330 097 373 555 47 961 1 108 555 Reinsurers' share of loss provision 2 268 409 551 265 473 613 1 731 851 5 025 138 Deferred acquisition costs 1 868 116 138 674 28 303 9 151 2 044 244 Goodwill 213 819 - - - 213 819 Deferred tax asset 120 593 - - - 120 593 Other assets 71 039 - 146 034 - 217 073 Investments in associated undertakings 1 374 - - - 1 374 Property, equipment and intangible assets 1 501 738 - - 10 991 1 512 729 Assets of disposal group held for distribution 2 748 257 - - - 2 748 257

Total assets 30 184 909 2 345 122 4 118 902 2 132 625 38 781 558

Liabilities Provision for unearned premiums 4 187 825 542 437 270 147 99 255 5 099 664 Loss provision 7 563 307 1 659 378 496 797 1 783 723 11 503 205 Payables 2 808 083 469 935 960 053 70 648 4 308 719 Obligatory medical insurance liability 12 301 623 - - - 12 301 623 Other liabilities 882 305 - - 3 278 885 583 Liabilities of disposal group held for distribution 2 683 098 - - - 2 683 098

Total liabilities 30 426 241 2 671 750 1 726 997 1 956 904 36 781 892

Net position (241 332) (326 628) 2 391 905 175 721 1 999 666

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

2016 2015



equity



equity

20% appreciation of USD against RUB (38 006) (30 405) (65 326) (52 261)

20% appreciation of EUR against RUB 333 356 266 702 478 381 382 705

A strengthening of the RUB against the above currencies at 31 December 2016 and 2015 would have had the equal but opposite effect on the above currencies to the amounts shown above, on the basis that all other variables remain constant.

The above sensitivity demonstrates the effect of change in one of the key factors (foreign exchange rate), while other factors remain unchanged. In reality, there is correlation between key economic factors as well as the Group actively manages currency structure of assets and liabilities. Management action could include selling investments, changing investment portfolio allocation and other protective actions.


45

Corporate governance framework. The Company is established as a joint stock company in accordance with Russian legislation. The supreme governing body of the Company is the general shareholders’ meeting that is called for annual or extraordinary meetings. The general shareholders’ meeting makes strategic decisions on the Company’s operations. The general shareholders’ meeting elects the Board of Directors. The Board of Directors is responsible for overall governance of the Company's activities.

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

Internal control policies and procedures. The Board of Directors and the Management Board have responsibility for the development, implementation and maintaining of internal controls in the Group that are commensurate with the scale and nature of operations. The purpose of internal controls is to ensure: ▪ proper and comprehensive risk assessment and management; ▪ proper business and accounting and financial reporting functions, including proper authorization,

processing and recording of transactions; ▪ completeness, accuracy and timeliness of accounting records, managerial information, regulatory

reports, etc.; ▪ reliability of IT-systems, data and systems integrity and protection; ▪ prevention of fraudulent or illegal activities, including misappropriation of assets; ▪ compliance with laws and regulations.

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

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

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

▪ requirements for the recording, reconciliation and monitoring of transactions; ▪ compliance with regulatory and other legal requirements; ▪ documentation of controls and procedures; ▪ requirements for the periodic assessment of operational risks faced, and the adequacy of controls and

procedures to address the risks identified; ▪ requirements for the reporting of operational losses and proposed remedial action; ▪ development of contingency plans; ▪ training and professional development; ▪ ethical and business standards and ▪ risk mitigation, including reinsurance where this is effective.

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

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


46

The internal control system in the Company comprises: ▪ the Board of Directors and its committees, including the Audit committee; ▪ the Chief Executive officer and the Board of Management; ▪ the Chief Accountant; ▪ the Chief Actuary; ▪ the Supervisory Board; ▪ the risk management function; ▪ the security function, including IT-security; ▪ the human resource function; ▪ the internal audit function; ▪ other employees, division and functions that are responsible for compliance with the established

standards, policies and procedures, including: ▪ heads of branches and heads of business units; ▪ business processes managers; ▪ the internal controls division responsible for compliance with anti-money laundering requirements; ▪ professional securities market participant controller – an executive office responsible for compliance

with the requirements for securities market participants; ▪ the legal officer – an employee responsible for compliance with the legal and regulatory requirements; ▪ the internal controls and coordination of corporate and regulatory procedures division responsible for

the compliance with internal controls rules and realization of programs of such rules implementation, developed in accordance with anti-money laundering legislation of the Russian Federation;

▪ other employees/divisions with control responsibilities. Russian legislation, including the Law dated 27 November 1992 No 4015-1 “On organization of insurance activity in the Russian Federation”, establishes the professional qualifications, business reputation and other requirements for members of the Board of Directors, Management Board, Head of internal audit function and other key management personnel. All members of the Company’s governing and management bodies meet with these requirements. Management believes that the Group complies with the regulatory requirements related to internal control systems, including requirements related to the internal audit function, and that Group’s internal control systems are appropriate for the scale, nature and complexity of operations.

21. Capital Management

The Insurance Regulatory Bodies of the Russian Federation set and monitor capital requirements for the Company. The Company recognizes as Capital, items which are defined in accordance with legislation of the Russian Federation as capital. The main objective of the Company's capital management is to comply with the regulatory requirements of the Russian Federation legislation in respect of financial stability and solvency of the Company and its ability to continue carrying out its financial and economic activity in accordance with going concern principle. The regulatory requirement for fully paid minimum share capital of the Company which provides any type of reinsurance coverage is RUB 480 000 thousand. As at 31 December 2016, the actual fully paid share capital of the Company is RUB 2 857 344 thousand which complies with the minimum statutory limit. In order to comply with regulatory requirements in respect of capital and insurance reserves allocation the Company implements an investment policy which imposes certain restrictions on the structure of investment assets. The Company monitors application of investment policy on a daily basis. The Company assesses capital adequacy level on a regular basis to comply with the minimum paid share capital requirements and regulatory solvency margin level. The Company monitors compliance with the stated above requirements on a monthly basis. Regular monitoring of capital adequacy level enables the Company to forecast the need for additional capital investment. As at 31 December 2016 and 2015, the Company complied with the requirements set by the Insurance Regulatory Bodies of the Russian Federation in respect of solvency margin level, placements of insurance reserves funds and structure of assets used for coverage of equity.


47

22. Contingencies and Commitments

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

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

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

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

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

The transfer pricing rules primarily apply to cross-border transactions between related parties, as well as to certain cross-border transactions between independent parties, as determined under the Russian Tax Code. In addition, the rules apply to in-country transactions between related parties if the accumulated annual volume of the transactions between the same parties exceeds a particular threshold (RUB 1 billion in 2015 and thereon).

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

The Management believes that their interpretation of the relevant legislation is appropriate and the Group’s tax, currency and customs positions will be sustained. Accordingly, as at 31 December 2016 and 2015 no provision for potential tax liabilities is recognized. Operating lease commitments. Where the Group is the lessee, the future minimum lease payments under non-cancellable operating leases are as follows:

2016 2015 Less than 1 year 52 811 207 358 Between 1 and 5 years 91 433 150 879

Total operating lease commitments 144 244 358 237

Pensions and retirement plans. As at 31 December 2016 and 2015, the Group was not liable for any supplementary pensions, post-retirement health care, insurance benefits, or retirement indemnities to its current or former employees.


48

23. Fair Value of Financial Instruments

The following table shows the carrying amounts and fair values of financial assets as at 31 December 2016 and 2015:

Carrying amounts as at 31 December 2016 Carrying amounts as at 31 December 2015

Loans and receivables

Available-for-sale financial

instruments

Designated at fair value Total

Loans and receivables

Available-for-sale financial

instruments

Designated at fair value Total

Financial assets and liabilities measured at fair value Debt securities - 3 499 836 - 3 499 836 - 4 905 236 - 4 905 236 Mutual investment funds and other - 149 905 - 149 905 - 161 149 - 161 149 Other assets measured at fair value - - 96 554 96 554 - - 146 034 146 034 Payables measured at fair value - - (59 647) (59 647) - - (101 888) (101 888)

- 3 649 741 36 907 3 686 648 - 5 066 385 44 146 5 110 531

Financial assets not measured at fair value Cash and cash equivalents 1 689 751 - - 1 689 751 3 962 826 - - 3 962 826 Deposits with banks 4 741 145 - - 4 741 145 4 171 971 - - 4 171 971 Promissory notes and originated loans 38 046 - - 38 046 5 735 - - 5 735 Receivables 2 042 441 - - 2 042 441 2 654 139 - - 2 654 139

8 511 383 - - 8 511 383 10 794 671 - - 10 794 671

Other assets and payables measured at fair value relate to remuneration of senior management (note 24).

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

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

▪ Level 1: quoted market price (unadjusted) in an active market for an identical instrument. ▪ Level 2: inputs other than quoted prices included within Level 1 that are observable either directly

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

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

Fair values of available-for-sale financial instruments that are traded in active markets and other assets and payables measured at fair value are based on quoted market prices or dealer price quotations. For all other financial instruments the Group determines fair values using other valuation techniques. The estimated fair values of all financial assets and liabilities approximate their carrying values.


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The table below analyses financial instruments measured at fair value as at 31 December 2016 and 2015, by the level in the fair value hierarchy into which the fair value measurement is categorized. The amounts are based on the values recognized in the consolidated statement of financial position:

Carrying amounts as at 31 December 2016 Carrying amounts as at 31 December 2015 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Available-for-sale financial instruments 3 499 836 - 149 905 3 649 741 4 905 236 - 161 149 5 066 385 Other assets measured at fair value 96 554 - - 96 554 146 034 - - 146 034 Payables measured at fair value (59 647) - - (59 647) (101 888) - - (101 888)

Other assets and payables measured at fair value relate to remuneration of senior management (note 24). The following table shows a reconciliation for the year ended 31 December 2016 for fair value measurements in Level 3 of the fair value hierarchy:

2016 2015 As at 1 January 161 149 249 303 Increase in fair value recognized in equity 3 942 5 494 Net gains and losses recognized in profit or loss (15 186) (11 215) Consideration received from sale of investments in mutual fund - (82 433) As at 31 December 149 905 161 149

As at 31 December 2016, available-for-sale financial instruments categorized into Level 3 include investments in one mutual investment fund totaling RUB 148 352 thousand (2015: RUB 159 569 thousand), whose net assets primarily comprise of investments in land plots and banks’ deposits. The mutual investment fund’s fair value is estimated based on a combination of independent third-party evidence and internally developed models, which use both observable and non-observable data. To the extent that fair value of the land plots held by the mutual investment fund differs by plus/minus 10% the fair value of the investments in the mutual investment fund would be RUB 5 514 thousand (2015: RUB 8 338 thousand) higher/lower.

In 2015, the Group sold stake in one mutual investment fund with a carrying amount as at 31 December 2014 of RUB 91 839 thousand for consideration of RUB 82 433 thousand.


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24. Related Party Transactions

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

The shareholder of the Group is Allianz New Europe Holding GMBH which is ultimately owned and controlled by Allianz SE. These companies are further referred to as “Parent company”. Other related parties comprise affiliates and subsidiaries of Allianz SE group, except for Allianz New Europe Holding GMBH.

The Group’s principal transactions with related parties comprise reinsurance operations.

The outstanding balances as at 31 December 2016 and 2015, as well as income and expenses for 2016 and 2015 with related parties are as follows:

2016 2015

Parent company

Other subsidiaries of

Parent company Parent

company

Other subsidiaries of

Parent company

Assets and liabilities Receivables 23 955 565 774 149 883 370 325 Reinsurers' share of provision for unearned premiums 83 459 763 490 200 405 669 131 Reinsurers' share of loss provision 266 519 792 130 273 254 2 956 635 Provision for unearned premiums (2 062) (8 016) (7 154) (1 841) Deferred acquisition costs 416 1 033 1 654 603 Reinsurers' share in deferred acquisition costs (10 322) (136 204) (43) (118 707) Loss provision (4 942) (1 706) (25 121) (324) Payables (59 608) (1 284 376) (45 711) (1 233 417)

Income and expenses Gross premiums written 41 115 489 614 85 237 Change in provision for unearned premiums, gross 5 092 (6 174) 14 029 (866) Premiums ceded (166 691) (2 453 899) (415 079) (2 445 864) Change in reinsurers' share of provision for unearned premiums (70 526) 94 359 179 887 (60 303) Gross claims paid (27) (29 645) (423) (13 884) Claims ceded 41 990 864 849 236 277 2 700 252 Change in reinsurer’s share of loss provision (6 735) (435 701) 61 348 1 100 784 Claims handling expenses - (27 572) (1 596) (3 257) Acquisition costs (17) (30 449) (471) (1 608) Commission income on reinsurance outwards 13 440 542 052 26 683 438 722 Insurance operating expenses (32 319) (146 453) (83 849) (48 783) Net expenses allocated to discontinued operations - - (98 567) (28 763) Other charges - (114 934) - -

In 2016, the Group transferred voluntary medical insurance portfolio and sold its share in Allianz Ukraine and Medexpress Service (Allianz Eurasia Medicina) to entities under common control (note 26).

In February 2016, the Group also transferred life insurance portfolio to Allianz Life Insurance Company, Ltd. As a result, the Group derecognized loss provision of RUB 267 389 thousand and corporate bonds of RUB 231 439 thousand and paid a cash consideration of RUB 4 558 thousand. The result from transfer of RUB 31 391 thousand was recorded as a shareholders’ contribution and recognized directly in equity.


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In 2016 the total remuneration of the key management and discretionary compensation amounts to RUB 174 384 thousand (2015: RUB 221 211 thousand). As at 31 December 2016, loans issued to employees of the Group amount to RUB 364 thousand (2015: RUB 5 735 thousand).

Remuneration of senior management includes grants of restricted stock units (“RSU”), which obligate the Group to pay in cash the average market price of shares of the Group’s parent, Allianz SE, or to issue one Allianz SE share, or other equivalent equity instrument, for each unit granted to the senior management upon expiration of the vesting period of 5 years. RSU’s are virtual stocks without dividend payments. RSU’s are accounted for as cash settled plans as the Group intends to settle in cash. The Group accrues the fair value of the RSU as a compensation expense over the vesting period. As at 31 December 2016, accrued liability on RSU’s amounted to RUB 59 647 thousand (2015: RUB 101 888 thousand) and presented within payables. When issuing RSU’s, the Group also purchases virtual stocks from the parent, Allianz SE, which are accounted for at fair value through profit or loss and are presented within other assets (note 23).

25. Principal Subsidiaries and Associates

The following subsidiaries of the Group are included into these consolidated financial statements as at 31 December 2016 and 2015:

Name Country of

incorporation

Percentage of equity controlled as at

31 December Principal activity 2016 2015

Rosno MS Russia 0% 100% Medical insurance Allianz Ukraine Ukraine 0% 100% Insurance Allianz Ukraine Life Ukraine 96% 100% Insurance Medexpress Russia 100% 100% Insurance Medexpress Service (Allianz Eurasia Medicina) Russia 16% 100% Medical services My Clinic Russia 16% 100% Renting of premises Progress-Med Russia 100% 100% Medical services Risk Audit Russia 100% 100% Consulting

The following associates of the Group are accounted for by the equity method of accounting in these consolidated financial statements as at 31 December 2016 and 2015:

Name Country of

incorporation

Percentage of equity held as at

31 December Principal activity 2016 2015

MedCentreStrakh Russia 0% 36% Medical insurance Povolzhskiy Leasing Center Russia 20% 20% Leasing Avarijnyj Komissar Russia 0% 23% Assistance


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26. Disposals of subsidiaries and discontinued operaitons

In March 2016, the Group sold its 100% share in Allianz Ukraine to an entity under common control. In November 2016 the Group sold its 84% share in My Clinic and Medexpress Service (Allianz Eurasia Medicina) to an entity under common control. The management considers that these transactions were executed on an arm’s length terms. Accordingly, the difference between consideration received and net identifiable assets disposed was recorded as loss on disposal of the subsidiary and recognized within profit for the period. In November 2016, the Group sold its 100% share in OJSC IC Rosno-MS to a third party and discontinued obligatory medical insurance.

The above disposals had the following effect on assets and liabilities of the Group:

Carrying amount as at the date of disposal

Assets Cash and cash equivalents 799 864 Deposits with banks 594 711 Available-for-sale financial instruments 375 729 Receivables 210 032 Prepayments 7 395 636 Reinsurers' share of provision for unearned premiums 148 632 Reinsurers' share of loss provision 1 852 898 Deferred acquisition costs 13 322 Deferred tax asset 8 487 Goodwill 83 737 Other assets 4 848 Property, equipment and intangible assets 350 462 Total assets 11 838 358

Liabilities Provision for unearned premiums 174 698 Loss provision 1 899 022 Reinsurer’s share of deferred acquisition costs 24 892 Payables 343 462 Obligatory medical insurance liability 8 013 619 Other liabilities 62 298 Total liabilities 10 517 991 Net identifiable assets and liabilities 1 320 367 Result from disposal of subsidiaries Consideration received 3 106 828 Carrying amount of net assets disposed (1 320 367) Sale related expenses (10 750) Fair value of remaining 15% share in My Clinic 66 489 Transfer of disposed subsidiary’s fair value reserve for available-for-sale financial instruments (5 020) Transfer of disposed subsidiary’s cumulative currency translation reserve (75 571) Gain on disposal 1 761 609 Consideration received 3 106 828 Cash and cash equivalents disposed of and sale related expenses paid (810 614) Proceeds from disposal of subsidiaries, net of cash disposed 2 296 214

The above disposals during 2016 resulted in a decrease of goodwill balance from RUB 213 819 thousand to RUB 130 082 thousand.


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Discontinued operations In November 2015, the management committed to a plan to sell the voluntary medical insurance business of the Company to Allianz Life Insurance Company, Ltd., an entity under common shareholders’ control, following a strategic decision to place greater focus on the Group’s key competencies. Accordingly, the related assets and liabilities as at 31 December 2015 are presented as a disposal group held for distribution.

The transfer of assets and liabilities was executed on 1 January 2016 and accounted for using book value accounting. The difference between book value of transferred assets and liabilities of RUB 162 355 thousand was recorded as a distribution to shareholders and recognized directly in equity. As at 31 December 2015 related assets of disposal group held for distribution totaled RUB 2 748 257 thousand and comprised available-for-sale financial instruments amounting to RUB 1 194 382 thousand, receivables amounting to RUB 1 070 437 thousand, cash and cash equivalent amounting to RUB 172 930 thousand and other assets amounting to RUB 310 508 thousand. Liabilities of disposal group held for distribution totaled RUB 2 683 098 thousand and comprised provision for unearned premiums amounting to 1 945 637 thousand, loss provision amounting to RUB 584 348 thousand and other liabilities amounting to RUB 153 113 thousand.

In November 2016, the Group sold its 100% share in OJSC IC Rosno-MS to a third party and discontinued obligatory medical insurance. Analysis of the results of discontinued obligatory medical insurance is as follows:

2016 2015

Obligatory medical

insurance

Obligatory medical

insurance

Voluntary medical

insurance Total INSURANCE Net premiums written (2 326) (7 643) 4 293 310 4 285 667 Change in provision for unearned premiums, net (12 133) 14 030 104 206 118 236 Net premiums earned (14 459) 6 387 4 397 516 4 403 903 Net claims paid (23 711) (43 403) (3 587 083) (3 630 486) Claims handling expenses - - (257 181) (257 181) Change in loss provision, net 4 560 (185) 55 688 55 503 Net claims incurred (19 151) (43 588) (3 788 576) (3 832 164) Acquisition costs (2 700) (3 619) (101 576) (105 195) Insurance operating expenses - 905 (600 998) (600 093) Insurance activity result (36 310) (39 915) (93 634) (133 549) INVESTMENT Interest income 76 675 99 058 141 027 240 085 Net realized gain arising from investment securities available-for-sale 1 377

6 847 (29 876) (23 029)

Impairment of investment securities available-for-sale - (13 785) (93) (13 878) Investment operating expenses (545) (2 140) (21 144) (23 284) Investment activity result 77 507 89 980 89 914 179 894 OTHER - Commission income from obligatory medical insurance 2 169 146 2 435 763 - 2 435 763 Other operating expenses (1 637 361) (2 055 969) - (2 055 969) Net foreign exchange loss - (5 114) - (5 114) Other income 3 302 8 596 40 919 49 515 Other activity result 535 087 383 276 40 919 424 195 Profit before other provisions charge and tax 576 284 433 341 37 199 470 540 Income tax expense (101 132) (203 567) (7 440) (211 007) Profit for the year from discontinued operations 475 152 229 774 29 759 259 533

Cash flows from discontinued operations: Net cash (outflow) inflow from operating activities (1 554 589) 654 586 341 297 995 883 Net cash inflow from investing activities 122 453 71 232 89 914 161 146

Net cash (outflows) inflows for the year (1 432 136) 725 818 431 211 1 157 029


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Under obligatory medical insurance Russian Federation citizens are provided with free of charge medical services. The program is carried out by the Federal Fund for Obligatory Medical Insurance (“FOMI”), being an insurer. OJSC IC Rosno-MS contracted with FOMI to administer portion this program. The Group was not assuming any insurance risk under this program.

In 2016 the Group received funds from FOMI of RUB 143 435 212 thousand (2015: RUB 176 762 657 thousand) and penalties for violation of service quality from medical institutions of RUB 5 932 402 thousand (2015: RUB 10 454 218 thousand). In 2016 the Group made payments to medical institutions for services provided by these institutions of RUB 148 576 503 thousand (2015: RUB 175 088 908 thousand). Funds received from FOMI by the Group, which are not paid out for medical services are retained within the Group, and treated as a liability for future medical expenses.

During 2016 the Group received a commission of RUB 2 169 146 thousand (2015: RUB 2 435 763 thousand) for performing these services.

As at 31 December 2015, the prepayments of RUB 9 926 880 thousand comprised prepayments under obligatory medical insurance program of RUB 9 820 449 thousand, which were made by the Group to medical institutions for purchases of medical equipment and for medical services, that are not yet provided. The Group’s liabilities on obligatory medical insurance totaled RUB 12 301 623 thousand.

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