IF LATVIA AAS · If Latvia AAS Annual Accounts for the Year ended 31 December 2007 2 CONTENT...

IF LATVIA AAS

(United registration number 40003387390)

Annual Accounts For the year ended 31 December 2007

(10th financial year) Prepared in accordance with

International Financial Reporting Standards

Together with Independent Auditors’ Report

If Latvia AAS Annual Accounts for the Year ended 31 December 2007

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CONTENT INFORMATION ABOUT THE COMPANY 3 MANAGEMENT REPORT 5 ON BEHALF OF THE MANAGEMENT OF IF LATVIA AAS, WE WOULD LIKE TO EXPRESS OUR DEEP GRATITUDE TO ALL OUR CLIENTS, SHAREHOLDERS AND EMPLOYEES FOR OUR SUCCESSFUL COOPERATION IN 2007, HOPING TO CONTINUE IT ALSO IN THE FUTURE. 6 FINANCIAL HIGHLIGHTS 7 STATEMENT OF RESPONSIBILITY OF THE MANAGEMENT 8 BALANCE SHEET 9 INCOME STATEMENT 10 STATEMENT OF CHANGES IN EQUITY 11 CASH FLOW STATEMENT 12 NOTES TO THE FINANCIAL STATEMENTS 13

1. Accounting policies................................................................................................................... 13 1.1 The Company and its operations 13 1.2 Basis of preparation 13 1.3 Use of estimates, assumptions and judgments 13 1.4 Summary of significant accounting policies 14

2. Risk management ..................................................................................................................... 21 3. Property and equipment .......................................................................................................... 24 4. Intangible assets ....................................................................................................................... 25 5. Deferred acquisition costs ........................................................................................................ 26 6. Reinsurance assets.................................................................................................................... 27 7. Prepayments............................................................................................................................. 28 8. Financial assets......................................................................................................................... 29 9. Insurance receivables ............................................................................................................... 30 10. Other receivables ..................................................................................................................... 30 11. Cash and cash equivalents........................................................................................................ 30 12. Share capital............................................................................................................................. 30 13. Insurance liabilities .................................................................................................................. 31 14. Corporate income tax............................................................................................................... 36 15. Trade and other payables ........................................................................................................ 37 16. Net insurance revenue.............................................................................................................. 37 17. Fee and commission income ..................................................................................................... 38 18. Interest income......................................................................................................................... 38 19. Net realised gain/(loss) of financial assets at fair value ............................................................ 38 20. Other income............................................................................................................................ 38 21. Claims paid .............................................................................................................................. 39 22. Other operating and administrative expense ........................................................................... 39 23. Personnel expense .................................................................................................................... 40 24. Breakdown of income statement by the three largest insurance types..................................... 41 25. Related party transactions ....................................................................................................... 42 26. Contingent liabilities ................................................................................................................ 43 27. Risk Management..................................................................................................................... 43 28. Events after the balance sheet date .......................................................................................... 53

INDEPENDENT AUDITOR’S REPORT 54


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INFORMATION ABOUT THE COMPANY Company Name If Latvia AAS

Legal Status Insurance Joint Stock Company

Registration Number

Date and Location

40003387390, 1 April 1998, Riga, Latvia

Re-registration with the Commercial Register on 9 December 2004 Legal Address Kronvalda Blvd. 3,

Riga, LV-1010, Latvia phone (+371) 7094777 fax (+371) 7094701

The Name and Address of the Shareholder

If P&C Insurance Holding Ltd (100%) Registration No 556241 – 7559 Address: Barks väg.15, 106 80 Stockholm, Sweden

Supervisory Council 21 February 2007 to the date of issue of the financial statements Vuorinen Timo - Chairman of the Council Rehme Dag - Member of the Council Laitinen Jukka Tapani - Member of the Council Alsaker Knut Arne – Member of the Council Wennerklint Ake Ricard– Member of the Council 18 October 2006 to 21 February 2007 Vuorinen Timo - Chairman of the Council Rehme Dag - Member of the Council Schubiger Georg - Member of the Council Alsaker Knut Arne – Member of the Council Wennerklint Ake Ricard– Member of the Council 25 July 2005 to 18 October 2006 Eide Tom Yngve Melbye – Chairman of the Council Alsaker Knut Arne – Member of the Council Wennerklint Ake Ricard – Member of the Council Vuorinen Timo – Member of the Council


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INFORMATION ABOUT THE COMPANY Board of Directors

4 June 2007 to the date of issue of the financial statements Andris Morozovs – Chairman of the Board Janis Sprindzuks – Member of the Board Ainars Skrubis – Member of the Board Oskars Hartmanis – Member of the Board Janis Kesteris – Member of the Board Sanita Livdane – Member of the Board 16 May 2006 to 4 June 2007 Andris Morozovs – Chairman of the Board Janis Sprindzuks – Member of the Board Ainars Skrubis – Member of the Board Oskars Hartmanis – Member of the Board Janis Kesteris – Member of the Board Sanita Livdane - Member of the Board Edgars Grandans - Member of the Board 7 February 2006 to 16 May 2006 Andris Morozovs – Chairman of the Board Janis Sprindzuks – Member of the Board Ainars Skrubis – Member of the Board Oskars Hartmanis – Member of the Board Janis Kesteris – Member of the Board 1 January 2005 to 7 February 2006 Andris Morozovs – Chairman of the Board Janis Sprindzuks – Member of the Board Ainars Skrubis – Member of the Board Oskars Hartmanis – Member of the Board Janis Kesteris – Member of the Board Sigita Steina-Murniece - Member of the Board Yrjo Marko Sakari Karapalo - Member of the Board

Financial year 1 January 2007– 31 December 2007

Auditor: Responsible certified auditor: Diana Krisjane Personal ID: 250873-12964 Certified auditor Certificate No. 124

Ernst & Young Baltic SIA Audit company licence No. 17 Kronvalda blvd. 3-5 Riga LV-1010, Latvia


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MANAGEMENT REPORT If Latvia AAS (hereinafter - the Company) has closed the tenth year of its operations, the best in the Company’s history so far. If Latvia AAS closed the year 2007 with a profit of LVL 1 334 703, and it was the fourth consecutive year when the Company had made a profit. Despite growing competition on the market and high inflation in the Latvian economy in general, in particular in the sectors representing the insurance customer base, such as construction, health care and car maintenance services, we were able to produce accurate forecasts of the economic and market development trends, make the required adjustments and ensure excellent result in terms of both the growth and profitability. At the same time, If Latvia AAS showed a significant growth of turnover in 2007 by 47% from 2006, while retaining its market share. We continued following our long-term strategy which includes development of quality products and services and investments in modern business processes and systems. The Company has always built its growth with caution, assessing different market segments and focusing investments on the segments which offer not only steep growth but also profitability. In line with this strategy last year we fully ceased providing ship insurance because, in our opinion, it is the line of business which is not and never will be profitable in Latvia. Transport insurance showed very rapid growth on the market last year. If Latvia AAS was not an exception. Truly, the focus of our growth was on profitable segments of voluntary transport insurance, not on the obligatory motor third party liability insurance which suffered a new record-high loss last year due to tough price competition, entry of new players and increasing claims for accidents abroad. If Latvia AAS market share in respect of this product still remains insignificant and we offer it only in order to provide our clients with a full range of the required services. We are genuinely pleased that in conditions of growing inflation we had been able to make accurate forecasts of the cost changes in the medical, construction and car maintenance industries. That way we were able to timely adjust prices of our services, ensuring good performance by the Company. These timely changes will protect our clients against inadequate growth of prices for services in future in order to cover the loss of prior periods. The result of our operations clearly confirms the Company’s competence and ability to demonstrate stable results also in difficult market conditions. With the purpose of improving the competitive ability, competence and exchange of knowledge, parent company If last year made serious efforts to establish closer ties between its three Baltic subsidiaries. By building a common functional structure we can now respond better to new external trends and use the experience of neighbours. There is close cooperation also with IF companies in Scandinavia where the insurance market has much older traditions. Knowledge and achievements by If Latvia AAS experts are appreciated and put to use when building If operations in Russia. Last year the Company paid much attention to introduction of online services. In addition to the online travel insurance service launched in 2006, online property and transport insurance services were made available to the clients last year along with an option to file indemnity claims under kasko insurance remotely through the Internet without the need to visit the insurer in person. We think that If Online is main novelty that we brought to the Latvian clients last year. This is confirmed by recognition that this online insurance system won also from professionals in November. If Latvia AAS has received the Platinum Mouse 2007 award by the Latvian Association of Information and Communication Technologies (LIKTA) in the nomination Business Development and E-commerce.

Use of modern technologies for the sake of clients’ convenience, efficiency of the Company’s operations and optimization of resources will remain one of If Latvia AAS priorities also in future. The Company has expanded the network of cooperation partners – car maintenance shops where its clients can file indemnity claims without the need to visit the insurer’s office. Several improvements have been made to the system to enable automated response to the reported accidents, saving the time of clients, car maintenance shop personnel


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and the overall duration of the indemnity claim processing and also improving the client satisfaction. During 2008 the Company expects to double the number of its cooperation partners among the car maintenance shops. Last year If Latvia AAS kept up its activities towards improving public security. The Company continued the consumer education programme Speaking openly about insurance (Atklāti par apdrošināšanu), which was launched the year before, and informed people about the opportunities to increase security of their housing, in particular during the period of summer holidays. In 2007, If Latvia AAS Security Foundation granted financing to more than 10 projects for purchase of security equipment and other arrangements improving security at schools, homes for the elderly and other non-profit organizations. The projects supported by the Company suggest that last year the focus had been on security and visibility on the roads which was equally important for school children and young people as well as the elderly. At the end of last year If Latvia AAS took the top position among non-life insurers in a rating produced by the Latvian Association of Insurance Brokers (LABA). This rating is significant as an overall evaluation of the Company’s operations by both professionals and clients and also serves as inspiration for further upgrading of the quality of products and services in future.

Looking to future, If Latvia AAS expects stabilization of the insurance market growth in Latvia. The market will continue growing fast but not as steeply as in 2007. Rapid growth of consumption in the country will not be enough for future growth of the insurance market. Instead, there will be increasing demand from the clients for improved quality of insurance products and increasing pressure for improved efficiency. The clients more than ever will come to appreciate quality and convenience of services offered by use of modern technologies in the insurance business. The Company’s objective remains unchanged – to respond to the growing needs of clients by improving its products and service models. The Company will also pursue the same strategic goal of growing fast but in a profitable manner by retaining its leading position in terms of efficiency and thus also ensuring reliability, stability, honest and fair treatment of its clients. In 2007, the Company had a share capital of LVL 3 100 000. As at 31 December 2007, all the shares were fully paid up and held by IF P&C Insurance Holding Ltd.

The management of the Company suggests that the profit for 2007 in the amount of LVL 1 334 703 should be transferred to retained earnings to ensure financing for further growth of the Company.

ON BEHALF OF THE MANAGEMENT OF IF LATVIA AAS, WE WOULD LIKE TO EXPRESS OUR DEEP GRATITUDE TO ALL OUR CLIENTS, SHAREHOLDERS AND EMPLOYEES FOR OUR SUCCESSFUL COOPERATION IN 2007, HOPING TO CONTINUE IT ALSO IN THE FUTURE.

Vuorinen Timo Pekka Andris Morozovs Sanita Livdane Chairman of the Council Chairman of the Board of

Directors Member of the Board of

Directors/ CFO 18 February 2008


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FINANCIAL HIGHLIGHTS 2007 2006 LVL LVL

Gross earned premiums 19 309 464 13 473 127 Premiums earned, net of reinsurance

17 397 083 11 570 547

Claims incurred, net of reinsurance

10 666 486 7 007 211

Total operating expenses 5 888 375 4 343 640 Net profit 1 334 703 348 384 Combined ratio 95.16% 97.70% Expense ratio 33.85% 37.10% Loss ratio 61.31% 60.60% Financial investments 11 685 515 8 271 385 Annual return on investments 5.94% 1.70% Balance sheet volume 24 652 589 19 577 903 Equity 6 058 351 4 723 648 Formulas:

Operating expenses less reinsurance commission Expense ratio Premiums earned, net of reinsurance

Claims incurred, net of reinsurance Loss ratio Premiums earned, net of reinsurance

Combined ratio Expense ratio + loss ratio

Return on investments less investment expenses Annual return on investments

Average volume of financial investments in the period


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STATEMENT OF RESPONSIBILITY OF THE MANAGEMENT The management of If Latvia AAS confirm that the Annual accounts for the year ended 31 December 2007 are prepared in accordance with the International Financial Reporting Standards as endorsed by the European Union and statutory requirements of the Republic of Latvia, based on relevant accounting methods that have been applied in a consistent manner, and give a true and fair view of the financial position of the Company as at the end of the reporting year, as well as the results of its operations and cash flows for the reporting year. Management decisions and assumptions in preparing the financial statements were prudent and reasonable. The management of If Latvia AAS is responsible for maintaining accounting records in accordance with the statutory requirements, for safeguarding of the Company’s assets and immediate prevention of any fraud and other illegal activity. Vuorinen Timo Pekka Andris Morozovs Sanita Livdane Chairman of the Council Chairman of the Board of

Directors Member of the Board of

Directors/ CFO 18 February 2008


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BALANCE SHEET AS AT 31 DECEMBER 2007

Notes 31.12.2007 31.12.2006 LVL LVL

ASSETS Property and equipment 3 302 823 312 450 Intangible assets 4 914 356 771 990 Deferred acquisition costs 5 845 897 491 157 Reinsurance assets 6 1 191 351 779 350 Prepayments 7 60 063 45 965 Financial assets

Held to maturity 8 (a), 27 1 027 148 2 141 838 At fair value through income statement 8 (b), 27 10 644 796 6 118 369 Loans and receivables 8 (c) 13 571 11 178

Insurance receivables 9 5 457 555 4 489 070 Other receivables 10 410 281 358 164 Cash and cash equivalents 11 3 784 748 4 058 372 Total assets 24 652 589 19 577 903 EQUITY AND LIABILITIES EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT

Share capital 12 3 100 000 3 100 000 Retained earnings 2 958 351 1 623 648 Total equity 6 058 351 4 723 648 LIABILITIES Insurance liabilities 13 17 199 313 11 797 647 Deferred tax liability 14 (c) 81 907 89 809 Deferred income 5 881 7 185 Current corporate income tax 14 (d) 103 648 76 329 Trade and other payables 15 1 203 489 2 883 285 Total liabilities 18 594 238 14 854 255 Total equity and liabilities 24 652 589 19 577 903


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INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2007 Notes 2007 2006 LVL LVL

Gross earned premiums on insurance 16 19 309 464 13 473 127 Reinsurers’ share of gross earned premiums on insurance 16 (1 912 381) (1 902 580) Net insurance revenue 17 397 083 11 570 547 Fee and commission income 17 58 121 48 763 Interest income 18 623 921 322 287 Net realised gain/loss of financial assets at fair value 19 3 736 (2 976) Net fair value (loss) of financial assets at fair value (12 018) (217 952) Other income 20 49 396 56 810 Other revenue 723 156 206 932 Total revenue 18 120 239 11 777 479 Gross claims paid 21 (a) (9 264 438) (10 235 105) Reinsurers’ share in gross claims 21 (b) 187 858 4 133 473 Gross change in insurance contracts 13 (b) (2 009 267) (14 507) Reinsurers’ share of gross change in insurance contracts 6 (a) 419 361 (891 072) Net insurance benefits and claims (10 666 486) (7 007 211) Fee and commission expense (22 173) (27 362) Other operating and administrative expense 22 (5 866 202) (4 316 278) Other expenses (5 888 375) (4 343 640) Total claims and expenses (16 554 861) (11 350 851) Net result before tax 1 565 378 426 628 Income tax expense 14 (a),(b) (230 675) (78 244) Net result for the year 1 334 703 348 384


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STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2007

Share capital

LVL

Retained earnings

LVL

Total

LVL Balance as at 1 January 2006 3 100 000 1 275 264 4 375 264 Net profit for the year - 348 384 348 384 Balance as at 31 December 2006 3 100 000 1 623 648 4 723 648 Net profit for the year - 1 334 703 1 334 703 Balance as at 31 December 2007 3 100 000 2 958 351 6 058 351


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CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2007

Notes 2007

LVL 2006 LVL

Cash flow from insurance activities Premiums received from direct insurance 21 571 131 14 652 890 Claims paid for direct insurance (9 264 438) (9 768 276) Receipts from ceded reinsurance 200 855 3 465 969 Payments made for ceded reinsurance (3 369 350) (1 577 212) Mandatory payments (235 610) (181 487) Administrative costs paid (5 475 430) (4 168 610) Other cash paid (522 171) (146 474) Other cash received 447 489 219 193 Corporate income tax paid (211 258) (21 270)

Total net cash flow from insurance activities 3 141 218 2 474 723 Cash flow from investing activities Acquisition of investments

Financial assets held to maturity (18 764 609) (2 818 093) Financial assets at fair value (12 080 072) (3 762 605) Loans and receivables (77 895) (31 701) Acquisition of tangible assets (460 734) (125 521) Acquisition of intangible assets (87 910) (391 700)

Disposal of investments Financial assets held to maturity 18 660 084 3 320 000 Financial assets at fair value 8 861 297 3 542 150 Loans and receivables 75 502 31 039 Disposal of tangible assets 4 364 9 220

Income from investing activities Interest received from financial assets held to maturity 292 101 86 338 Interest received from financial assets at fair value 208 449 212 143 Interest received from loans and receivables 8 827 597 Other cash received 19 006 6 685 Other cash paid (22 173) (27 361)

Total net cash flow from investing activities (3 363 763) 51 191 Cash flow from financing activities

Share issue - - Total net cash flow from financing activities - - Net (decrease)/ increase of cash and cash equivalents (222 545) 2 525 914 Result of foreign exchange rate fluctuations (51 079) (90 612) Cash and cash equivalents at the beginning of the year 4 058 372 1 623 070 Cash and cash equivalents at the end of the year 11 3 784 748 4 058 372


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NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2007

1. Accounting policies 1.1 The Company and its operations If Latvia AAS (further “the Company”), founded in year 1998, is part of the If group. If group was formed in 1999 through the merger of Scandinavian companies Skandia and Storebrand. In 2002, Sampo P&C joined the the If group. In 2004, all the If group became a part of Sampo group, owned by Sampo Oyj (Finland). If Latvia operates in Latvia and its area of business is non-life insurance. The Company’s income is comprised from insurance premiums in the following insurance lines:

§ Accident insurance; § Assistance insurance (travel); § Motor hull insurance; § Voluntary third party liability insurance for the owners motor vehicles; § Cargo insurance; § Marine hull insurance; § Marine third party liability insurance; § Property insurance against fire and catastrophe damages and other losses; § Insurance of financial risks; § General third party liability insurance; § Obligatory motor third party liability insurance; § Health insurance

1.2 Basis of preparation The stand alone financial statements of If Latvia AAS have been prepared in accordance with International Financial Reporting Standards (further IFRS) and Interpretations issued by its International Financial Reporting Interpretations Committee (further IFRIC) as endorsed by the European Union, and under the historical cost model, except for certain financial investments that have been measured at fair value. New or revised standards and interpretations, which have been endorsed by the European Union by the balance sheet date, but which will enter into force after the balance sheet date have no effect on the accounting principles applied by the Company. These standards include revisions of IFRS 8 Operating Segments, IAS 1 Presentation of Financial Statements (changes), IAS 23 Borrowing costs (changes), IAS 27 Consolidated and Separate Financial Statements (changes), IFRS 3 Business Combinations (changes), IFRIC 12 Service Concession Agreements, IFRIC 13 Customer Loyalty Programmes and IFRIC 14 The Limit on Defined Benefit Asset, Minimum Funding Requirements and their Interaction. The Company have adopted the following new and amended IFRS and IFRIC interpretations during the year: IFRS 7 Financial Instruments: Disclosures, Amendments to IAS 1 regarding Capital disclosures, IFRIC 7 Applying the Restatement Approach under IAS 29, IFRIC 8 Scope of IFRS 2, IFRIC 9 Reassessment of Embedded Derivatives and IFRIC 10 Interim Financial Reporting and Impairment. Besides adoption of IFRS 7 and changes to IAS 1, which have required additional disclosures regarding financial instruments and capital that have been disclosed throughout the financial statements, there had been no impact on the financial position or performance of the Company. 1.3 Use of estimates, assumptions and judgments


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The preparation of the financial statements necessitates the use of estimates, assumptions and judgements. These estimates and assumptions affect the reported amounts of assets and liabilities and contingent liabilities at the balance sheet date as well as affecting the reported income and expenses for the year. Although the estimates are based on management’s best knowledge and judgement of current facts as at the balance sheet date, the actual outcome may differ from these estimates, possibly significantly. 1.4 Summary of significant accounting policies If Latvia has identified the accounting policies that are most significant to its business operations and the understanding of its results. These accounting policies are those which involve the most complex or subjective decisions or assessments, and relate to insurance liabilities, deferred acquisition costs, the ascertainment of fair values of reinsurance assets and financial assets. In each case, the determination of these is fundamental to the financial results and position and requires management to make complex judgements based on information and financial data that may change in the future periods. Since these involve the use of assumptions and subjective judgements as to future events and are subject to change, the use of different assumptions or data could produce materially different results. The significant accounting policies adopted in the preparation of the financial statements are set out below. (a) Foreign currency transactions

The Latvian Lat is the underlying currency and the reporting currency of the financial statements of the Company. All other currencies are considered foreign currencies. Foreign currency transactions are recorded on the basis of the foreign currency exchange rates of the Bank of Latvia officially valid on the transaction date. Monetary assets and liabilities denominated in foreign currency are translated into Latvian Lats on the basis of the currency exchange rates of the Bank of Latvia officially valid on the balance sheet date. Foreign exchange gains and losses resulting from the revaluation are recorded in the income statement of the reporting period. (b) Property and equipment

All property and equipment, which include owner occupied properties, are stated at cost less accumulated depreciation and any impairment in value. Depreciation is provided on straight line basis over the estimated useful lives of the individual significant components of property and equipment. The estimated useful life of the equipment varies from 2 to 10 years. The assets’ residual values and useful lives are reviewed at each balance sheet date and adjusted if appropriate. Where the carrying amount of property and equipment exceeds its estimated recoverable amount, it is written down immediately to its recoverable amount. Recoverable amount is the higher of the fair value less costs to sell and the value in use of the related asset. Repairs and maintenance are charged to the income statement account during the period in which they are incurred. Leasehold improvements are amortised on a straight-line basis over the shorter of the estimated useful life of the leasehold improvement and the term of the lease. (c) Intangible assets

Intangible assets are initially recorded at acquisition cost, consisting of purchase price and expenses directly related to the acquisition. Intangible assets are carried in the balance sheet at cost, less accumulated amortisation and any accumulated impairment losses. These assets are amortised on a straight-line basis, on the basis of the useful life of the asset item during the period of 3 – 5 years.


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Intangible assets are written down to the recoverable amount (the higher of the fair value, less sales expenses, or the value-in-use), if the carrying amount is no longer recoverable. Impairment tests are conducted, if there is any indication that the carrying amount may not be recoverable.


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(d) Deferred acquisition costs

Acquisition costs directly related to premiums that are carried over to the next period are recognised in the balance sheet as deferred acquisition costs. Direct acquisition costs are recorded in the balance sheet on the basis of the ratio of the provision for unearned premiums to premiums written. Client acquisition costs are expense incurred by the Company in distribution of its policies through external intermediaries or agents network of the Company. (e) Income taxes

Income tax on the profit or loss for the year comprises current and deferred tax. Current corporate income tax for the reporting period is included in the financial statements based on the management’s calculations prepared in accordance with tax legislation of Republic of Latvia. Corporate income tax rate is 15%. Deferred tax is provided for using liability method on all temporary differences arising between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes at the balance sheet date. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of the assets and liabilities, using tax rates enacted at the balance sheet date. The principal temporary differences arise from different fixed asset depreciation rates, accrued expense, revaluation of certain investments in securities, and tax losses carried forward. Deferred income tax assets are only recognised to the extent that it is probable that future taxable profits will be available against which the temporary differences, carry forward of unused tax assets and unused tax losses, can be utilised. The carrying amount of deferred income tax assets are reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the deferred income tax asset to be utilised. (f) Reinsurance assets

The Company cedes reinsurance in the normal course of business. Reinsurance assets primarily include balances due from reinsurance companies for ceded insurance liabilities. Amounts due to reinsurers are estimated in a manner consistent with the associated reinsured policies and in accordance with the reinsurance contract. Premiums ceded and claims reimbursed are presented on a gross basis. An impairment review is performed on all reinsurance assets when an indication of impairment occurs. Reinsurance assets are impaired only if there is objective evidence that the Company may not receive all amounts due to it under the terms of the contract and that this can be measured reliably. (g) Fair values of financial assets and liabilities

Fair values are based on quoted market prices for the specific instrument or comparisons with other highly similar financial instruments. Establishing valuations where there are no quoted market prices inherently involves the use of judgment and applying judgment in establishing reserves against indicated valuations for aged positions, deteriorating economic conditions (including country specific risks), concentrations in specific industries, types of instruments or currencies, market liquidity and other factors.


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(h) Financial assets

The Company classifies its investments into the following categories; held to maturity financial assets, available for sale financial assets, financial assets at fair value through income statement and loans and receivables. The classification depends on the purpose for which the investments were acquired or originated. All regular way purchases of financial assets are recognised on the trade date i.e. the date the Company commits to purchase the asset. All regular way sales of financial assets are recognised on the settlement date i.e. the date the asset is delivered to the counterparty. Regular ways of purchase or sale are purchase or sale of financial assets that require delivery of assets within the time frame generally established by regulation or convention in the market place. Financial assets are initially recognised at cost, being the fair value of the consideration given. The acquisition cost includes all expenditures directly related to the purchase of the financial asset, including service charges payable to brokers and advisors, non-refundable taxes and other similar expenditures, except for expenses related to the acquisition of financial assets recognised at fair value in the income statement.

Held to maturity financial assets comprise financial assets that the Company has the positive intension an ability to hold until maturity. Premiums and discounts are amortised over the life of the instrument using the effective interest rate method. The amortisation of premiums and discounts is taken to the income statement. Available for sale financial assets, after initial recognition, are measured at fair value. Unrealised gains and losses are reported as a separate component of equity until the investment is derecognised or the investment is determined to be impaired. On derecognition or impairment, the cumulative gain or loss previously reported in equity is transferred to the income statement (the Company had no such investments in the reporting period and the comparative period). Financial assets at fair value through income statement have two sub categories; financial assets held for trading and those designated at fair value through income statement at inception. These are initially recorded at cost and subsequently measured at fair value. Fair value and realised gains and losses adjustments are recorded in the income statement. The Company has designated all financial assets at fair value through income statement at inception. Loans and receivables are financial assets with fixed or determinable payments. Loans and receivables are measured at amortised cost, using the effective interest method. Impairments The carrying value of all financial assets not carried at fair value is reviewed for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable. The identification of impairment and the determination of recoverable amounts is an inherently uncertain process involving various assumptions and factors, including the financial condition of the counterparty, expected future cash flows, observable market prices and expected net selling prices. For held to maturity financial assets and loans and receivables, carried at amortised cost, the amount of the loss measured as the difference between the financial assets’s carrying amount and the present value of estimated future cash flows discounted at the financial asset’s original effective interest rate. If a variable interest rate was used, the discounted rate for measuring the impairment loss is the current effective interest rate. Impairment loss is recorded in the income statement. Receivables are measured on individual basis, considering the information available regarding the customer's solvency. The write-down of financial assets related to operating activities is charged to expenses in the income statement while the write-down of financial assets related to investing activities is charged to investment expenses in the income statement.


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If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed. Any subsequent reversal of an impairment loss is recognised in the income statement, to the extent that the carrying value of the asset does not exceed its amortised cost at the reversal date. Only reversals of debt securities impairment losses are reversed through the income statement, to the extent that the initial impairment loss was transferred from equity to the income statement. The reversal must be objectively supported by an increase in the fair value of the instruments after the impairment loss was recognized. (i) Insurance receivables

Insurance receivables consist of amounts that are due from policy holders, reinsurers, agents, brokers, and other and which are carried in the balance sheet at amortised cost less doubtful debt provision. The amount of provisions is the difference between the carrying amount and the recoverable amount. Doubtful receivables are provided for when management identifies that the recovery of respective receivables is doubtful. Bad debts are written off when the recoverability of debtors is improbable. When amounts due from insurance debtors become overdue the policy is cancelled and respective amounts are reversed against premium written. (j) Cash and cash equivalents

Cash and cash equivalents comprise cash at bank and in hand and short term deposits with an original maturity of three months or less at the date of placement, free of any encumbrances. (k) Product classification

Insurance contracts are defined as those containing significant insurance risk at the inception of the contract, or those where at the inception of the contract there is a scenario with commercial substance where the level of insurance risk may be significant. The significance of insurance risk is dependant on both the probability of an insured event and the magnitude of its potential effect. Once a contract has been classified as an insurance contract, it remains an insurance contract for the remainder of its lifetime, even if the insurance risk reduces significantly during this period. (l) Insurance contracts liabilities

General insurance contracts liabilities General business contract liabilities are based on the estimated ultimate cost of all claims incurred but not settled at the balance sheet date, whether reported or not, together with related claims handling costs and reduction for the expected value of salvage and other recoveries. Significant delays can be experienced in the notification and settlement of certain type of general insurance claims, particularly in respect of liability business, environmental and pollution exposures, therefore the ultimate cost of which cannot be known with certainty at the balance sheet date. The estimations of insurance contract liabilities require certain assumptions to be made by the management of the Company. These assumptions have been disclosed in note 13. Provision for unearned premiums The proportion of written premiums attributable to subsequent periods is deferred as unearned premium. The change in the provision for unearned premium is taken to the income statement in the order that revenue is recognised over the period of risk in order to set up for future losses and operating expenses that may arise during the term of the insurance contract. The provision for unearned premiums is calculated separately for each contract, based on the share of the unexpired term of the contract of the total term of the contract


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Liability adequacy test At each balance sheet date, a liability adequacy test is performed, to ensure the adequacy of unearned premiums net of related deferred acquisition cost assets. In performing the test, current best estimates of future contractual cash flows, claims handling and policy administration expenses, as well as investment income from assets backing such liabilities, are used. Any inadequacy is immediately charged to the income statement by establishing an unexpired risk provision.

(m) Provision for other financial liabilities

A provision is recognised when the Company has a present legal or constructive obligation, as a result of past event, which it is probable, will result in a outflow of resources and when a reliable estimate of the amount of the obligation can be made. If the effect is material, the provisions is determined by discounting the expected future cash flows at a pre tax rate that reflects a current market assessment for the time value of money and, where appropriate, the risks specific to the liability. (n) Revenue recognition

Premium income Non-life business premiums written are recognised on policy inception and earned on a pro rata basis over the term of the related policy coverage. Premiums collected are premiums received and receivable under the insurance contracts or, in case of instalment payments, those instalment payments with the due date in the accounting period. If the due date of the first instalment payment is later than the effective date of the contract, the recognition of insurance premiums will be based on the effective date of the contract. Insurance premiums and instalment payments received for contracts whose effective date is later than the balance sheet date, are recognised as a prepayment. Commission income from fronting activities Commission income paid by reinsurer based on the fronting agreement is recognised as commission in the income statement. Investment income Interest income is recognised in the income statement as it accrues, taking into account the effective yield of the asset or an applicable floating rate. Interest income includes the amortisation of any discount or premium.

Realised gains and losses recorded in the income statement Realised gains and losses on the sale of property and equipment and of available for sale financial assets are calculated as the difference between net sales proceeds and the original or amortised cost. Realised gains and losses are recognised in the income statement when the sale transaction occurred. (o) Claims

General insurance claims incurred include all claim losses occurring during the year, whether reported or not, including the related handling costs and reduction for the value of salvage and other recoveries and any adjustments to claims outstanding from previous years. Claims handling costs include internal and external costs incurred in connection with the negotiation and settlement of claims. Internal costs include salary and social tax payments of the claims department employees.


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(p) Claims liability arising from insurance contracts For general insurance contracts, estimates have to be made both for the expected ultimate cost of claims reported at the balance sheet date and for the expected ultimate cost of claims incurred but not yet reported (IBNR) at the balance sheet date. It can take a significant period of time before the ultimate claims cost can be established with certainty, therefore IBNR claims form the part of the balance sheet claims provision. The primary technique adopted by management in estimating the cost of notified and IBNR claims, is that of using past claim settlement trends to predict future claims settlement trends. At each reporting date, prior year claims estimates are reassessed for adequacy and changes are made to the provision. The provisions for claims outstanding are not discounted for the time value of money. The provision for claims outstanding includes both indemnification and claims handling expenses. (q) Current, non current disclosure

For each assets and liability line item that combines amounts expected to be recovered or settled within twelve months after the balance sheet date, those items will be classified as current at the balance sheet date and the remaining balance as non current. (r) Events after the balance sheet date

Material circumstances that have an effect on the valuation of assets and liabilities and became evident between the balance sheet date and the date of preparing the financial statements, but are related to transactions that took place in the reporting period or earlier periods, are recorded in the financial statements.


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2. Risk management The primary objective of If Latvia AAS risk and financial management framework is to ascertain, manage and evaluate the risks related to the Company's operations, secure a stable revenue structure, ensure the Company's reliability, stability and profitability as well as to protect it from events that hinder the sustainable achievement of the Company’s performance objectives, including failing to exploit opportunities. If Latvia recognises the critical importance of having efficient and effective risk management systems in place. If Latvia assesses the range of risks to which the business is exposed, their evolution over time, and the impact of the mitigating actions which might be taken. The Company’s ordinary business operations involve insurance risk, financial risk and market risk.

(a) Regulatory framework Regulators are interested in protecting the rights of the policyholders and maintain close attention to ensure that the Company is satisfactorily managing affairs for their benefit. At the same time, the regulators are also interested in ensuring that the Company maintains an appropriate solvency position to meet unforeseen liabilities arising from economic shocks or natural disasters and that the risk levels are at acceptable levels. The operations of the Company are also subject to local regulatory requirements within the jurisdictions where it operates. Such regulations not only prescribe approval and monitoring of activities, but also impose certain restrictive provisions e.g. capital adequacy to minimise the risk of default and insolvency on the part of the insurance companies to meet the unforeseen liabilities as these arise. The Board of Directors of If Latvia AAS has established processes and guidelines to manage risk affecting the Company. The following internal regulations and procedures have bee approved: policy of identification of unusual and suspicious financial transactions, continuity plan, ethical guidelines, honesty in provision insurance services, an open attitude to the policy holders and possible conflict of interest of insurers employees in receiving and using insurance transaction necessary information, provisions of consideration customers complaints, BA Baltic governance policy, decision procedure guidelines and authorization policy of If Latvia, outsourcing procedures and policy, information security policy, provisions of business documentation. (b) Insurance risk The risk under an insurance contract is the risk that an insured event will occur including the uncertainty of the amount and timing of any resulting claim. The principal risk the Company faces under such contracts is that the actual damages exceed the estimated technical insurance provisions. This is influenced by the frequency of claims, severity of claims, and amount in relation to originally estimated and subsequent development of long term claims. The distribution of risks is improved by diversification of risk of loss to a large portfolio of insurance contracts as a more diversified portfolio is less likely to be affected across the board by change in any subset of the portfolio, as well as unexpected outcomes. The variability of risks is also improved by careful selection and implementation of underwriting strategy and guidelines as well as the use of reinsurance arrangements.


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The Company’s underwriting strategy is designed to ensure that risks are well diversified in terms of type of risk and level of insured sums. This is largely achieved through diversification across industry sectors and customer segements, increasing share of private account insurance in the total portfolio, regular review of actual claims experience and product pricing, as well as detailed claims handling procedures. Underwriting limits are in place to enforce and control appropriate risk selection. The Company enforces a policy of actively managing and promptly pursuing of claims, in order to reduce its exposure to unpredictable future developments that can negatively impact the Company.

Claims handling is governed by the claims handling guidelines. Indemnification limits are established in the course of the regular evaluation of claims handlers. The realisation of insurance risks is evaluated periodically, with additions being introduced in the respective procedures and rules when necessary. (c) Financial risk (1) Credit risk

Credit risk involves fluctuations in the Company's income, caused by the counterparty's failure to fulfil his obligations, or changes in the counterparty's creditworthiness. The Company's credit risk is related to the insurance receivables, arrangement of reinsurance, management of financial investments, and liquidity risk. Insurance receivables The credit risk in respect of customer balances, incurred on non payment of premiums will only persist during the grace period specified in the policy document of which the policy is either paid up or terminated. The terms and conditions of the insurance cover have been stipulated in the general insurance conditions. Adherence to the terms is systematically monitored. Reinsurance Reinsurance contracts are mostly placed with the related companies. The conclusion of each individual reinsurance contract with an external independent reinsurer is based on the analysis of the reinsurer's solvency and reliability. At each year end, management performs assessment of creditworthiness of reinsurers and ascertains suitable allowance for impairment of reinsurance assets. Financial investments Management of financial investments is regulated with the investment policy developed by the investment committee and approved by the Supervisory Council of If Latvia AAS. These regulations establish the credit, interest and currency risk limits for investments and their regional distribution. The investment policy is reviewed and, if necessary, adjusted by the investments committee on a half-yearly basis. (2) Liquidity risk Liquidity risk is the Company's inability to fulfil its obligations due to the current situation on the financial market or incorrect decisions regarding management of the balance sheet structure. Liquidity management involves mutually co-ordinated decisions regarding the structure of the terms of assets and liabilities, and financial instruments. The main purpose of liquidity management is to ensure the Company's ability to timely fulfil its liabilities, as well as fulfil the requirements set forth in the Law on Insurance Companies and Supervision Thereof, and to timely and adequately respond to significant changes occurring in the business environment. In order to maintain an adequate liquidity level, If Latvia AAS keeps a portion of its assets in liquid instruments, such as bank deposits and securities. The volume and distribution of liquid assets is established by the Investment committee.


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It is unusual for a Company primarily transacting insurance business to predict the requirements of funding with absolute certainty as theory of probability is applied on insurance contracts to ascertain the likely provision and the time period when such liabilities will require settlement. The amounts and maturities in respect of insurance liabilities are thus based on management’s best estimate based on statistical techniques and past experience. (d) Market risk Market risk is the risk of change in fair value of financial instruments from fluctuation in foreign exchange rates (currency risk), market interest rates (interest rate risk) and market prices (price risk), whether such change in price is caused by factors specific to the individual instrument or its issuer or factors affecting all instruments traded in the market. The Company structures levels of market risk and accepts them with the Investment committee that determines what constitutes market risk for the Company: basis used to fair value financial assets and liabilities; asset allocation and portfolio limit structure; diversification benchmarks by type of instrument and geographical area; sets out the net exposure limits by each counterparty, geographical segments; monitoring compliance with market risk policy and review of market risk policy for pertinence and changing environment. Currency risk The Company’s principal transactions are carried out in Latvian Lats and euros (pegged to Latvian Lat), therefore its exposure to foreign exchange risk arise primarily with respect to US dollar and British pounds which form insignificant part of the Company’s operations. In order to mitigate foreign currency exchange rate risk the Company’s financial assets are denominated in the same currencies as its insurance liabilities. The investment policy has established the limits for the open foreign currency positions, subject to half-yearly review by the Investment committee. Currency positions are kept on the minimum level required for servicing customers. Interest rate risk Interest rate risk is the risk that the value and future cash flows of a financial instrument will fluctuate because of changes in interest rates. The general interest risk limit is approved by the investments committee. The Company’s interest risk policy requires it to manage interest rate risk by maintaining appropriate mix of fixed and variable rate/ financial instruments. The policy also requires it to manage/ match the maturities of interest bearing financial assets and insurance liabilities. Price risk The Company’s price risk exposure relates to financial assets whose values will fluctuate as a result of changes in market prices, principally investment securities. Such investment securities are subject to price risk due to changes in market values of instruments arising either from factors specific to individual instruments or their issuers or factors affecting all instruments traded in the market.

The Company’s price risk policy requires managing such risks by setting and monitoring objectives and constraints on investments, diversification plans, limits on investment in each country.


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3. Property and equipment

Notes Equipment Total LVL LVL

Cost At 1 January 2006 611 996 611 996 Additions 125 521 125 521 Disposals (32 267) (32 267) At 31 December 2006 705 250 705 250 Additions 125 815 125 815 Disposals (37 904) (37 904) At 31 December 2007 793 161 793 161 Accumulated depreciation At 1 January 2006 306 686 306 686 Depreciation charge for the year 22 116 527 116 527 Disposals (30 413) (30 413) At 31 December 2006 392 800 392 800 Depreciation charge for the year 22 130 990 130 990 Disposals (33 452) (33 452) At 31 December 2007 490 338 490 338 Carrying amount At 31 December 2006 312 450 312 450 At 31 December 2007 302 823 302 823 The cost of fully depreciated property and equipment as at 31 December 2007 is LVL 228 426 (as at 31 December 2006: LVL 154 146).

Depreciation charges have been charged in other operating and administrative expense.


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4. Intangible assets

Notes Licences, software Total LVL LVL

Cost At 1 January 2006 948 291 948 291 Cost capitalised during the year 391 699 391 699 At 31 December 2006 1 339 990 1 339 990 Cost capitalised during the year 460 735 460 735 At 31 December 2007 1 800 725 1 800 725 Accumulated amortisation At 1 January 2006 298 857 298 857 Amortisation charge for the year 22 269 143 269 143 At 31 December 2006 568 000 568 000 Amortisation charge for the year 22 324 396 324 396 Disposals (6 027) (6 027) At 31 December 2007 886 369 886 369 Carrying amount At 31 December 2006 771 990 771 990 At 31 December 2007 914 356 914 356 The cost of fully depreciated intangible assets as at 31 December 2007 is LVL 473 633 (as at 31 December 2006: LVL 22 171) Amortisation charges have been charged in other operating and administrative expense.


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5. Deferred acquisition costs 31.12.2007 31.12.2006 LVL LVL At 1 January 491 157 327 885 Costs deferred during the year 1 885 735 1 123 145 Amortisation charge for the year (1 530 995) (959 873) Net change during the year 354 740 163 272 At 31 December 845 897 491 157

Distribution among insurance lines may be presented as follows:

2007 2006 LVL LVL

Motor hull insurance 151 277 70 354 General third party liability insurance 54 451 15 831 Property insurance (fire damage) 53 298 27 938 Property insurance (other losses) 28 699 15 044 Obligatory motor third party liability 26 427 3 413 Health insurance 23 169 28 635 Cargo insurance 15 487 6 823 Assistance insurance 1 791 220 Marine hull insurance 323 (6 167) Voluntary motor third party liability 302 - Marine third party liability insurance - - Insurance of financial risks (69) (776) Accident insurance (415) 1 957 Total 354 740 163 272


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6. Reinsurance assets 31.12.2007 31.12.2006 LVL LVL Reinsurers` share of claims reported by policyholders 1 147 870 728 509 Reinsurers` share of unearned premiums 43 481 50 841 Total reinsurance assets 1 191 351 779 350 Nearly 100% of re-insurers’ share of claims reported by policyholders are due from group companies. The Company has not obtained any collateral in relation to the reinsurance assets held.

(a) Reinsurers’ share of claims reported by policyholders The changes of reinsurers’ share of claims reported by policyholders during the year may be presented as follows:

Notes 31.12.2007 31.12.2006 LVL LVL

At 1 January 728 509 1 619 581 Claims incurred in the current accident year 811 424 2 757 874 Movement on claims incurred in prior accident years (204 205) 484 527 Claims paid during the year 21 (b) (187 858) (4 133 473) Net change during the year 419 361 (891 072) At 31 December 1 147 870 728 509


2007 2006 LVL LVL

Cargo insurance 632 479 37 082 Property insurance (fire damages) 7 229 (408 335) Property insurance (other losses) 3 893 (219 873) Obligatory motor third party liability 1 229 22 500 General third party liability insurance (6 833) (80 331) Insurance of financial risks (16 191) 15 191 Motor hull insurance (16 947) 14 969 Marine hull insurance (185 498) (272 275) Total 419 361 (891 072)


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(b) Reinsurers’ share of unearned premiums The changes of reinsurers’ share of unearned premiums during the year may be presented as follows:

31.12.2007 31.12.2006

Notes LVL LVL At 1 January 50 841 108 819 Premiums written in the year 16 1 905 021 1 844 602 Premiums earned during the year 16 (1 912 381) (1 902 580) Net change during the year (7 360) (57 978) At 31 December 43 481 50 841


2007 2006 LVL LVL

Insurance of financial risks 522 (16 894) Property insurance (other losses) - (12 749) Property insurance (fire damages) (288) (23 677) General third party liability insurance (7 594) (4 658) Total (7 360) (57 978)

7. Prepayments

31.12.2007 31.12.2006 LVL LVL Rental prepayments 23 747 17 056 Other prepayments 36 316 28 909 Total prepayments 60 063 45 965


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8. Financial assets

(a) Held to maturity Held to maturity portfolio is invested in term deposits.

(b) At fair value through income statement Financial assets classified in this category are designated by management on initial recognition when the designation eliminates or significantly reduces the inconsistent treatment that would otherwise arise from measuring the assets or recognising gains or losses on them on a different basis. Such policy is applied as insurance liabilities, that are covered by financial assets are also measured on fair value basis.

The Company’s investments in securities at fair value through income statement are analysed by listed and unlisted securities as follows: 31.12.2007 31.12.2006 LVL LVL Equity securities Listed 1 027 504 2 054 197 Total equity securities 1 027 504 2 054 197 Debt securities Listed 9 617 292 4 064 172 Total debt securities 9 617 292 4 064 172 Total financial assets at fair value 10 644 796 6 118 369

The Company’s investments in securities at fair value through income statement are analysed by type of securities as follows: 31.12.2007 31.12.2006 LVL LVL Equity securities Managed funds 1 027 504 2 054 197 Total equity securities 1 027 504 2 054 197 Debt securities Government bonds 5 514 757 1 664 148 Corporate bonds 2 643 717 1 107 975 Financial institution bonds 1 458 818 1 292 049 Total debt securities 9 617 292 4 064 172 Total financial assets at fair value 10 644 796 6 118 369

(c) Loans and receivables

Loans and receivables consist of loans to employees.


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9. Insurance receivables

31.12.2007 31.12.2006 LVL LVL Due from policyholders 4 122 667 2 807 353 Due from reinsurers 1 086 929 1 416 415 Due from agents, brokers and other intermediaries 247 959 265 302 Total insurance receivables 5 457 555 4 489 070

10. Other receivables Notes 31.12.2007 31.12.2006 LVL LVL Receivables from insurance companies (recourses) 227 218 140 328 Other receivables 146 805 87 552 Salvage assets 32 771 50 502 Receivables from reinsurers on settlement of claims 3 487 79 782 Total other receivables 410 281 358 164

11. Cash and cash equivalents

31.12.2007 31.12.2006 LVL LVL

Short term deposits (including demand and time deposits) 2 868 135 1 718 511 Cash at bank 911 339 2 336 331 Cash in hand 5 274 3 530 Total cash and cash equivalents 3 784 748 4 058 372

12. Share capital

The share capital consists of 310 000 ordinary shares with voting rights at the nominal value of LVL 10. As at 31 December 2007 the shares were fully paid and owned by If P&C Insurance Holding Ltd.


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13. Insurance liabilities 31.12.2007 31.12.2006 LVL LVL Provision for claims reported by policyholders 4 343 664 3 840 833 Provision for claims incurred but not reported (IBNR) 2 478 499 972 061 Total claims related to insurance liabilities 6 822 163 4 812 894 Provision for unearned premiums 10 377 150 6 984 753 Total premiums related insurance liabilities 10 377 150 6 984 753 Total insurance contracts liabilities 17 199 313 11 797 647

(a) Insurance liabilities split by main product lines Split for provision for claims reported by policyholders:

31.12.2007 31.12.2006 LVL LVL

Motor hull insurance 1 384 591 1 334 629 Cargo insurance 1 250 012 580 767 General third party liability insurance 602 293 712 133 Other 1 106 768 1 213 304 Total 4 343 664 3 840 833 Split for provision for claims incurred but not reported (IBNR):

Notes 31.12.2007 31.12.2006 LVL LVL

General third party liability insurance 1 497 507 129 762 Obligatory motor third party liability 729 685 102 854 Motor hull insurance 83 441 305 593 Other 167 866 433 852 Total 13 (e) 2 478 499 972 061 Split Provisions for unearned premiums:

31.12.2007 31.12.2006 LVL LVL

Motor hull insurance 4 541 298 3 003 186 Property insurance (fire damages) 1 486 845 1 019 103 Health insurance 1 452 796 1 051 382 Other 2 896 211 1 911 083 Total 10 377 150 6 984 753


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(b) Claims related to insurance contracts liabilities

The changes in claims reported during the year may be presented as follows:

Notes 31.12.2007 31.12.2006 LVL LVL

At 1 January 4 812 894 4 671 347 Claims incurred in the current accident year 12 000 219 11 728 315 Movement on claims incurred in prior accident years (726 514) (1 351 663) Claims paid during the year 21(a) (9 264 438) (10 235 105) Net change during the year 2 009 267 141 547 At 31 December 6 822 161 4 812 894

The changes in claims reported during the year may be also presented as follows:

31.12.2007 31.12.2006 LVL LVL

At 1 January 4 812 894 4 671 347 Change during the year 2 009 267 14 507 Adjustment for recourses and salvages - 127 040 Net change during the year 2 009 267 141 547 At 31 December 6 822 161 4 812 894 Distribution among insurance lines may be presented as follows:

2007 2006 LVL LVL

General third party liability insurance 1 257 904 32 420 Obligatory motor third party liability 798 564 117 157 Cargo insurance 649 776 103 114 Property insurance (fire damages) 6 561 (377 188) Property insurance (other losses) 3 533 (203 101) Voluntary motor third party liability 254 (85) Marine third party liability insurance - (360) Assistance insurance (2 338) 5 967 Accident insurance (44 363) 17 397 Insurance of financial risks (56 053) 39 261 Motor hull insurance (172 189) 702 336 Health insurance (199 762) 99 077 Marine hull insurance (232 620) (394 448) Total 2 009 267 141 547


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(c) Loss development triangle

2006 and prior 2007 Total LVL LVL LVL At the end of: Accident year 26 784 446 11 913 287 38 697 733 One year later 26 057 784 26 057 784 Current estimate of cumulative claims 26 057 784 11 913 287 37 971 071 Cumulative payments to date 23 501 610 7 647 300 31 148 910 Liability recognised in the balance sheet 2 556 174 4 265 987 6 822 161

(d) Premiums related to insurance contracts liabilities

The changes of premiums related to insurance contracts liabilities may be presented as follows:

Notes 31.12.2007 31.12.2006 LVL LVL

At 1 January 6 984 753 5 006 208 Premiums written in the year 16 22 701 862 15 451 672 Premiums earned during the year 16 (19 309 464) (13 473 127) Net change during the year 3 392 397 1 978 545 At 31 December 10 377 150 6 984 753


2007 2006 LVL LVL

Motor hull insurance 1 538 112 1 138 289 Property insurance (fire damages) 467 743 264 163 Obligatory motor third party liability 431 193 79 286 Health insurance 401 415 475 743 General third party liability insurance 304 264 137 768 Property insurance (other losses) 251 861 142 241 Accident insurance 13 964 22 862 Assistance insurance 8 619 1 619 Voluntary motor third party liability 2 514 (135) Cargo insurance (2 036) (9 880) Insurance of financial risks (9 219) (10 304) Marine hull insurance (16 033) (263 107) Total 3 392 397 1 978 545 (e) Assumptions The estimations of insurance contract liabilities require certain assumptions to be made by the management of the Company. It has been assumed that insurance liabilities related to reported but not settled claims will require outflow of resources in amount as estimated by the responsible claim handling department.


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Starting year 2007 reported but not settled claims are decreased by amount of possibly receivable regresses and salvages. Decrease in reserves is estimated by taking into account the statistics of received amounts in regresses and salvages as a proportion of total paid claims during last three years. The management of the Company has assumed that the claims from short-tale product lines are reported in a due period from the actual accident date and that possibility of claim being reported decreases with passage of time. As a result it has been assessed that insurance liabilities related to incurred but not reported claims from short-tale product lines are directly related to two main factors: i) gross insurance premiums earned and ii) time when premium was earned. Based on these assumptions the management of the Company has developed a method for estimating incurred but not reported (IBNR) claims. This method is based on statistical model, where claim reserve is calculated as estimated percentage of gross insurance premium earned; the longer the period from the date when premium was earned, the smaller the percentage applied for calculation of claim reserve. The assumptions regarding timing of earning of premiums and its estimated effect on incurred but not reported claim reserve can be disclosed as follows:

Time elapsed from earning of insurance premium

1 to 3 months 4 to 6 month 7 to 9 month 10 month and above

Range of IBNR reserve as percentage of gross premiums earned

0.02 - 0.2062 0.004 – 0.201 0 - 0.196 0 - 0.1911

According to historical trends the Company had high IBNR reserve level for short-tale product lines; as a result, there have been changes in assumptions during the year with respect to calculation of IBNR reserve. And based on analysis of triangular reports, the coefficients were decreased, and total decrease in IBNR for short-tale products resulted in LVL 537 thsd. During 2007 the management of the Company changed its assumptions with respect to calculation of incurred but not reported (IBNR) claims for long-tale product lines (i.e. Liability, CMTPL, and CMR). The major change relates to the assumption that claims may be reported after several years. Therefore IBNR for CMR product is calculated for three years, and CMTPL and Liability – for all historically issued policies. For Liability product a new reserving technique is applied, where IBNR is calculated using target risk ratio methodology. Total increase in IBNR for long-tale products resulted in LVL 1 243 thsd. The related reserve for claim handling expenses are assumed to be a percentage of both reported but not settled and incurred but not reported claims, dependant on the type of the insurance. During the year the Company has changed its assumptions based on resources needed to be spent on claim handling, as a result the claim handling expenses have decreased from around 11% to 9% of claim reserve. (f) Sensitivities The insurance contract liabilities are sensitive to the above key assumptions. The analysis below is performed based on possible movement in key assumptions all other assumptions held constant, showing effect on insurance liabilities. The correlation of assumptions might have a significant effect in determining the ultimate insurance liabilities.

Change in key assumption Change in assumption*

Change in insurance liabilities, LVL thousand

Change in claim handling expenses* 1% 60 Change in target risk ratio for Liability insurance* 1% 46 Change in IBNR percentage of earned premiums for CMTPL** 10% 79

Change in IBNR percentage of earned premiums for all other insurance lines** 10% 47


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* Change of one percentage point. ** Parallel increase of IBNR reserve as percentage of gross premiums earned in all time periods.


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14. Corporate income tax (a) Income tax expense 2007 2006 LVL LVL Current tax 238 577 88 491 Deferred tax (7 902) (10 247) Total income tax expense 230 675 78 244 (b) Reconciliation of tax charge

2007 2006 LVL LVL Profit before tax 1 565 378 426 628 Tax at 15% 234 807 63 994 Permanent differences 22 170 19 310 Prior year tax adjustment 13 263 - Differences arising from unrealized gains and losses 2 610 14 226 Recognition of previously unrecognized tax asset 755 (20 214) First time adoption of IFRS items - 14 072 Donation (42 930) (13 144) Total tax charge for the year 230 675 78 244 (c) Deferred tax liability 31.12.2007 31.12.2006 LVL LVL At 1 January 89 809 100 056 Accelerated capital allowances 10 657 19 028 Other timing differences (18 559) (29 275) At 31 December 81 907 89 809 (d) Current corporate income tax liability

31.12.2007 31.12.2006 LVL LVL

At 1 January 76 329 9 108 Calculated 238 577 88 491 Paid (211 258) (21 270) At 31 December 103 648 76 329


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15. Trade and other payables 31.12.2007 31.12.2006 LVL LVL Direct insurance payables 486 750 418 532 Accruals for bonuses and unused vacations 316 315 193 445 Payables from reinsurance activities 159 663 2 051 852 Trade payables 123 024 120 880 Other accrued expenses 117 737 98 576 Total trade and other payables 1 203 489 2 883 285

16. Net insurance revenue Notes 2007 2006 LVL LVL Gross written premiums on insurance 13 (d) 22 701 862 15 451 672 Gross change in unearned premium 13 (d) (3 392 398) (1 978 545) Total gross earned premiums on insurance 19 309 464 13 473 127 Reinsurers’ share of premium revenue 6(b) (1 905 021) (1 844 602) Reinsurers’ share of unearned premium 6(b) (7 360) (57 978) Total reinsurers’ share of gross earned premiums (1 912 381) (1 902 580) Total net insurance revenue 17 397 083 11 570 547 (a) Gross written premiums on insurance

Distribution among insurance lines may be presented as follows: 2007 2006 LVL LVL Motor hull insurance 9 374 323 5 713 141 Health insurance 3 325 847 2 478 224 Property insurance (fire damages) 3 021 051 2 084 228 General third party liability insurance 1 817 943 1 322 184 Obligatory motor third party liability 1 705 173 898 201 Property insurance (other losses) 1 626 720 1 122 276 Cargo insurance 1 130 488 1 135 708 Accident insurance 260 516 226 165 Assistance insurance 239 681 152 089 Insurance of financial risks 192 084 203 559 Voluntary motor third party liability 4 775 - Marine hull insurance 3 261 115 897 Total gross written premiums 22 701 862 15 451 672


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(b) Reinsurers’ share of premiums revenue 2007 2006 LVL LVL Property insurance (fire damages) 629 871 400 940 Cargo insurance 485 140 375 874 Property insurance (other losses) 339 162 215 891 General third party liability insurance 229 822 246 411 Motor hull insurance 96 370 62 530 Insurance of financial risks 72 048 54 204 Obligatory motor third party liability 28 030 28 175 Accident insurance 10 373 6 253 Assistance insurance 7 430 5 770 Marine hull insurance 6 775 448 554 Total reinsurers’ share of premiums revenue 1 905 021 1 844 602

17. Fee and commission income Fee and commission income consists of fronting commission income.

18. Interest income 2007 2006 LVL LVL Financial assets at fair value 340 502 194 445 Financial assets held to maturity 217 780 82 496 Cash and cash equivalents 56 812 44 749 Loans and receivables 8 827 597 Total interest income 623 921 322 287

19. Net realised gain/(loss) of financial assets at fair value 2007 2006 LVL LVL Realised gain 9 688 2 850 Realised loss (5 952) (5 826) Total net realised gain/(loss) of financial assets at far value

3 736 (2 976)

20. Other income

2007 2006 LVL LVL Previous year income 26 254 27 912 Income from disposal of assets 9 403 7 695 Intermediary commission for provided service 3 402 5 996 Other income 10 337 15 207 Total other income 49 396 56 810


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21. Claims paid

(a) Gross claims paid 2007 2006 LVL LVL Motor hull insurance 4 348 958 2 723 758 Health insurance 1 744 133 1 135 883 Obligatory motor third party liability 918 376 650 705 Property insurance (fire damages) 691 880 1 485 490 General third party liability insurance 454 606 187 395 Cargo Insurance 399 765 851 732 Property insurance (other losses) 372 551 799 879 Marine hull insurance 133 973 1 164 446 Accident insurance 85 151 70 146 Assistance insurance 68 211 49 877 Insurance of financial risks 46 834 1 115 794 Total gross claims paid 9 264 438 10 235 105

(b) Reinsurers’ share in gross claims 2007 2006 LVL LVL Marine hull insurance 133 973 1 014 545 Property insurance (fire damages) 54 959 1 309 361 Property insurance (other losses) 29 594 275 000 Insurance of financial risks 16 191 1 113 182 General third party liability insurance 8 466 45 565 Motor hull insurance 967 842 Cargo insurance (56 292) 374 978 Total reinsurers’ share in gross claims 187 858 4 133 473

22. Other operating and administrative expense

Notes 2007 2006 LVL LVL Client acquisition costs 1 840 451 1 267 642 Personnel expense 23 1 805 840 1 259 801 IT maintenance and operations 380 182 314 030 Amortisation of intangible assets 4 324 396 269 143 Rent of premises 297 147 236 703 Transportation costs 173 829 141 005 Depreciation on property and equipment 3 130 990 116 527 Office expense 128 199 98 859 Communication expense 108 153 81 713 Other administrative expense 677 015 530 855 Total other operating and administrative expense 5 866 202 4 316 278


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23. Personnel expense In year 2007 the average number of employees was 135 (2006: 128). Of total number of employees 26 (2006: 28) were employed in customer service centres. Personnel expense has been included in the following expense categories:

2007 2006 LVL LVL Other operating and administrative expenses 1 805 840 1 259 801 Claims paid 347 069 245 982 Total personnel expense 2 152 909 1 505 783 Personnel expense may be specified as follows:

2007 2006 LVL LVL Salaries 1 341 994 1 068 172 Social security contributions 460 035 281 722 Bonuses 299 544 110 614 Vacation reserve 51 336 45 275 Total personnel expense 2 152 909 1 505 783 Remuneration paid to the Board members:

2007 2006

LVL LVL Salaries 226 573 172 995 Bonuses 51 972 25 825 Social security contributions 34 667 40 214 Vacation reserve 9 144 8 306 Total remuneration 322 356 247 340


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24. Breakdown of income statement by the three largest insurance types

Motor hull insurance

Health insurance

Property insurance

Other product

lines

Total

(fire damages)

Gross earned premiums on insurance 7 836 211 2 924 432 2 553 308 5 995 513 19 309 464 Reinsurers’ share of gross earned premiums on insurance

(96 370) - (630 059) (1 185 952) (1 912 381)

Net insurance revenue 7 739 841 2 924 432 1 923 249 4 809 561 17 397 083 Fee and commission income - - 14 143 43 978 58 121 Interest income 190 723 63 672 133 488 236 038 623 921 Net realised gain/loss of financial assets at fair value

28 675 9 573 20 070 35 489 93 807

Net fair value (loss) of financial assets at fair value

(31 207) (10 418) (21 842) (38 622) (102 089)

Other income 15 100 5 041 10 568 18 687 49 396 Other revenue 203 291 67 868 156 427 295 570 723 156 Total revenue 7 943 132 2 992 301 2 079 676 5 105 130 18 120 239 Gross claims paid (4 348 958) (1 744 133) (691 880) (2 479 467) (9 264 438) Reinsurers’ share of gross insurance 967 - 54 959 131 932 187 858 Gross change in insurance contracts 172 189 199 762 (6 561) (2 374 657) (2 009 267) Reinsurers’ share of gross change in insurance contracts

(16 947) - 7 229 429 079 419 361

Net insurance benefits and claims (4 192 749) (1 544 371) (636 253) (4 293 113) (10 666 486) Fee and commission expense (6 778) (2 263) (4 744) (8 388) (22 173) Other operating and administrative expenses

(1 889 706) (630 294) (1 162 084) (2 184 118) (5 866 202)

Other expenses (1 896 484) (632 557) (1 166 828) (2 192 506) (5 888 375) Total claims and expenses (6 089 233) (2 176 928) (1 803 081) (6 485 619) (16 554 861) Net result before tax 1 853 899 815 373 276 595 (1 380 489) 1 565 378 Income tax expense (70 514) (23 541) (49 353) (87 268) (230 676) Net result for the year 1 783 385 791 832 227 242 (1 467 757) 1 334 702


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25. Related party transactions All insurance deals between the related parties are made at fair values, based on market prices and conditions. (a) Balances with related parties may be specified as follows:

Notes 31.12.2007 31.12.2006 LVL LVL

Receivables from reinsurance operations 1 064 863 1 342 421 Provisions for claims 908 806 423 905 Receivables for provided services 3 487 - Receivables for claims settlement for group companies - 79 782 Assets 1 977 156 1 846 108 Payables for reinsurance operations 49 773 1 884 523 Payables for received services 55 913 1 946 Liabilities 105 686 1 886 469 (b) Transactions with related parties may be specified as follows:

2007 2006 LVL LVL

Reinsurance premium

Parent company - - Other related companies (1 521 430) (1 571 593)

Claims paid Parent company - - Other related companies 146 317 3 703 024

Change in reinsurance share for claims liabilities Parent company - - Other related companies 484 901 (303 167)

Reinsurance agreement (890 212) 1 828 264 Premiums written

Other related companies 9 961 27 086 Intermediary commissions for provided service

Other related companies 3 314 5 564 Other sold services

Other related companies 93 341 8 469 Purchased IT licences

Other related companies (23 227) (29 536) Claims paid to related parties

Parent company - - Other related companies (53 583) (28 639)

Intermediary commissions for received service Other related companies (1 016) (6 748)

Other received services Other related companies (132 735) (736)

Other, net (103 945) (24 540)


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26. Contingent liabilities (a) The Company has entered into operating lease for vehicles. Future minimum lease payments under non-

cancellable leases may be specified as follows: 31.12.2007 31.12.2006 LVL LVL Within one year 48 379 32 475 After one year but not more than five years 56 346 31 655 Total 104 725 64 130

(b) The Company has entered into operating lease for premises. Future minimum lease payments under non-

cancellable leases may be specified as follows: 31.12.2007 31.12.2006 LVL LVL Within one year 333 607 300 463 After one year but not more than five years 1 040 021 1 187 040 More than five years - 90 688 Total 1 373 628 1 578 191

The Management of the Company is not aware of any other contingent liabilities.

27. Risk Management

(a) Capital management To meet capital requirements management of the company monitors solvency ratio on monthly basis and projects it for forthcoming years. Solvency status is reported to the council of the company on quarterly basis, and shareholders of the company make capital injection in case of insufficient forecasted solvency levels. The solvency requirement as at 31 December 2007 set by Financial and Capital Market Commission is LVL 3 374 614, while actual solvency level was LVL 3 809 292. (b) Fair value of financial assets and liabilities

All financial assets and liabilities carrying values as recorded in the balance sheet represent their fair value; as a result there is no unrecognized gain or loss. All long term financial assets (bonds and equities) are designated at fair value through profit or loss and revalued to show actual market value at particular date. Other financial assets and liabilities are liquid or have a short term maturity (such as overdrafts, money market deals with maturity less than 12 months) and have been placed at market rates prevailing at the year end, and therefore it is assumed that the carrying amounts approximate to their fair value.


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(c) Financial instruments recorded at fair value:

Quoted market

Valuation techniques – market observable

inputs Total

As at 31 December 2007 LVL LVL LVL

Financial assets at fair value through income statement 10 644 796 - 10 644 796

Equity security 1 027 504 - 1 027 504 Debt security 9 617 292 - 9 617 292

Held-to-maturity financial assets - 1 027 148 1 027 148

Loans and other receivables - 13 571 13 571 Reinsurance assets - 1 191 351 1 191 351 Insurance receivables - 5 457 555 5 457 555 Cash and cash equivalents 3 784 748 - 3 784 748 Financial assets 14 429 544 7 689 625 22 119 169 Insurance liabilities - 17 199 313 17 199 313 Trade and other payables - 1 203 489 1 203 489 Financial liabilites - 18 402 802 18 402 802

Quoted market

Valuation techniques – market observable

inputs Total

As at 31 December 2006 LVL LVL LVL Financial assets at fair value through income statement

6 118 369 - 6 118 369

Equity security 2 054 197 - 2 054 197 Debt security 4 064 172 - 4 064 172

Held-to-maturity financial assets

- 2 141 838 2 141 838

Loans and other receivables - 11 178 11 178 Reinsurance assets - 779 350 779 350 Insurance receivables - 4 489 070 4 489 070 Cash and cash equivalents 4 058 372 - 4 058 372 Financial assets 10 176 741 7 421 436 17 598 177 Insurance liabilities - 11 797 647 11 797 647 Insurance payables - 418 532 418 532 Reinsurance payables - 2 051 852 2 051 852 Trade and other payables - 412 901 412 901 Financial liabilites - 14 680 932 14 680 932


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(d) Concentration of risk The Company structures levels of market risk and accepts them with the Investment committee that determines what constitutes market risk for the Company: basis used to fair value financial assets and liabilities; asset allocation and portfolio limit structure; diversification benchmarks by type of instrument and geographical area; the net exposure limits by each counterparty, geographical segments; monitoring compliance with market risk policy and review of market risk policy for pertinence and changing environment (see Note 27(g)). The following table provides an analysis of Companies financial assets based on the country where these assets have been placed:

As at 31 December 2007 (LVL)

Latvia

European Union

member states

Estonia Eastern Europe Other Total

Financial assets at fair value through income statement 2 106 133 5 911 910 664 730 1 135 036 826 987 10 644 796

Equity security - - - 844 871 182 633 1 027 504 Debt security 2 106 133 5 911 910 664 730 290 165 644 354 9 617 292

Held-to-maturity financial assets - - 1 027 148 - - 1 027 148 Loans and other receivables 13 571 - - - - 13 571 Reinsurance assets 1 191 351 - - - - 1 191 351 Insurance receivables 5 457 555 - - - - 5 457 555 Cash and cash equivalents 2 761 149 - 1 023 599 - - 3 784 748 Total 11 529 760 5 911 910 2 715 477 1 135 036 826 987 22 119 169

As at 31 December 2006 (LVL)

Latvia

European Union

member states

Estonia Eastern Europe Other Total

Financial assets at fair value through income statement

2 071 313 3 414 966 432 840 145 236 54 014 6 118 369

Equity security - 2 054 197 - - - 2 054 197 Debt security 2 071 313 1 360 770 432 840 145 236 54 014 4 064 172

Held-to-maturity financial assets 2 141 838 - - - - 2 141 838 Loans and other receivables 11 178 - - - - 11 178 Reinsurance assets 779 350 - - - - 779 350 Insurance receivables 4 489 070 - - - - 4 489 070 Cash and cash equivalents 4 054 897 - 3 475 - - 4 058 372 Total 13 547 646 3 414 967 436 315 145 236 54 014 17 598 177

The financial assets of the Company have been diversified and there is no significant concentration on any particular issuers or group of issuers. The Company has not obtained any collateral in relation to the financial assets held.


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(e) Credit risk disclosure The table below shows the maximum exposure to credit risk for the components of balance sheet.

31.12.2007 31.12.2006 LVL LVL

Financial assets at fair value through income statement

Equity security 1 027 504 2 054 197 Debt security 9 617 292 4 064 172

Held-to-maturity financial assets 1 027 148 2 141 838 Loans and other receivables 13 571 11 178 Reinsurance assets 1 191 351 779 350 Insurance receivables 5 457 555 4 489 070 Cash and cash equivalents 3 784 748 4 058 372 Total 22 119 169 17 598 177

The table below provides information regarding the credit risk exposure of the Company by classifying assets according to the Company’s credit ratings of counterparties.

As at 31 December 2007 Neither past-due nor impaired

Investment grade

Non-investment grade

Past-due or

impaired

Total

LVL LVL LVL LVL Financial assets at fair value through income statement 7 971 108 2 673 688 - 10 644 796

Equity security - 1 027 504 - 1 027 504 Debt security 7 971 108 1 646 184 - 9 617 292

Held-to-maturity financial assets - 1 027 148 - 1 027 148 Loans and other receivables - 13 571 - 13 571 Reinsurance assets - 1 191 351 - 1 191 351 Insurance receivables* - 5 088 215 369 340 5 457 555 Cash and cash equivalents - 3 784 748 0 3 784 748 Total 7 971 108 13 778 721 369 340 22 119 169


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Neither past-due nor impaired As at 31 December 2006

Investment grade

Non-investment grade

Past-due or

impaired

Total

LVL LVL LVL LVL Financial assets at fair value through income statement 3 799 279 2 319 090 - 6 118 369

Equity security - 2 054 197 - 2 054 197 Debt security 3 799 279 264 893 - 4 064 172

Held-to-maturity financial assets - 2 141 838 - 2 141 838 Loans and other receivables - 11 178 - 11 178 Reinsurance assets - 779 350 - 779 350 Insurance receivables* - 4 268 576 220 494 4 489 070 Cash and cash equivalents - 4 058 372 - 4 058 372 Total 3 799 279 13 578 404 220 494 17 598 177

* The Company created 100% provisions for impaired insurance receivables; in 2007 - LVL 10 536, in 2006 - LVL 4 453. The table below provides information regarding the credit risk exposure of the Company at 31 December 2007 by classifying assets of the counterparties according to Moody’s rating system. AAA is the highest possible rating.

As at 31 December 2007 AAA AA A BBB BB B Not rated Total

(‘000) LVL LVL LVL LVL LVL LVL LVL LVL Financial assets at fair value through income statement

2 611 1 058 3 330 972 465 152 2 057 10 645

Equity security - - - - - - 1 028 1 028 Debt security 2 611 1 058 3 330 972 465 152 1 029 9 617


- 1 027 - - - - - 1 027

Loans and other receivables - - - - - - 14 14 Reinsurance assets - - 909 - - - 283 1 192 Insurance receivables - - - - - - 5 457 5 457 Cash and cash equivalents - 3 708 - 71 - - 5 3 784 Total 2 611 5 793 4 239 1 043 465 152 7 816 22 119


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As at 31 December 2006 AAA AA A BBB BB B Not rated Total (‘000) LVL LVL LVL LVL LVL LVL LVL LVL Financial assets at fair value through income statement

104 270 2 867 559 60 - 2 259 6 119

Equity security - - - - - - 2 054 2 054 Debt security 104 270 2 866 559 60 - 205 4 064


- 1 023 836 282 - - - 2 141

Loans and other receivables - - - - - - 11 11 Reinsurance assets - - 424 - - - 355 779 Insurance receivables - - - - - - 4 489 4 489 Cash and cash equivalents - 4 051 - 4 - - 4 4 059 Total 104 5 344 4 127 845 60 - 7 118 17 598

Equity securities are controlled by investment guidelines, which permit investments in fine quality equity funds. Insurance receivables are not rated, but receivables are analysed and supervised carefully. Past-due receivables constitute only a small part of total amount, and are considered to have fine quality. Age analysis of financial assets past-due but not impaired:

As at 31 December 2007

< 30 days 31 to 60 days

61 to 90 days

> 90 days Total past-due but not

impaired LVL LVL LVL LVL LVL Insurance receivables 297 474 28 252 21 796 21 818 369 340 Total 297 474 28 252 21 796 21 818 369 340


< 30 days 31 to 60 days

61 to 90 days

> 90 days Total past-due but not

impaired LVL LVL LVL LVL LVL Insurance receivables 142 366 32 987 17 590 27 551 220 494 Total 142 366 32 987 17 590 27 551 220 494


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(f) Liquidity risk The table below summarises the maturity profile of the financial liabilities of the Company based on remaining undiscounted contractual obligations, except for insurance contract liabilities, when maturity profiles are determined on the estimated timing of net cash outflows.

As at 31 December 2007 Up to a year Over 1 year Total LVL LVL LVL

Insurance liabilities 14 642 990 2 556 323 17 199 313 Trade and other payables 1 203 489 - 1 203 489 Total 15 846 479 2 556 323 18 402 802

As at 31 December 2006 Up to a year Over 1 year Total LVL LVL LVL Insurance liabilities 10 985 989 811 658 11 797 647 Trade and other payables 2 883 285 - 2 883 285 Total 13 869 274 811 658 14 680 932

Financial liabilities’ maturity is managed by related financial assets, where total duration of financial assets is held at low levels. Target duration is set in investment guidelines, and majority of investments constitutes of liquid government and financial institution bonds and deposits.


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(g) Market risk i) Currency risk

The table below summarises the Company’s exposure to foreign currency exchange rate risk at balance sheet date by categorising assets and liabilities by major currencies.


ASSETS LVL EUR USD SEK GBP Total Property and equipment 302 823 - - - - 302 823 Intangible assets 914 356 - - - - 914 356 Deferred acquisition costs 845 897 - - - - 845 897

Reinsurance assets 1 150 099 40 852 400 - - 1 191 351 Prepayments 60 063 - - - - 60 063 Financial assets

Held to maturity - 1 027 148 - - - 1 027 148 At fair value through

income statement 2 024 316 7 887 468 579 285 - 153 727 10 644 796

Loans and receivables 13 571 - - - - 13 571 Insurance receivables 3 547 452 1 494 869 64 156 326 040 25 038 5 457 555 Other receivables 406 794 3 487 0 0 0 410 281 Cash and cash equivalents 2 287 966 1 300 168 144 206 0 52 408 3 784 748 Total assets 11 553 337 11 753 992 788 047 326 040 231 173 24 652 589 EQUITY AND LIABILITIES EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT

Share capital 3 100 000 - - - - 3 100 000 Retained earnings 2 958 351 - - - - 2 958 351 Total equity 6 058 351 - - - - 6 058 351 LIABILITIES Insurance liabilities 12 857 222 3 133 919 1 100 376 0 107 796 17 199 313 Deferred tax liability 81 907 0 0 0 0 81 907 Deferred income 5 881 0 0 0 0 5 881 Current corporate income tax 103 648 0 0 0 0 103 648

Trade and other payables 818 137 301 146 33 593 41 252 9 361 1 203 489 Total liabilities 13 866 795 3 435 065 1 133 969 41 252 117 157 18 594 238 Total equity and liabilities 19 925 146 3 435 065 1 133 969 41 252 117 157 24 652 589


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ASSETS LVL EUR USD SEK GBP Total Property and equipment 312 450 - - - - 312 450 Intangible assets 771 990 - - - - 771 990 Deferred acquisition costs 491 157 - - - - 491 157 Reinsurance assets 726 004 50 347 2 999 - - 779 350 Prepayments 45 965 - - - - 45 965 Financial assets 3 648 670 3 652 463 638 134 - 332 118 8 271 385

Held to maturity 2 141 838 - - - - 2 141 838 At fair value through income

statement 1 495 654 3 652 463 638 134 - 332 118 6 118 369

Loans and receivables 11 178 - - - - 11 178 Insurance receivables 2 263 235 1 451 172 286 253 343 495 144 915 4 489 070 Other receivables 278 382 79 782 - - - 358 164 Cash and cash equivalents 3 516 721 381 474 79 401 - 80 776 4 058 372 Total assets 12 054 574 5 615 238 1 006 787 343 495 557 809 19 577 903 EQUITY AND LIABILITIES EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT Share capital 3 100 000 - - - - 3 100 000 Retained earnings 1 623 648 - - - - 1 623 648 Total equity 4 723 648 - - - - 4 723 648 LIABILITIES Insurance liabilities 9 398 794 2 174 622 116 017 - 108 214 11 797 647 Deferred tax liability 89 809 - - - - 89 809 Deferred income 7 185 - - - - 7 185 Current corporate income tax 76 329 - - - - 76 329 Trade and other payables 2 331 716 390 571 15 831 136 960 8 207 2 883 285 Total liabilities 11 903 833 2 565 193 131 848 136 960 116 421 14 854 255 Total equity and liabilities 16 627 481 2 565 193 131 848 136 960 116 421 19 577 903


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The analysis below is performed for reasonably possible movements in key variables with all other variables held constant, showing the impact on profit before tax (due to changes in fair value of currency sensitive monetary assets and liabilities) and equity (that reflects adjustments to profit after tax). The correlation of variables will have a significant effect in determining the ultimate impact on market risk, but to demonstrate the impact due to changes in variables, variables had to be changed on an individual basis.

31 December 2007 31 December 2006

Currency

Changes in variables

Impact on profit before

tax

Impact on equity


tax

Impact on equity

LVL LVL LVL LVL USD 5% (17 296) (14 702) 43 747 37 185 GBP 5% 5 701 4 846 22 069 18 759 USD (5%) 17 296 14 702 (43 747) (37 185) GBP (5%) (5 701) (4 846) (22 069) (18 759)

ii) Interest rate risk

The analysis below is performed for reasonably possible movements in key variables with all other variables held constant, showing the impact on profit before tax (due to changes in fair value of interest rate sensitive monetary assets) and equity (that reflects adjustments to profit after tax). The correlation of variables will have a significant effect in determining the ultimate impact on interest rate risk, but to demonstrate the impact due to changes in variables, variables had to be changed on an individual basis.

31 December 2007 31 December 2006

Currency



tax

Impact on equity


tax

Impact on equity

LVL LVL LVL LVL LVL 2.00% (64 088) (54 475) (74 949) (63 706) EUR 0.25% (16 367) (13 912) (10 364) (8 809) USD 0.25% (25) (21) (547) (465) LVL (2.00%) 64 088 54 475 74 949 63 706 EUR (0.50%) 32 734 27 824 20 727 17 618 USD (1.50%) 150 127 3 283 2 790

iii) Price risk

Equity price risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market prices (other than those arising from interest rate risk or currency risk), whether those changes are caused by factors specific to the individual financial instrument or its issuer, or factors affecting all similar financial instruments traded in the market. The Company’s price risk policy requires it to manage such risks by setting and monitoring objectives and constraints on investments, diversification plans, limits on investments in each country, sector and market and careful and planned use of derivative financial instruments. The Company has no significant concentration of price risk.


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The analysis below is performed for reasonably possible movements in key variables with all other variables held constant, showing the impact on profit before tax (due to changes in fair value of monetary assets) and equity (that reflects adjustments to profit after tax). The correlation of variables will have a significant effect in determining the ultimate impact on price risk, but to demonstrate the impact due to changes in variables, variables had to be changed on an individual basis. 31 December 2007 31 December 2006

Market



tax

Impact on equity*


tax

Impact on equity*

LVL LVL LVL LVL Eastern Europe 25% 211 218 179 535 - - Balkans 25% 45 658 38 810 - - Eastern Europe (25%) (211 218) (179 535) - - Balkans (25%) (45 658) (38 810) - -

28. Events after the balance sheet date

There were no material circumstances to the date of issue of the financial statements that have an effect on the valuation of assets and liabilities.


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INDEPENDENT AUDITOR’S REPORT

IF LATVIA AAS · If Latvia AAS Annual Accounts for the Year ended 31 December 2007 2 CONTENT...

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