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Annual Report 2008

Plain-text annual report

Annual Report 2008 1 S I R I U S I N T E R N A T I O N A L I N S U R A N C E C O R P O R A T I O N A N N U A L R E P O R T 2 0 0 8 Annual Report 2008 Contents White Mountains Insurance Group Comments from the President and CEO Board of Directors’ Report Income Statement - Group Balance Sheet - Group Change in shareholders’ equity - Group Cash flow Statement - Group Income Statement – Parent Company Balance Sheet - Parent Company Change in shareholders’ equity – Parent Company Cash flow Statement – Parent Company Performance analysis – Parent Company Note 1 Accounting Principles Note 2 Information on risks Note 3 Premium income Note 4 Claims incurred for own account Note 5 Operating costs Note 6 Investment income Note 7 Unrealised gains on investment Note 8 Investment expenses and charges Note 9 Unrealised losses on investments Note 10 Net profit or net loss per category of financial instrument Note 11 Taxes Note 12 Intangible assets Note 13 Land and buildings Note 14 Shares and participations in group companies Note 15 Shares and participations in associated companies Note 16 Investment in shares and participations Note 17 Bonds and other interest-bearing securirites Note 18 Other financial assets Note 19 Debtors arising out of direct insurance and other debtors Note 20 Categories of financial assets and liabilities and their fair values Note 21 Tangible assets Note 22 Deferred acquisition costs Note 23 Untaxed reserves Note 24 Provisions for unearned premiums Note 25 Claims outstanding Note 26 Equalisation provision Note 27 Claims handling provision Note 28 Pensions provisions and similar items Note 29 Tax provisions Note 30 Creditors, direct insurance and other creditors Note 31 Derivatives with negative values Note 32 Contingent liabilities and commitments Note 33 Associated parties Note 34 Average number of employees, salaries and other remuneration Note 35 Fees and reimbursement to auditors Note 36 Operational leasing Note 37 Class analysis The Board of Directors’ and the President’s signatures Audit report Definitions 1 3 6 11 12 14 16 17 18 20 22 23 24 31 38 38 40 40 41 41 41 42 42 43 44 44 46 46 47 47 48 48 49 49 49 50 51 52 52 52 53 55 55 55 56 57 59 59 60 61 62 63 2 Annual Report 2008 White Mountains – our owners White Mountains Re Group, Ltd. (White Mountains Re) is a Bermuda holding company whose operating companies offer capacity for most property, casualty, acci- dent & health, marine, and aviation expo- sures. Its principal operating companies are: White Mountains Reinsurance Company of America, a U.S.-based international mul- tiline reinsurance company that employs a conservative strategy with specialized under- writing expertise, a diversified portfolio, and strong operational discipline. Sirius International Insurance Corpora- tion, a Swedish-based international reinsurer that focuses mainly on property and other short-tailed lines. WMRe Sirius is the largest reinsurance company in Scandinavia and a leading reinsurer in Europe. White Mountains Re Bermuda Ltd., a Bermuda-based Class 4 property and casu- alty reinsurer that writes a portfolio of third party property catastrophe reinsur- ance and provides reinsurance capacity for its sister reinsurers, WMRe America and WMRe Sirius. White Mountains Insurance Group, Ltd. (White Mountains or the Company) is a financial services holding company with primary business interests in property and casualty insurance and reinsurance. The Company’s corporate headquarters and its registered office are located in Hamilton, Bermuda and its principal executive office is located in Hanover, New Hampshire. The Company conducts its business through: WHITE MOUNTAINS RE – global reinsur- ance. ONEBEACON – specialty and segmented commercial and personal property and casualty primary insurance. OneBeacon’s common shares are listed on the New York Stock Exchange under the symbol “OB”. White Mountains holds a 75% interest in OneBeacon. ESURANCE – personal auto insurance directly marketed and underwritten on the internet. WHITE MOUNTAINS ADVISORS – invest- ment management with $25.8 billion of assets under management. White Mountains’ common shares are listed on the New York Stock Exchange and the Bermuda Stock Exchange under the sym- bol “WTM”. Market capitalization as of December 31, 2008 was approximately $2.4 billion. As of December 31, 2008, White Moun- tains reported total assets of $15.9 billion, shareholders’ equity of $2.9 billion, and ad- justed GAAP book value per share NGM of $353. . 1 Annual Report 2008 "Once again, my sincere thanks to all those who make our continued success possible: to our hard-working and skilled staff for all their efforts and to our brokers and customers for their continued support." 2 Annual Report 2008 Comments from the President and CEO Stability and resilience were the themes despite some very significant losses. of 2008. We successfully navigated Unsurprisingly, Hurricane Ike topped our way through a terrible year for the the list, costing us around $25 million world’s financial system, enhancing our net ($28 million gross). This made it our profitability at the same time as reaching third highest loss ever, and there were out to new customers. others. We were heavily exposed to In all the attention paid to the dif- hailstorms in Slovenia, for example, and ficulties of the banks, some people have also to extreme cold weather conditions overlooked the fact that it was also a big in parts of China. Despite these events, year for natural catastrophes. The total all classes of business made an under- cost to insurers and reinsurers is esti- writing profit. mated to have been around $50 billion, a The fact that we managed to im- figure only previously exceeded in 2005. prove on last year’s excellent results Add in the soft renewal season at the reflected the lower number of minor start of 2008, with prices falling in most losses. Above all, though, we were of classes of business, and it was always again able to release funds from prior going to be a challenging year. years. At Sirius we take a conserva- I am, therefore, pleased to report that tive view of our loss reserves, and it is Sirius International was able to deliver a normal for us to see them run off at a slightly improved performance, recording profit. This year our claims development its second highest profits ever. We have was especially favourable. now achieved positive underwriting re- Although 2008 was a grim year for sults for each of the past seven years – in investment returns globally, even here bad times as well as good. As I have said we achieved a profit of $42 million: ex- before, it is this consistency that enables cellent under the circumstances if mod- us to provide our customers with a mean- est by historical standards. Like the rest ingful, long-term commitment. of the market we saw our equities fall Our combined ratio of 87% (88% in in value, but this movement was offset 2007) is certain, yet again, to be one of by our holdings in the United States and the best in our industry. It came about the sharp rise in the dollar. 3 Annual Report 2008 4 g ö r a n t h o r s t e n s s o n p r e s i d e n t & c e o Annual Report 2008 Our security ratings were confirmed trend. It is worth noting that increased during the year: A (Excellent) from A.M. line sizes and a growing reputation in Best; A3 from Moody’s; and A- (Strong) the market have enabled us to lead more from Standard & Poor’s. Noting “the com- business. We expect this trend to con- pany’s outperformance of its peers over tinue. In January 2009 we were pleased to an extended period,” S&P predicted that open a new branch office in Australia, in Sirius would prove more resilient than order to better serve our clients. most during the economic downturn. Once again, my sincere thanks to all Looking ahead, the market has those who make our continued success stopped softening and is moving upwards possible: to our hard-working and skilled in some areas. At the 2008/2009 renewal staff for all their efforts and to our bro- we saw rate rises on United States busi- kers and customers for their continued ness and in those programs that had re- support. Whatever 2009 may bring to the cently experienced high loss ratios. After wider economy, we look forward to being writing slightly less premium in 2008 in of continued service. response to worsening market conditions, we anticipate a resumption in our upward At a glance 2008 2007 Net premium income $858 million $858 million Claims net of reinsurance $560 million $505 million Combined Ratio 87% 88% Investment income $42 million $61 million Income before tax (group) $127 million $132 million Solvency capital (group) $1,343 million $1,617 million Solvency capital (group) SEK 10,455 million SEK 10,399 million g ö r a n t h o r s t e n s s o n p r e s i d e n t & c e o 5 Annual Report 2008 Board of Directors’ Report Sirius International Insurance Corporation Catastrophic events worth noting during (publ) 2008 are the snowstorm in China, in Janua- Corporate Identity Number: 516401-8136 ry, the storm Emma in March, hailstorms in Slovenia and Germany during the summer The Board of Directors and the President and Hurricane Ike, which hit the American of Sirius International Insurance Corpora- East Coast in September. Together, these tion (publ) (Sirius International) hereby events are expected to result in claims submit the company’s annual report for totalling approximately MSEK 600 for own 2008. General information concerning the company account, and refer primarily to the class of business, Property. Except for these claims, the claims frequency and the allo- cation between the classes of business are Sirius International is active in internatio- in line with expected results. As regards nal insurance and reinsurance. Sirius Inter- the reinsurance business, in total, 2008 is national was established in 1989. seen as one of the years with the highest Insurance operations commenced in claims frequency occurring during the last 1945 in Sirius Insurance Company Ltd. In 20 years. 1989, the reinsurance activities were trans- Gross premium income for the Group ferred to Sirius International. Sirius Inter- amounted to MSEK 6,683 (2007: MSEK national has been the Parent Company of 6,652) and MSEK 6,683 (2007: MSEK 6,652) the Sirius Group since 1992. for the Parent Company. Premium income for own account for the Group totalled The development, results and position of MSEK 5,602 (2007: MSEK 5,810) and for the the company Parent Company MSEK 5,602 (2007: MSEK The financial year 2008 was yet another of 5,810). The insurance operating results of the best years for Sirius in terms of the re- the Group amounted to MSEK 928 (2007: sults of the insurance operations, in spite a MSEK 972) and for the Parent Company somewhat higher level of claims frequency MSEK 923 (2007: MSEK 998). compared with the previous year. Contri- It is worth noting that all of the branch buting factors have included the continued offices, with the exception of the agency favourable results of the run-off portfo- in Hamburg, which was hit by claims for lios from previous years and a satisfactory the hailstorms mentioned above, recorded premium rate level on the active insurance a combined ratio below 100%, as did all portfolio. The positive run-off results of active classes of insurance. The combined the previous years’ portfolios is due to the ratio was 87% (2007: 88%) for the Group adjustments of the reserve levels which and 87% (2007: 88%) for the Parent Compa- were made after internal and external ny. The return on deployed capital in the technical reviews were undertaken earlier insurance operations amounted to 16% in the year. The volatility on the financial markets 6 Annual Report 2008 during the autumn with dramatic collapses national (WMI), and now owns a total of in the world's stock markets has had a ne- 22% of the company. The shareholding in gative impact on the company's investment WMI is reported according to capital equity results. It is principally the equity portfolio method and is classified as an investment that has been impacted by significant reali- in an associated company. Furthermore, sed and unrealised losses, as a result of the the Company has acquired, through the global recession. The Company has had no subsidiary in The Netherlands, approxima- exposure against bonds with inferior credit tely 6% of the fellow subsidiary OneBeacon ratings (Subprime Debt) and, therefore, Insurance Group (OBI.) The classification, the amount of incurred and expected los- valuation and reporting as regards OBI is ses in the bond portfolio are insignificant. based on the rules for financial instruments The substantial reductions in interest rates listed in active markets as approximately which have been carried out by the majo- 25% of OBI is listed on the New York Stock rity of the central banks during the year Exchange (NYSE). have positively affected the increase in Sirius International Holdings (NL) BV, value of the bond portfolio. Furthermore, Amsterdam, The Netherlands, has received the Company's continued, strategic policy a capital contribution of MUSD 100. regarding currency exposure to, primarily, Other events regarding changes in the the USD has provided significant realised Group’s structure are described primarily and unrealised currency rate gains. under the section “Ownership”. The investment results, as presented in the Income Statement of the Group, Ownership amounted to a profit of MSEK 94 (2007: Sirius International is a wholly owned sub- MSEK 208) before allocation of interest sidiary of Sirius Insurance Holding Sweden to the insurance operations. If unreali- AB (Corporate Identity Number 556635- sed fluctuations in the value of the bond 9724), Stockholm, Sweden, which is ultima- portfolio, which is recorded directly in tely owned by White Mountains Insurance equity, are included, then the investment Group Ltd, Bermuda. result amounted to a profit of MSEK 213, In June 2008, the company Sirius Inter- which is equivalent to a total yield of 2%. national Holdings (NL) BV, Amsterdam, The Calculation of investment yield and to- Netherlands, was acquired. tal yield is made in accordance with the At year-end, the Group consists of recommendations of the Swedish Financial Sirius International Insurance Corporation Supervisory Authority. The Group has, (publ) with the subsidiaries Sirius Belgium during the year, decreased the share of Réassurances S.A. (in liquidation), Liège, equities in the investment portfolio from Belgium, Sirius Rückversicherungs Service approximately 25% at the beginning of the GmbH, Hamburg, Germany, and Sirius In- year to approximately 23% at the end of ternational Holdings (NL) BV, Amsterdam, the year, including investments in associa- The Netherlands. ted companies and deposits from compa- In addition, Sirius International has six nies which have ceded reinsurance. During branch offices outside of Sweden. These the year, Sirius International acquired an include the branch office in London, Great additional 5% of White Mountains Inter- Britain - Sirius International Insurance Cor- 7 Annual Report 2008 poration (publ) UK Branch; the branch of- Information on risks fice in Zurich, Switzerland - Sirius Interna- Please refer to Note 1, Accounting princip- tional Insurance Corporation (publ), Stock- les and Note 2, Information on risks. holm, Zurich Branch; the branch office in Singapore - Sirius International Insurance Financial instruments and risk management Corporation (publ) (Asia Branch), Singa- Please refer to Note 1 Accounting principle pore; the branch office in Liège, Belgium and Note 2 Information on risks. - Sirius International Insurance Corporation (publ), Belgian Branch; the branch office Salaries and other remuneration to senior in Copenhagen, Denmark, Sirius Interna- members of the management tional Danish Branch, filial af Sirius Inter- Please refer to Note 34, Average number national Försäkringsaktiebolag (publ) and of employees, salaries and other remune- in Hamburg, Germany. The operation in ration. Germany is conducted through the agency Sirius Rückversicherungs Service GmbH, Insurance contracts with no significant which operates on behalf of Sirius Interna- insurance risk tional. The Company has only a few insurance Additionally, Sirius International has contracts with no significant insurance risk. applied for and received permission to These contracts are classified as investment establish a branch office in Australia, contracts. Please refer to Note 1, Accoun- where the operations are planned to ting principles. commence during the first half year 2009. During 2001, a voluntary liquidation Expectations concerning future developments of Sirius Belgium Réassurances S.A., Liège, The underlying profitability of the insuran- Belgium, was commenced as the company ce operations is positive in spite of increa- is no longer in active operation. The liqui- sing competition and the diversified invest- dation has not been completed, due to a ment portfolio is expected to contribute to tax dispute. a stable return on investments. However, the continued increased competition requi- Major events occurring during the financial res discipline in pricing and underwriting, year or after the closing day continued efficiency improvements and a As per January 21, 2009 a restructuring well-balanced risk relationship between has taken place within the White Moun- insurance operations and investments in tains International Group, of which Sirius order to secure long-term profitability. International owns approximately 28.2%. For 2009, Sirius International’s objective This restructuring is considered to have no is to achieve a combined ratio lower than impact on Sirius International's holding. 94% and an underwriting return on capital (UROC) of 12%. 8 Five-year Summary Annual Report 2008 GROUP (MSEK) Net premium income Net premiums earned Other technical income Allocated interest Net claims incurred Net operating expenses Insurance operating result Investment operating result Other expenses Net income for the year Net technical provisions Market value on investment assets Insurance operating result Claims ratio Cost ratio Combined ratio Investment result Investment yield Total yield Solvency capital Shareholders’ equity Deferred tax on untaxed reserves Deferred tax other Deferred tax on reserve for unrealised capital gains Excess/under values on investment assets - Other investment assets Total solvency capital Solvency ratio Capital base 3) Required solvency capital Group-based values 4) Capital base Solvency requirement PARENT COMPANy (MSEK) Net premium income Net premiums earned Allocated interest Net claims incurred Net operating expenses IInsurance operating result Investment operating result Other expenses Net income for the year Net technical provisions Market value on investment assets Insurance operating result Claims ratio Cost ratio Combined ratio Investment result IInvestment yield Total yield Solvency capital Shareholders’ equity Untaxed reserves Deferred tax other Deferred tax on Reserve on reserve for unrealised capital gains Excess/under values on investment assets - Other investment assets Total solvency capital Solvency ratio Capital base Required solvency capital 2008 2007 1) 2006 2) 2005 2) 2004 5 602 5 822 0 168 -3 659 - 1 403 928 -74 -27 695 7 992 16 743 63% 24% 87% 3% 2% 8 017 2 420 0 18 5 810 6 019 10 259 -3 471 -1 845 972 -51 -27 577 7 257 5 898 5 149 -3 046 -1 927 1 079 84 -35 669 4 877 4 988 -12 130 -3 463 -1 618 26 692 -35 541 4 781 4 608 5 173 -2 663 -1 805 316 597 -35 651 7 001 15 508 8 774 17 881 8 824 18 862 8 907 14 957 58% 30% 88% 6% 2% 7 833 2 581 0 -15 51% 33% 84% 3% 1% 7 468 2 430 0 -5 69% 32% 102% 4% 5% 7 268 2 094 0 4 58% 39% 97% 3% 6% 6 616 2 081 -26 44 0 0 0 -2 65 10 455 187% 10 013 956 10 399 179% 9 764 956 9 893 136% 9 628 1 154 9 364 192% 8 324 792 8 780 184% 8 040 1 302 17 236 2 566 18 482 2 369 2008 2007 1) 2006 2) 2005 2) 2004 5 602 5 822 168 -3 659 -1 408 923 106 -17 738 5 810 6 019 258 -3 418 -1 861 998 153 -17 430 7 245 5 886 149 -2807 -1916 1 312 329 -25 227 4 713 4 739 130 -3165 -1543 161 511 -25 553 3 768 3 765 164 -1973 -1536 421 -109 -25 -70 7 993 16 882 7 001 15 508 7 340 15 314 7 159 14 431 4 588 11 774 63% 24% 87% 3% 2% 57% 31% 88% 5% 3% 1 295 9 197 1 136 9 217 18 -15 0 10 510 0 10 338 188% 9 968 956 178% 9 776 956 48% 32% 80% 3% 3% 1 093 8 680 0 -14 0 9 759 135% 9 560 1 105 67% 33% 99% 4% 5% 1 077 7 408 0 0 28 8 513 181% 8 210 724 52% 41% 93% 3% 2% 785 7 433 0 44 83 8 345 198% 7 876 722 1) For the comparison year 2006 the figures have been recalculated according to legally restricted IFRS 2) For the comparison years 2005 and 2004 the figures have not been recalculated according to legally restricted IFRS. 3) Includes Sirius International with subsidiaries. 4) Includes WM Re Ltd Group. 9 Annual Report 2008 Proposed Appropriation of Earnings For 2008, the Parent Company recorded a result before appropriations and taxes of MSEK 1,012 (2007: MSEK 1,134). Net in- come for the year amounted to a profit of MSEK 738 (2007: MSEK 430). As of December 31 2008 retained earnings in the Group amounted to MSEK 439. At the disposal of the General Meeting of the Shareholders of the Parent Company Sirius International: Retained earnings Unrestricted reserves Dividend paid, resolved by the meeting of the shareholders Group contribution Net income for the year Total The Board of Directors and the President propose that the amount shall be appro- priated as follows (TKR): SEK in thousands 372,559 49,345 -330,000 -335,084 738,207 495,027 - Dividends to owners - Retained earnings Total 295,000 200,027 495,027 The company’s financial position does not Regarding the company’s and the Group’s reflect any other view than that the com- results and financial position, please refer pany can be expected to fulfil its obliga- to the attached income statements and ba- tions in the short-term, as well as in the lance sheets, cash flow analyses, report on long-term. It is the opinion of the Board changes in shareholders' equity and of Directors that the solvency capital of accompanying notes. the company as it has been reported in the annual report is adequate in relation to the scope and risks of the operations. 10 Annual Report 2008 Income Statement – Group January 1 - December 31 (MSEK) TEChNICAL ACCOUNT FOR INSURANCE OPERATIONS Earned premiums, for own account Gross premium income Ceded reinsurance premiums Change in the gross provision for unearned premiums Change in the provision for unearned premiums, Reinsurers´ share Total earned premiums, for own account Allocated investment return transferred from the non-technical account Other technical income, for own account Claims incurred, for own account Claims paid - Gross amount - Claims handling expenses - Reinsurers’ share Claims paid, for own account Change in the provision for claims, for own account - Gross amount - Reinsurers’ share Total claims incurred, for own account Change in other technical provisions, for own account - Gross amount Total other claims incurred, for own account Operating costs Operating profit/loss of technical account NON-TEChNICAL ACCOUNT Balance of technical account Investment income/expenses - Investment income - Unrealized gains/losses - Investment expenses and charges Investment income allocated to the technical account Total investment income/expenses Goodwill depreciation Result before appropriations and taxes Taxes Net income for the year Note 2008 2007 3 3 4 5 4 5 6 7, 9 8 11 6,683 -1,081 156 64 5,822 168 0 6,652 -842 120 89 6,019 259 10 -4,080 -3,714 -241 561 -163 423 -3,760 -3,454 -2,992 3,090 -3,662 -71 44 -3,481 3 3 10 10 -1,403 928 -1,845 972 928 972 1,386 1,136 -729 -563 -168 -74 -27 827 -132 695 -5 -923 -259 -51 -27 894 -317 577 11 Annual Report 2008 Balance Sheet - Group December 31 ASSETS Intangible assets Goodwill Capitalized software Total intangible assets Investment assets Land and buildings Total land and buildings Investments in associated companies Shares and participations in associated companies Total investments in associated companies Other financial investments Shares and participations Bonds and other interest bearing securities Other financial assets Total other financial investments Note 2008 2007 12 13 15 16, 20 17, 20 18, 20 291 1 292 4 4 2,101 2,101 1,745 8,782 0 10,527 318 0 318 5 5 1,652 1,652 2,196 7,662 2 9,860 Deposits with cedents 1,716 1,268 Reinsurers’ share of technical provisions Provisions for unearned premiums Claims outstanding Total reinsurers’ share of technical provisions Debtors Debtors arising out of direct insurance operations Debtors arising out of reinsurance operations Other debtors Total debtors Other assets Tangible assets Cash and bank balance Total other assets Prepayments and accrued income Accrued interest Deferred acquisition costs Other prepayments and accrued income Total prepayments and accrued income TOTAL ASSETS 12 24 25 19 19 21 385 4,588 4,973 37 1,252 842 2,131 16 2,454 2,470 254 1,107 1,361 30 991 654 1,675 17 2,723 2,740 170 166 22 441 464 18 629 11 641 24,843 19,520 Annual Report 2008 December 31 Note 2008 2007 ShAREhOLDERS’ EQUITy, PROVISIONS AND LIABILITIES Shareholders’ equity Share capital (8 million shares of nom. Value SEK 100) Fair value reserve Restricted reserves Retained earnings Net income for the year Total shareholders’ equity Technical provisions Provisions for unearned premiums Claims outstanding Equalization provision Claims handling provision Total technical provisions Provisions for other risks and expenses Pension provisions Tax provisions Total provisions for other risks and expenses Deposits received from reinsurers Creditors Creditors arising out of direct insurance operations Creditors arising out of reinsurance operations Derivatives Other creditors Total creditors Accrued expenses and deferred income Accrued expenses and deferred income Total accrued expenses and deferred income TOTAL ShAREhOLDERS’ EQUITy, PROVISIONS AND LIABILITIES Pledged assets Contingent liabilities 800 49 6,778 -305 695 8,017 2,343 10,507 3 113 800 -37 6,637 -144 577 7,833 2,061 6,219 5 77 12,966 8,362 15 2,848 2,863 13 2,841 2,854 59 36 25 245 0 546 816 122 122 23 17 1 301 342 93 93 24 25 26 27 28 29 30 31 30 24,843 19,520 32 32 8,527 79 7,714 76 13 Annual Report 2008 Change in shareholders´equity for the Group Restricted equity Non-restricted equity Total Group (MSEK) Amount 1 January 2008 Transfer of net result from previous year Translation differences for the year Transfer to fair value reserve Change of untaxed reserves Net profit/loss for the year Group contribution provided Dividend paid2) Amount 31 December 2008 Share Other Fair value brought loss for Capital Reserves reserve forward the year Profit/loss Net profit/ 800 6,637 -37 0 0 0 0 0 0 0 0 0 0 141 0 0 0 800 6,778 0 0 86 0 0 0 0 49 -144 577 68 0 -141 0 -335 -330 -305 577 - 577 0 0 0 695 0 0 Total equity 7,833 0 68 86 0 695 -335 -330 695 8,017 Amount 1 January 2007 800 6,250 - 50 -202 670 7,468 Transfer of net result from previous year Translation difference for sale of subsidiary Translation difference for the year Acquisition of subsidiary 1) Sale of subsidiary Transfer from fair value reserve net previous year Transfer to fair value reserve Tax effect of transfer from fair value reserve previous year Tax effect of transfer to fair value reserve Transfer to untaxed reserves Net profit/loss for the year Group contribution provided Dividend paid Amount 31 December 2007 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 387 0 0 0 0 0 0 0 0 69 -52 -19 15 0 0 0 0 800 6,637 -37 670 158 1 6 -3 0 0 0 0 -387 0 -152 -235 -144 -670 0 0 0 0 0 0 0 0 0 577 0 0 577 0 158 1 6 -3 69 -52 -19 15 0 577 -152 -235 7,833 1) The subsidiary Sirius International Holdings (NL) B.V. has been acquired during the year. 2) During the year dividends have been provided to the Parent Company Fund American Holdings AB. 14 Annual Report 2008 ShARE CAPITAL Specified in number of shares, SEK Issued per 1 January Issued per 31 December 2008 2007 8,000,000 8,000,000 8,000,000 8,000,000 Per 31 December 2008, registered share capital comprised of 8,000,000 (8,000,000) ordinary shares. The shares have a quotient value of SEK 100 (100). TRANSLATION DIFFERENCE Opening translation difference Change for the year Closing translation difference UNTAxED RESERVES Equity portion of untaxed reserves Opening equity portion of untaxed reserves Change for the year Closing equity portion of untaxed reserves FAIR VALUE RESERVE Fair value reserve before tax Opening fair value reserve Change for the year Closing fair value reserve Tax on fair value reserve Opening tax on fair value reserve Change for the year Closing tax on fair value reserve Fair value reserve after tax Opening fair value reserve Change for the year Closing fair value reserve PROFIT/LOSS BROUGhT FORWARD Opening profit/loss brought forward Transfer of net result from previous year Translation difference for the year Transfer to restricted reserves Bought/sold subsidiaries, net Dividend paid Group contribution provided 72% - equity portion Closing profit/loss brought forward NET PROFIT/LOSS FOR ThE yEAR Net profit/loss for the year 2008 7 68 75 6,637 141 6,778 -52 119 67 15 -33 -18 -37 86 49 -144 577 68 -141 0 -335 -330 -305 695 2007 -152 159 7 6,250 387 6,637 -69 17 -52 19 -4 15 -50 13 -37 -202 670 159 -387 3 -235 -152 -144 577 15 Annual Report 2008 Cash flow statement for the Group 2008 2007 OPERATING ACTIVITIES Profit/loss before tax 1) Adjustment for non-cash items Income tax paid Cash flow from current operations before changes in assets and liabilities Change in land and buildings Change in financial investments Change in other operating receivables Change in other operating liabilities Cash flow from operating activities INVESTING ACTIVITIES Net investment in tangible assets Acquisition of subsidiaries, net impact on liquidity Disposal of subsidiaries, purchase price received Disposal of subsidiaries, cash and cash equivalents disposed of Cash flow from investing activities FINANCING ACTIVITIES Loans taken Repayment of loans Dividends paid Group contributions paid Cash flow from financing activities Cash flow for the year Cash and cash equivalents at beginning of year Cash flow for the year Cash and cash equivalents at end of year 2) 1) Of which Interest received Dividends received Total 2) The following sub-components are included in cash and cash equivalents: Cash and bank balances Current investments, equivalent to cash and cash equivalents Total 827 94 -193 728 1 -997 -4,399 4,885 278 -6 0 0 0 -6 0 0 -330 -211 -541 - 269 2,723 -269 2,454 455 52 507 272 2,182 2,454 894 198 -83 1,009 2 -517 1,712 -2,870 1,673 -4 2 414 -537 -125 414 -414 -235 -242 -477 -1,266 3,989 -1,266 2,723 614 435 1,049 229 2,494 2,723 16 Annual Report 2008 Income Statement – Parent Company January 1 - December 31 (MSEK) TEChNICAL ACCOUNT FOR INSURANCE OPERATIONS Earned premiums, for own account Gross premium income Ceded reinsurance premiums Change in the gross provision for unearned premiums Change in provision for unearned premiums, reinsurers’ share Total earned premium, for own account Allocated investment return transferred from the non-technical account Claims incurred, for own account Claims paid - Gross amount - Claims handling expenses - Reinsurers’ share Claims paid, for own account Change in the provision for claims, for own account - Gross amount - Reinsurers’ share Total claims incurred, for own account Change in other technical provisions, for own account - Gross amount Total claims incurred, for own account Note 2008 2007 3 3 4 5 4 6,683 -1,081 156 64 5,822 6,652 -842 120 89 6,019 168 258 -4,080 -3,693 -241 561 -163 423 -3,760 -3,433 -2,992 3,090 -3,662 3 3 -44 44 -3,433 15 15 -1,861 998 Operating costs Operating profit/loss of technical account 5 -1,408 923 NON-TEChNICAL ACCOUNT Balance of technical account Investment income/expenses - Investment income - Unrealised gains/losses - Investment expenses and charges Investment income allocated to the technical account Total investment income/expenses Goodwill depreciation Result before appropriations and taxes Appropriations Change of excess depreciation on intangible assets Result before taxes Taxes Net income for the year 6 7, 9 8 11 923 998 1,053 -450 -329 -168 106 -17 1,012 0 19 1,031 -293 738 1,016 9 -614 -258 153 -17 1,134 -537 0 597 -167 430 17 Annual Report 2008 Balance Sheet - Parent Company December 31 (MSEK) ASSETS Intangible assets Goodwill Other intangible assets Total intangible assets Investment assets Land and buildings Total land and buildings Investments in group companies and associated companies Shares and participations in group companies Shares and participations in associated companies Total investments in group companies and associated companies Other financial investments Shares and participations Bonds and other interest-bearing securities Other financial assets Total financial investments Deposits with cedents Reinsurers’ share of technical provisions Provisions for unearned premiums Claims outstanding Total reinsurers’ share of technical provisions Debtors Debtors arising out of direct insurance operations Debtors arising out of reinsurance operations Other debtors Total debtors Other assets Tangible assets Cash and bank balance Total other assets Prepayments and accrued income Accrued interest Deferred acquisition costs Other prepayments and accrued income Total prepayments and accrued income Note 2008 2007 12 13 14 15 16, 20 17, 20 18, 20 24 25 19 19 21 22 229 1 230 4 4 246 0 246 5 5 656 2,058 13 1,673 2,714 1,686 1,294 8,782 0 10,076 2,191 7,662 2 9,855 1,716 1,267 385 4,588 4,973 37 1,252 814 2,103 15 2,431 2,446 169 441 18 628 254 1,107 1,361 30 992 630 1,652 15 2,720 2,735 165 464 11 640 TOTAL ASSETS 24,890 19,447 18 Annual Report 2008 December 31 Note 2008 2007 ShAREhOLDERS’ EQUITy, PROVISIONS AND LIABILITIES Shareholders’ equity Share capital (8 million shares of nom. value SEK 100) Fair value reserve Retained earnings Net income for the year Total shareholders’ equity Untaxed reserves Excess depreciations on intangible assets Safety reserve Total untaxed reserves Technical provisions Provisions for unearned premiums Claims outstanding Equalization provision Claims handling provision Total technical provisions Provisions for other risks and expenses Tax provisions Total provisions for other risks and expenses Deposits received from reinsurers Creditors Creditors arising out of direct insurance operations Creditors arising out of reinsurance operations Derivatives Other creditors Total creditors Accrued expenses and deferred income Accrued expenses and deferred income Total accrued expenses and deferred income TOTAL ShAREhOLDERS’ EQUITy, PROVISIONS AND LIABILITIES Pledged assets Contingent liabilities 23 24 25 26 27 29 30 31 30 800 49 -292 738 800 -37 -57 430 1,295 1,136 61 9,136 9,197 2,343 10,507 3 113 81 9,136 9,217 2,061 6,219 5 77 12,966 8,362 427 427 59 25 245 0 554 824 122 122 257 257 35 23 17 1 306 347 93 93 24,890 19,447 32 32 8,527 79 7,714 76 19 Annual Report 2008 Change in shareholders´ equity - Parent Company (MSEK) Amount 1 January 2008 Transfer of net result from previous year Change in fair value reserve Group contribution provided 2) Dividend paid 1) Net profit/loss for the year Amount 31 December 2008 Amount 1 January 2007 Transfer of net result from previous year Change in fair value reserve Group contribution provided - equity portion Dividend paid Net profit/loss for the year Amount 31 December 2007 Non-restricted equity Total Restricted equity Share Capital 800 0 0 0 0 0 800 Profit/loss Net profit/ Fair value brought loss for reserve forward the year -37 0 86 0 0 0 49 -57 430 0 -335 -330 0 -292 103 227 0 -152 -235 0 -57 430 -430 0 0 0 738 738 227 -227 0 0 0 430 430 800 -37 0 0 0 0 0 0 0 0 0 0 800 -37 Total equity 1,136 0 86 -335 -330 738 1,295 1,093 0 0 -152 -235 430 1,136 1) During the year, dividends have been provided to the Parent Company Fund American Holdings AB. 2) Group contributions have been provided to Fund American Holdings AB and Sirius Insurance Holding Sweden AB. 20 Annual Report 2008 ShARE CAPITAL Specified in number of shares, SEK Issued per 1 January Issued per 31 December 2008 2007 8,000,000 8,000,000 8,000,000 8,000,000 Per 31 December 2008, registered share capital comprised of 8,000,000 (8,000,000) ordinary shares. The shares have a quotient value of SEK 100 (100). FAIR VALUE RESERVE Opening fair value reserve Change for the year Closing fair value reserve Tax on fair value reserve Opening tax on fair value reserve Change for the year Closing tax on fair value reserve Fair value reserve, net Opening fair value reserve Change for the year Closing fair value reserve after tax PROFIT/LOSS BROUGhT FORWARD Opening profit/loss brought forward Transfer of net result from previous year Dividend paid Group contribution provided 72% - equity portion Closing profit/loss brought forward NET PROFIT/LOSS FOR ThE yEAR Net profit/loss for the year 2008 2007 -52 119 67 15 -33 -18 -37 86 49 -57 430 -330 -335 -292 738 -51 -1 -52 14 1 15 -37 0 -37 103 227 -235 -152 -57 430 21 Annual Report 2008 Cash flow statement for the Parent Company OPERATING ACTIVITIES Profit/loss before tax 1) Adjustment for non-cash items Income tax paid Cash flow from current operations before changes in assets and liabilities Change in land and buildings Change in financial investments Change in other operating receivables Change in other operating liabilities Cash flow from operating activities INVESTING ACTIVITIES Net investment in tangible assets Acquisition of subsidiaries, net impact on liquidity Disposal of subsidiaries, net impact on liquidity Cash flow from investing activities FINANCING ACTIVITIES Shareholders' contribution paid Loans taken Repayment of loans Dividends paid Group contributions paid Cash flow from financing activities Cash flow for the year Cash and cash equivalents at beginning of year Cash flow for the year Cash and cash equivalents at end of year 2) 1) Of which Interest received Interest paid Dividends received Total 2) The following sub-components are included in cash and cash equivalents: Cash and bank balances Current investments, equivalent to cash and cash equivalents Total 22 2008 2007 1,031 4 -178 597 561 -89 857 1,069 1 -487 -4,349 4,880 902 -7 0 0 -7 -643 0 0 -330 -211 -1,184 -289 2,720 -289 2,431 419 0 34 453 448 1,983 2,431 2 -771 -50 -334 -84 -9 -414 414 -9 -282 414 -414 -234 -242 -758 -851 3,571 -851 2,720 585 0 435 1,020 968 1,752 2,720 Annual Report 2008 Performance analysis, Parent Company Analysis of Insurance Result (MSEK) Direct Swedish Direct Swedish Direct Assumed risks, credit risks, aviation foreign risks reinsurance Total Technical result insurance operations Premiums earned, for own account Allocated investment return transferred from the non-technical account Claims incurred, for own account) Operating costs Change of equalisation provision Technical result of insurance operations Of which results from prior years 1) Technical provisions Unearned premiums and remaining risks Outstanding claims Equalisation provision Claims adjustment provision Total technical provisions Reinsurer´s share of technical provisions Unearned premiums and remaining risks Outstanding claims Total technical provisions, reinsurer´s share Premiums earned, for own account Gross premium income Ceded reinsurance premium Change in gross provision for unearned premiums Reinsurer´s share of change in unearned premiums Premiums earned, for own account Claims incurred, for own account Claims paid Gross amount Reinsurer´s share Claims handling expenses Change in provision for outstanding claims Gross amount Reinsurer´s share Claims incurred, for own account 1) Defined as results from underwriting year 2007 and prior. 2 8 1 0 11 11 0 0 0 0 0 0 0 -80 0 82 0 2 0 0 0 8 0 8 1 0 0 0 1 1 0 0 0 0 0 0 0 1 0 0 0 1 0 0 0 0 0 0 497 5,322 5 822 13 -356 -251 3 -94 155 -3,314 -1,158 0 1,005 -60 852 168 -3,662 -1,408 3 923 804 -375 -353 -3 -4 -1,968 -10,154 0 -109 -2,343 -10,507 -3 -113 -735 -12,231 -12,966 77 63 140 635 -144 19 -13 497 -445 98 -20 22 -11 -356 308 4,525 4,833 6,127 -937 55 77 385 4,588 4,973 6,683 -1,081 156 64 5,322 5,822 -3,635 -4,080 463 -221 -3,022 3,101 -3,314 561 -241 -2,992 3,090 -3,662 23 Note 1 • Accounting Principles General information This annual report was issued per 31 December 2008 and refers to Sirius International Insurance Corporation (publ), both the Group and the Parent Company, which is an insurance company with its registered offices in Stockholm. The address of the head office is Birger Jarlsgatan 57B, Stockholm and the Corporate Identity Number is 516401-8136. Compliance with standards and law The Company's annual report/consolidated accounts have been prepa- red in accordance with the Swedish Act on Annual Accounts in Insurance Companies (ÅRFL), as well as the Swedish Financial Supervisory Authority's regulations and general advice on Annual Reports in Insurance Companies (FFFS 2008:26) and the Swedish Financial Accounting Standards Council's recommendation RFR 2. The insurance company applies so-called legally restricted IFRS (IFRS as restricted by Swedish legislation), which refers to international accounting standards adopted for application with the limitations implied by RFR 2 and FFFS 2008:26. This entails that all IFRS and statements approved by the EU are applied to the extent that this is possible within the framework of Swedish law and with regard to the relation between accounting and taxation. The Parent Company applies the same accounting principles as the Group, save for the exceptions described in the section on the Parent Company’s accounting principles. Assumptions in the preparation of the Company’s financial reports The Company’s functional currency is the Swedish krona (SEK) and the financial reports are presented in Swedish kronor. Unless otherwise stated, all amounts are rounded to the nearest million. Assets and liabilities are recorded at acquisition cost, with the exception of certain financial assets and liabilities which are valued at fair value. Financial assets and liabilities valued at fair value consist of derivative instruments, financial assets clas- sified as financial assets valued at fair value via the income statement or as available-for-sale financial assets. Assessments and estimates in the financial reports The preparation of financial statements in conformity with IFRS requires the Company’s management to make assessments and estimates, as well as as- sumptions impacting the application of the accounting principles and the re- corded values of assets, liabilities, income and expenses. These estimates and assumptions are based on historical experience and a number of other factors considered reasonable in the current situation. The results of these estimates and assumptions are, subsequently, used to assess the recorded values of assets and liabilities which are not otherwise clearly apparent from other sources. Actual outcome can deviate from these estimates and assessments. Estimates and assumptions are reviewed on a regular basis. Changes in estimates are recorded in the period in which the change is made if the change only affects that period, or the period in which the change is made as well as future periods, if such change affects both current and future periods. Insurance contracts and financial instruments According to IFRS 4, contracts transferring significant insurance risk should be classified as insurance. The Company has made the assessment that insurance risk in excess of five percent should be deemed significant and the contract is thus classified as insurance. All agreements which legally can be considered insurance contracts have been subject to assessment regarding whether they signify a transfer of significant insurance risk, so that they can also be presented as insurance contracts in the accounts. In the case of certain agreements which are a combination of risk and savings, the Company has been obligated to under- take an assessment of the contracts which can be considered to signify a transfer of significant insurance risk. The amount of the insurance risk has been assessed through a consideration of whether there exists one or more scenarios with commercial implications in which the insurance company would be liable to pay significant further benefits in excess of the amount which would have been paid had the insured event never occurred. Certain contracts include an option for the contract holder to insure themselves in the future. The Company does not consider such options, in themselves, to constitute a material insurance risk. Classification of financial assets and liabilities The Company’s accounting principles provide detailed definitions of the manner in which assets and liabilities should be classified into different categories: The classification of financial assets and liabilities held for trade presumes that these correspond to the description of financial assets and liabilities held for trade in the accounting principles. Financial assets and liabilities that the Company has initially chosen to value at fair value via the income statement under the presumption that the criteria of the accounting principles have been fulfilled. Classification of financial assets as investments held to maturity under the presumption that Company has the expressed intention and capacity to hold the assets until maturity in accordance with what is stated in the accounting principles. Important sources of uncertainty in estimates The Company makes assessments and estimates forming the basis for the valuation of certain assets and liabilities. These assessments and valuations are made on an ongoing basis and are based on previous experience and future expected outcomes. Technical provisions The Company’s accounting principles for insurance contracts are described below. The Company’s most critical accounting estimate concerns insu- rance technical provisions. This estimate is based on historical experience and other relevant factors considered as reasonable. Even if the applied methods and employed parameters are assessed as correct, future outco- mes may deviate from the expected value. The process applied for the determination of central assumptions, for- ming the basis for the valuation of the provisions, is described in Note 2. Determination of fair value of financial instruments The valuation methods described below have been applied in the valuation of financial assets and liabilities for which there is no observable market price. There may be some uncertainty as regards the observed market price for financial instruments with limited liquidity. Such instruments may, therefore, require further assessments, depending on the uncertainty of the market situation. Company management has discussed the development, selection and disclosure of significant accounting principles and estimates of the Group and of the Parent Company, as well as discussing the application of these principles and estimates. The specified accounting principles have been consistently applied to all periods presented in the financial reports, unless stated otherwise below. Approval The annual accounts were approved for publication by the Board of Direc- tors on 9 March 2009. The income statement and balance sheet will be adopted at the General Meeting held in the spring of 2009. Changed accounting principles No changes to the accounting principles have been made during the year. 24 Changes to standards, statements and interpretations A number of standards, statements and interpretations have been published in connection with the preparation of the Company’s annual report per 31 December 2008 but have not yet come into force. In addition, certain stan- dards, statements and interpretations currently in force have been changed, and certain standards, statements and interpretations have come into force during 2008. Below follows a summary and a preliminary assessment of the effect these standards, statements and interpretations may have on the Company’s financial reports. Changes other than those given below are not deemed relevant to the Company, alternatively are not expected to affect the Group’s financial reports. IAS 39 (Amendment) and IFRS 7 (Amendment), “Reclassification of Financial Instruments” (applies from 1 July 2008). The amendment to IAS 39 enables companies to, under certain circumstances, reclassify financial assets available for sale. The amendment is not obligatory. The Group has not applied the amendments made to IAS 39 and IFRS 7. IAS 1 (Revised) “Presentation of Financial Statements” (applies from 1 January 2009). The revised standard will prohibit the presentation of income and cost items (i.e. “changes in shareholders' equity exclusive of transac- tions with shareholders”) in the report on changes in shareholders' equity and will, instead, require such “changes in shareholders' equity exclusive of transactions with shareholders” to be presented in a separate report to that presenting changes in shareholders' equity involving transactions with sha- reholders. The Group will apply IAS 1 (amendment) as of 1 January 2009. Consolidation principles Subsidiaries Subsidiaries are companies in which the Parent Company has a controlling influence. The term “controlling influence” refers to the direct or indirect right to formulate a company’s financial and operative strategies with the intention of receiving financial benefit. Subsidiaries are reported according to the purchase accounting method. This method implies that the acquisition of subsidiaries is considered to be a transaction through which the Group indirectly acquires the subsidiary’s assets and takes over its liabilities and contingent liabilities. The Group acquisition value is determined through an acquisition analysis concurrent with the acquisition. In the case of business acquisitions in which the acquisition cost exceeds the net value of the acquired assets and assumed liabilities and contingent liabilities, the difference is recorded as goodwill. When the difference is negative, this is recorded directly in the income statement. Subsidiaries’ financial reports are included in the consolidated accounts from the date of acquisition until the date upon which the controlling influence ceases. Associated companies Associated companies are those companies in which the Group has a significant, but not controlling, influence over the operational and financial administration, usually through the holding of participations between 20% and 50% of the number of votes. From the point in time when the significant influence is acquired, participations in associated companies are recorded in the consolidated accounts according to the equity method. The equity method implies that the value of the shares in the associated company, reported in the Group, corresponds to the Group’s share of the associated companies’ equity and Group goodwill and any other remaining amount of positive or negative group adjustment in consolidation. In the consolidated income statement, the Group’s share of the associated companies’ net profit/loss after tax and minority interest adjusted for any amortisation, impairment or reversals of acquired surplus or deficit values, are recorded as “Participations in associated companies”. Dividends received from the associated company reduce the recorded value of the investment. When the Group’s share of reported losses in an associated company exceeds the book value of the Group’s participations in the company, the value of the participations is reduced to zero. The equity method is applied up to the point in time when the significant influence ceases. Transactions eliminated on consolidation Receivables and liabilities, income and expenses, and unrealised gains and losses arising on internal transactions between Group companies are eliminated in their entirety when the consolidated financial statements are prepared. Unrealised gains arising from transactions with associated companies are eliminated in an amount corresponding to the Group’s partici- pating interest in the company. Unrealised losses are eliminated in the same manner as unrealised gains, but only to the extent there is no impairment requirement. Foreign currency Transactions in foreign currency Transactions in foreign currency are translated to the functional currency at the exchange rate prevailing on transaction date. The Company’s functional currency is the Swedish krona and the closing rate on the balance sheet date has been used in the valuation of assets and liabilities in foreign cur- rency. Exchange rate fluctuations are recorded net in the income statement on the lines, Investment, income or Investment, expenses. Closing rates for the most important currencies USD 7.78 EUR 10.88 GBP 11.40 Financial reports of foreign operations Assets and liabilities in foreign operations, including goodwill and other Group surplus and deficit values, are translated from the functional currency of the foreign operation to the Group’s reporting currency, Swedish kronor, at the exchange rate prevailing on the balance sheet date. Income and expenses in foreign operations are translated into Swedish kronor at an average rate that approximates the exchange rates prevailing at the date of the respective transactions. Translation differences arising in the currency translation of foreign operations are recorded directly against shareholders' equity in a translation reserve. Net investments in foreign operations Translation differences arising in the translation of foreign net investments and the associated effects of the hedging of net investments are recorded directly in the translation reserve in shareholders' equity. Upon disposal of a foreign operation, accumulated translation differences attributable to the operation, less any currency hedging, are realised in the Group’s income statement. Insurance contracts Insurance contracts are recorded and valued in the income statement and balance sheet in accordance with their financial substance as opposed to their legal form, in the event that these differ. Contracts transferring material insurance risks from the policyholder to the Company and whereby the Company agrees to compensate the policyholder or other beneficiary in the event that a pre-agreed insured event occurs are recorded as insurance contracts. Investment contracts are contracts which do not transfer any material insurance risk from the policyholder to the Company. The Company has issued a policy entailing a mandatory test of whether sufficient insuran- ce risk exists in signed contracts for classification as insurance contracts. This test builds upon definitions in accordance with IFRS 4. For contracts or groups of contracts classified as insurance contracts, recording and valuation are carried out in accordance with previously applied principles. For contracts or groups of contracts which are not classified as insurance contracts, recording and valuation are conducted according to IAS 39, Financial Instruments or according to IAS 18, Revenue. Recording of insurance contracts Revenue recognition/Premium income The total gross premiums for direct insurance and assumed reinsurance 25 paid or credited to the Company, for insurance contracts in which the insurance period commenced prior to the close of the financial year, are recorded as premium income. Reinstatement premiums (premiums for rein- stating the coverage following a claim) and premiums for insurance periods not commencing until after the close of the financial year, are also recorded as premium income if, according to contract, they fall due for payment during the financial year. The term gross premium refers to the contractual premiums for the entire insurance period. Renewal premiums that are not confirmed by the policyholder and premiums for newly signed insurance contracts are recognised in the amounts expected to flow to the Company. Cancellations reduce premium income, as soon as the amount is known. Additional premiums are recognised in the amount estimated to flow to the Company. Premium revenue corresponds to the portion of premium income that has been earned. Unearned premiums are allocated to Provision for unearned premiums. Technical provisions Technical provisions consist of the Provisions for unearned premiums and unexpired risks, Provisions for outstanding claims, Equalisation provisions and Claims adjustment provisions. Provision for unearned premiums and unexpired risks In the balance sheet, this provision consists of amounts corresponding to the Company’s liability for claims, administrative expenses and other costs during the remainder of the contract period for policies in force. By “policies in force” is meant insurance policies in accordance with established contracts regardless of whether these policies refer, entirely or partly, to subsequent insurance periods. In calculating these provisions, an estimate is made of anticipated expenses for any claims that may occur during the remaining terms of these insurance policies, as well as administrative expenses for this period. The estimation of costs is based on the Company’s own experience and consideration is also made for both the observed and the forecasted development of relevant costs. Unexpired risk refers to the risk that the insurance contract’s claims and expenses cannot be covered by unearned and expected premium revenue after the close of the financial year. For insurance policies with premiums paid for multiple years, the provisi- on for unearned premiums is calculated on the basis of a careful estimation both of the Company’s liability for contracts in force and of the expected payment patterns. Provisions for unearned premiums are estimated with the help of the unearned portion of the premium for policies in force, generally using a pro rata temporis calculation in accordance with the insurance contract’s terms and conditions over the contract period in relation to the insurance coverage for the period. If the premium level for policies in force is considered insufficient, a provision is made for unexpired risks. The period’s change in provisions for unearned premiums and unexpired risks is recorded in the income statement. Changes that can be explained by the translation of balance sheet provisions at the exchange rate prevailing on balance sheet date are recorded as exchange gains or losses under the Non-technical account. reserves to the exchange rate prevailing on balance sheet date are recorded as exchange gains or losses under the Non-technical account. Embedded derivatives in insurance contracts The Company does not individually value embedded derivatives that can be defined as insurance contracts or options to repurchase insurance contracts, either on the basis of a fixed amount, or on the basis of a fixed amount and interest rate. Equalisation provision The amount of this provision is calculated as 150% of the highest net premium revenue for class 14, credit insurance, with equivalent reinsurance, during the five most recent financial years. Provisions for each financial year are equivalent to 75 % of the technical insurance surplus in the credit insu- rance operations. The period’s change in equalisation provision is recorded in the income statement. Claims adjustment provision The amount of this provision is based on outstanding claims, including IBNR, for certain specific years. The provision is equal to 4% of outstanding amounts. The period’s change in the claims adjustment provision is recorded in the income statement within the items Claims handling expenses and Operating costs. Provision adequacy testing The Company’s applied accounting and valuation principles for the balance sheet items Deferred acquisition costs, Provisions for unearned premiums and Unexpired risks automatically entail testing of whether the provisions are sufficient with regard to expected future cash flows. Deferred acquisition costs for insurance contracts The term acquisition costs refers to operating costs varying with and directly or indirectly constituting the acquisition or renewal of insurance contracts. Deferred acquisition costs are only recorded for insurance contracts deemed to generate a margin at least covering the acquisition costs. Sirius only records deferred acquisition costs to agents and ceding companies. Deferred acquisition costs are normally amortised over a period of 12 months in a manner corresponding to the earning pattern of the premium for the insurance policy in question. The asset is tested for impairment each quarter to ensure that the contracts are deemed to generate a margin that, as a minimum, covers the value of the asset. Other costs for insurance contracts are recorded as costs when they arise. Operating costs All operating costs are allocated in the income statement according to their functional nature, claims adjustment, administration, commission and profit shares in ceded reinsurance, investment expenses and in certain cases, other technical costs. Changes in technical provisions for insurance contracts are recorded in the income statement under each heading. Payments to poli- cyholders, due to insurance contracts or incurred claims, during the financial year, are recorded as claims paid, regardless of when the claim was incurred. Provision for outstanding claims This balance sheet item comprises of estimated undiscounted cash flows relating to final costs for settlement of all claims resulting from events occurring before the close of the financial year, with deduction of those amounts that have already been paid, on the basis of receipt of claims payment advices. This amount also includes estimated undiscounted cash flows regarding future operating costs for the settlement of incurred but, as of balance sheet date, outstanding claims, as well as refunds that are due for payment. The provision for incurred but not reported claims (IBNR) includes expen- ses for incurred but, to date, unknown claims. This amount is an estimate based on historic experience of the outcome of claims. The income statement records the change in outstanding claims for the period. Changes that can be explained by the translation of balance sheet Ceded reinsurance Amounts paid out during the financial year or amounts recorded as liabilities to insurance companies that have accepted reinsurance in accordance with signed reinsurance contracts, including portfolio premiums, are recorded as premiums for ceded reinsurance. These premiums are expensed so that costs are allocated to the corresponding period of the insurance cover. Deductions are made for amounts credited due to portfolio transfers or a change in the reinsurer’s share of proportional reinsurance contracts. The reinsurer’s share of technical provisions corresponds to the reinsurer’s liability for technical provisions according to contract. The Com- pany assesses any required impairment for assets referring to reinsurance contracts biannually. If the recoverable amount is lower than the carrying amount of the asset, the asset is impaired to the recoverable amount and the impairment is recorded in the income statement. 26 Reporting of investment return Investment income allocated to the technical account Investment return is transferred from the non-technical account to the techni- cal account on the basis of average technical provisions for the Company’s own account, less deductions for net receivables in insurance operations. This capital base is allocated per currency. The transferred investment return is calculated on the basis of an interest rate per currency equivalent to the actual total yield from the investment assets belonging to the insurance operations. The average interest rate for 2008 amounted to 2.83%. reversed within the foreseeable future are not considered either. The valua- tion of deferred tax is based on the extent to which underlying assets and liabilities are expected to be realised or settled. Deferred tax is calculated with the application of the tax rates and regulations that have been enacted or practically enacted as per balance sheet date. Deferred tax assets regarding deductible temporary differences and losses carry-forward are recorded only to the extent that they are likely to be utilised. The value of deferred tax assets is reduced when it is no longer considered likely that they can be utilised. Applied interest rates % EUR GBP SEK USD 2008 2007 6.22% 3.73% 8.03% 0.93% 3.88% 5.21% 2.86% 6.46% Investment, income The item Investment, income refers to yield from investment assets and comprises rental income from land and buildings, dividends from shares and participations, including dividends from shares in Group companies and as- sociated companies, interest income, net foreign exchange gains, reversed impairments and net capital gains. Investment expenses and charges Charges on investment assets are recorded under the item Investment ex- penses and charges. The item comprises operating costs for land and buil- dings, asset management costs, interest expenses, net foreign exchange losses, depreciations and impairments and net capital losses. Changes in realised and unrealised gains and losses For investment assets valued at acquisition value, capital gain comprises the positive difference between sale price and book value. For investment assets valued at fair value, a capital gain is the positive difference between sale price and acquisition value. For interest-bearing securities, acquisition value is the amortised cost value and, for other investment assets, it is the historical acquisition value. At the sale of investment assets, previously unrealised changes in value are recognised as adjustment entries under the item Unrealised profits from investment items or Unrealised losses from investment items, as appropriate. Capital gains from assets other than investment assets are recorded as Other income. Unrealised gains and losses are recorded net per asset class. Changes due to exchange rate fluctuations are recorded as exchange rate gains or exchange rate losses under the item Investment income/expenses. Taxes Income tax Income taxes consist of current tax and deferred tax. Income taxes are recorded in the income statement, except when the underlying transaction is recorded directly against shareholders' equity, whereupon the pertaining tax effect is recorded in shareholders' equity. Current tax is tax to be paid or received regarding the current year, with application of the tax rates which have been enacted or practically enacted at balance sheet date, which also includes the adjustment of current tax referring to previous periods. Deferred tax is calculated according to the balance sheet method on the basis of temporary differences between the book values of assets and liabilities and their tax values. Temporary differences are not considered as regards the differences arising at the initial recording of goodwill and the initial recording of assets and liabilities that are not business acquisitions and which did not affect either net profit/loss or taxable profit/loss at the transaction date. Furthermore, temporary differences referring to participa- tions in subsidiaries or associated companies that are not expected to be Intangible assets Goodwill Goodwill represents the difference between the acquisition value in the bu- siness acquisition and the fair value of acquired assets, assumed liabilities and contingent liabilities. Goodwill and other intangible assets with indeterminable economic lives are amortised in accordance with the Swedish Annual Accounts Act. This usually entails amortisation over five years. In certain cases, the amortisa- tion period may be longer than five years. Regarding goodwill arising from the purchase of the net assets of businesses acquired before 1 January 2004, the Company has chosen not to apply IFRS retroactively following the transition to IFRS. Instead, the car- rying amount at this date consists of the Company’s acquisition cost, after impairment testing. Other intangible assets Other separately acquired intangible assets acquired by the Company are recorded at acquisition value less accrued amortisation (see below) and impairment. Amortisation method Amortisation is recognised in the income statement on a straight-line basis over the intangible asset’s calculated useful life. This useful life is reasses- sed annually. Amortisable intangible assets are amortised from the date on which they become available for use. The calculated useful lives are: • goodwill • capitalised development expenditure • goodwill arising from the purchase of the net assets of businesses • other intangible assets 20 years 5 years 20 years 5 years Amortisation deviating from plan is recognised as an appropriation under the heading Difference between book amortisation and amortisation ac- cording to plan. Land and buildings Investment properties are recorded at acquisition value less a deduction for accumulated depreciation and any impairment, with an addition for ap- preciation, if applicable. Financial instruments Financial instruments recorded in the balance sheet include, on the asset side, shares and other equity instruments, loan receivables and interest- bearing securities as well as derivatives. Where appropriate, derivatives with negative market value are included among liabilities and shareholders' equity. Acquisitions and disposals of financial assets are recorded on trade date, the date upon which the Company commits to acquire or dispose of the asset. Classification and valuation Financial instruments which are not derivatives are initially recorded at acquisition value corresponding to the fair value of the instrument plus transaction costs, except in the case of instruments belonging to the category Financial assets recorded at fair value via the income statement, 27 which are recorded at fair value exclusive of transaction costs. A financial instrument is classified when it is initially reported, based upon the purpose for which the instrument was acquired. This classification determines the manner in which the financial instrument will be valued after initial recording, as described below. Derivative instruments are recorded at fair value both initially and on an ongoing basis. Changes in fair value are recorded in the manner described below. Financial assets valued at fair value via the income statement This category consists of two sub-groups: financial assets available for sale and other financial assets that the Company had initially chosen to be placed into this category (according to the so-called Fair Value Option). Financial instruments in this category are continually valued at fair value, with changes in value recorded in the income statement. The first sub-group includes derivatives with a positive fair value, except for derivatives that are identified as, and deemed effective hedging instruments. The second sub-group consists of financial investments in equity instruments, except for shares in subsidiaries or associated companies. Calculation of fair value The following summarises the methods and assumptions primarily used to establish the fair value of the financial instruments shown in the table above. Financial instruments listed on an active market For financial instruments listed on an active market, fair value is determined on the basis of the asset’s listed bid rate at balance sheet date, with no added transaction costs (e.g. commission) at the time of acquisition. A financial instrument is considered to be listed in an active market if listed pri- ces are easily accessible on a stock exchange, with a trader, broker, trade association, company supplying current price information or supervisory authority and these prices represent actual and regularly occurring market transactions under business-like conditions. Possible future transaction costs from a disposal are not considered. These instruments are included in the balance sheet items Shares and participations, Bonds and other interest-bearing securities and Other financial assets. Derivative transac- tions with a negative market value are recorded on the liability side of the balance sheet under the heading Derivatives. The predominant proportion of the Company’s financial instruments has been assigned a fair value with prices quoted on an active market. Financial instruments not listed on an active market If the market for a financial instrument is not active, the Company establis- hes the fair value by means of various valuation techniques. As far as is possible, the valuation methods employed are based on market data, while company-specific information is used to the least degree possible. The Company regularly calibrates valuation methods and tests their validity by comparing the outcome of the valuation methods with prices from obser- vable current market transactions in the same instrument. These valuation methods are used solely for the Company’s investments in private equity companies and hedge funds. The total effect in the Income Statement from financial instruments valued at fair value in the balance sheet by using valuation techniques based on assumptions that are neither supported by the prices from observable current market transactions in the same instruments, nor based on available observable market information, amounted to MSEK -190, while the recorded value per balance sheet date of 31 December 2008 amounted to MSEK 376. Loans receivable and accounts receivable Loans receivable and accounts receivable are non-derivative financial assets which are not listed on an active market and with fixed or determinable payments. These assets are valued at amortised cost. Amortised cost is determined on the basis of the effective rate calculated at the time of acquisition. Accounts receivables and loans outstanding are reported in the amounts which are expected to be received, that is, after deductions for bad debt losses. held-to-maturity investments Held-to-maturity investments are financial assets comprising interest-bea- ring securities with determined or determinable payments and determined durations which the Company has the expressed intent and ability to hold to maturity. Assets in this category are valued at amortised cost. Available-for-sale financial assets The category available-for-sale financial assets includes financial assets not classified in any other category or financial assets that the Company has initially chosen to classify in this category. The holding of bonds and other interest-bearing securities is recorded here. Assets in this category are continuously valued at fair value with changes in value recorded in share- holders' equity, except for changes in value due to impairment or to foreign exchange rate differences on monetary items recorded in the income sta- tement. Furthermore, interest on interest-bearing instruments is recorded in accordance with the effective interest method in the income statement. As regards these instruments, any transaction costs will be included in the acquisition value when initially reported, and will, thereafter, be assessed on an ongoing basis at fair value, to be included in the reserve item at fair value until that point in time the instruments in question mature or are sold. At disposal of the assets, the accumulated profit/loss, previously recorded in the shareholders' equity section, is recorded in the income statement. A long-term approach forms the basis for investments in this category, where the yield granted by these instruments at the time of investment is of significance for which investments shall be made. Other financial liabilities Borrowings and other financial liabilities, for example, accounts payable, are included in this category. These liabilities are valued at amortised cost. Financial guarantees Financial guarantee agreements are recorded as insurance contracts in ac- cordance with the accounting principles described in the section Accounting of insurance contracts, above. Write-downs of financial instruments Impairment testing of financial assets At each reporting date, the Company assesses whether there exists any objective evidence indicating that a financial asset or group of assets requires impairment as a consequence of one or several events occurring after the asset is reported for the first time and that these loss-making events have an impact on the estimated future cash flows from the asset or group of assets. If there is objective evidence indicating that an impairment requirement may exist, the assets in question are considered to be doubtful. Objective evidence is constituted both of observable conditions which have arisen and which have a negative impact on the possibility of recovering the acquisition cost, and of significant or extended reductions of the fair value of a financial investment classified as an available-for-sale financial asset. During an impairment of an equity instrument classified as an available- for-sale financial asset, previously reported accumulated profit or loss in the shareholders' equity section is recorded in the income statement. The reported value after impairment of assets belonging to the cate- gories held-for-maturity investments and loans receivable and accounts receivable, which are recorded at amortised cost, are estimated as the cur- rent value of future cash flows discounted by the effective interest rate app- licable when the asset was first recorded. Assets with a short duration are not discounted. An impairment loss is recognised in the income statement. Reversal of impairment An impairment is reversed if an indication exists both that the impairment requirement no longer exists and that a change has taken place in the as- sumptions forming the basis of the estimation of the impaired amount. The impairment of held-for-maturity investments or loans receivable and accounts receivable, recorded at amortised cost, is reversed if a later increase of the recoverable amount can be objectively related to an event 28 occurring after the impairment has been performed. The impairment of interest-bearing instruments, classified as available- for-sale financial assets, is reversed over the income statement if fair value increases and this increase can objectively be related to an event occurring after the impairment was carried out. Leased assets All lease agreements are classified and recorded in the Group and Parent Company as operational leases. In operational leasing, the leasing fee is expensed over the duration of the lease, on the basis of the benefit received, which can differ from the amount paid as a leasing fee during the year. Tangible assets Tangible assets are recorded at acquisition value after deduction for accumulated depreciation and any impairment, with a supplement for any appreciation. In disposal or sale, gains and losses are recorded net in operating cost. Depreciation takes place systematically over the estimated useful lives of the assets. Estimated useful lives: equipment such as cars, furniture and computer equipment 3 - 10 years Depreciation of tangible and amortisation of intangible assets Impairment testing of tangible and intangible assets and participations in subsidiaries and associated companies. The reported values of the assets are tested on each balance sheet date. If any indication of an impairment requirement exists, the asset's recoverable amount is estimated in accordance with IAS 36. An impairment loss is recognised when the reported value of an asset or cash-generating unit exceeds its recoverable amount. An impairment loss is recognised in the income statement. The impairment of assets related to a cash-generating unit is primarily allocated to goodwill. The proportional impairment of other assets included in the unit is subsequently performed. The recoverable amount is the highest of fair value less selling expenses and value in use. In the calculation of value in use, future cash flow is discounted by a discount factor that considers the risk-free interest rate and the risk associated with the specific asset. Reversal of impairment An impairment is reversed if an indication exists both that the impairment requirement no longer exists and that a change has taken place in the as- sumptions forming the basis of the estimation of the recoverable amount. However, the impairment of goodwill is never reversed. A reverse is only performed to the degree that the asset's reported value after reversal does not exceed the reported value that should have been reported, with deduc- tion for depreciation or amortisation when appropriate, if no impairment had been carried out. Share capital Dividends Dividends are recorded as liabilities after approval of the dividend by the General Meeting of Shareholders. Other provisions A provision is recognised in the balance sheet when the Company has an existing legal or constructive obligation as a result of past events, when it is likely that an outflow of resources will be required to settle the obligation and when the amount can be estimated reliably. In cases in which the date of payment has a material effect, the amount of the provision is calculated via the discounting of the expected future cash flow to an interest rate before taxes which reflects the relevant market assessments of the effect of the time value of money and, if applicable, the risks associated with the liability. Pensions and similar commitments The Company's pension plans for contracted occupational pensions are safeguarded via insurance contracts. The pension plan for the Company’s employees has been assessed as both a defined benefit and a defined contribution plan. The Company’s commit- ments regarding contributions to defined contribution plans are recorded as expenses in the income statement at the rate they are earned by employees through the performance of services to the Company over a period. In addition to the contracted occupational pensions safeguarded via insurance, the Company has also signed separate agreements with certain employees ensuring that these employees may terminate their service at an earlier age than 65 years of age, although no earlier than 64 years of age for an increased amount of compensation than granted by the collectively agreed pension benefits. Employees in Germany are covered by a defined benefit plan in which pension obligations are entered as a liability in the Company's balance sheet. held-for-sale assets and discontinued operations Classification as a discontinued operation takes place upon disposal or at an earlier point in time if and when the operation meets the criteria for classification as held-for-sale. A disposal group which is to be discontinued can also qualify for classification as a discontinued operation. Sirius lacks such assets. Contingent liabilities A contingent liability is recognised when there is a possible obligation which arises from past events and whose existence is solely confirmed by one or more uncertain future events, or when there is a commitment which is not recorded as an liability or provision due to the fact that it is unlikely that an outflow of resources will be required. Parent Company's accounting principles The Parent Company's annual report has been prepared in accordance with the Swedish Act on Annual Accounts in Insurance Companies (ÅRFL), the Swedish Financial Supervisory Authority's regulations and general advice concerning insurance companies (FFFS 2008:26) and the Swedish Financial Accounting Standards Council's recommendation RFR2, Accounting for Legal Entities. Changed accounting principles The Parent Company's changed accounting principles have been recorded in accordance with the provisions of IAS 8, but taking consideration of the special transitional regulations in RFR 2. This implies that the changed ac- counting principles are recorded with retroactive effect. Differences between accounting principles in the Group and the Parent Company The differences between the accounting principles in the Group and the Parent Company are presented below. The accounting principles stated below for the Parent Company have been consistently applied for all periods presented in the Parent Company’s financial statements, unless stated otherwise. Subsidiaries and associated companies The Parent Company records participations in subsidiaries and associates according to the cost method. Only dividends which have been received are recognised as income, provided that such dividends derive from profits earned subsequent to the acquisition. Dividend amounts exceeding this earned profit are considered as repayment of the investment and reduce the carrying value of the participations. 29 Anticipated dividends Anticipated dividends from subsidiaries are recorded in those cases in which the Parent Company has the sole right to make decisions regarding the amount of the dividend and the Parent Company has reached a decision on the dividend's amount before the Parent Company has published its financial statements. Taxes Untaxed reserves are recorded in the Parent Company including deferred income tax liabilities. However, untaxed reserves in the consolidated ac- counts are allocated between deferred income tax liabilities and sharehol- ders' equity. Appropriations and untaxed reserves Appropriations and untaxed reserves are only recorded in the Parent Com- pany and not in the Group. Taxation legislation in Sweden gives companies the option of decreasing taxable income for the year by making provisions to untaxed reserves. When applicable, untaxed reserves are set off against fiscal loss deductions or be- come subject to taxation upon resolution. In accordance with Swedish prac- tice, changes in untaxed reserves are recorded in the income statement. Provisions made to untaxed reserves are recorded in the income statement under the heading Appropriations. The accumulated value of the provisions is recorded in the balance sheet under the heading Untaxed Reserves. A total of 26.3 percent (28) of the untaxed reserves can be considered as a deferred tax liability and 73.7 percent (72) as shareholders' equity. The deferred tax liabilities can be described as an interest-free liability with a non-defined duration. In the group accounts, 26.3 percent (28) of the un- taxed reserves can be allocated to deferred tax liabilities and 73.7 percent (72) to shareholders' equity. In an assessment of financial strength, the total value of the untaxed reserves is considered risk capital, as any losses can be covered, to a large extent, by the dissolution of untaxed reserves without taxes becoming payable. The largest item attributable to untaxed reserves refers to the safety reserve. The safety reserve forms a collective security-conditioned reinforcement of the technical provisions. Accessibility is limited to loss coverage and otherwise requires official authorisation. Group contributions and shareholders’ contributions for legal entities The Company reports group contributions and shareholders' contributions in accordance with the statements of the Emerging Issues Task Force of the Swedish Financial Accounting Standards Council (UFR2). Shareholders’ contributions are recorded directly against shareholders' equity in the receiving entity and in shares and participations in the entity providing the contribution, to the extent that no impairment is required. Group contribu- tions are recorded according to their financial significance. This implies that group contributions provided and received for the purpose of minimising the Group’s total taxes are recorded directly against retained earnings, with a deduction for the current tax effects of the contribution. Group contributions which can be seen as the equivalent of a dividend are reported as a dividend. This implies that group contributions received and their current tax effects are recorded in the income statement. Group contributions provided and their current tax effects are recorded directly against retained earnings. In the receiving entity, group contributions which can be seen as the equivalent of a shareholders' contribution are directly recorded in retained earnings, with consideration for current tax effects. The contributor records the group contribution and its current tax effects as investments in participations in the Group company, to the extent that impairments are not required. 30 Risk management infrastructure The risk management processes within Sirius risk are supported by a risk management infrastructure consisting of the Board of Sirius, various risk committees, risk management functions, risk control functions, policies and procedures, risk models and reporting routines. This is described in further detail in the risk sections below. The Board of Sirius is ultimately responsible for the Sirius risk manage- ment strategy, risk tolerance and policies. Sirius´ Management is directly responsible for all ERM activities, and in order to discharge this responsibility, Sirius works through different risk committees in carrying out certain duties. The Sirius Group Risk Management function is responsible for the coordi- nation, monitoring, internal control and compliance of all risk areas. Internal Audit fulfils an important role in the independent evaluation of risk management and control systems. This includes evaluating the reliabi- lity of reporting, effectiveness and efficiency of operations, and compliance with laws and regulations. Sirius’ owner is listed in the US and, consequently, is required by the Sar- banes-Oxley Act, Section 404, to express an opinion on the effectiveness of internal control over financial reporting executed during the year. As part of this assessment, a thorough documentation and evaluation of all processes and controls leading up to the annual report have been undertaken. This work has enabled Sirius to demonstrate compliance with the requirements of the act. Insurance risk management Goals, principles and methods A clear focus on managing insurance risks is vital for Sirius’ continued success. These risks are managed mainly by evaluating the degree of gross and net risk after retrocession Sirius is willing to assume. The goal for all underwriting is to maximize profitability for each selec- ted risk level. The anticipated profitability of each contract which is entered into shall comprise the basic grounds for decision making regarding all underwriting. Other guiding principles include diversification, strong ac- cumulation controls and an active use of reinsurance in order to adjust risks to acceptable levels. Sirius divides insurance risk management into two principal areas; underwriting risk and reserve risk. Underwriting risk Underwriting risk refers to premium and accumulation assessment, which is defined as premium risk and catastrophe risk, respectively. The underwri- ting risk assessment is performed by underwriters on each individual risk and the Chief Underwriting Officer is ultimately responsible for managing these risks. The insurance premiums for assumed business are to cover expected losses and expenses as well as provide a reasonable return on capital. The premium risk is therefore associated with any possible level of losses deviating from expected levels. The premium risk is generally managed through the application of pricing models and underwriting procedures, but also through a reduction in under-priced business, or through declining to accept such business. If a larger, catastrophic event occurs, impacting simultaneously a large number of cedants, this may result in a single loss that could wipe out the expected annual profit, or, even consume a portion of the solvency capital. This catastrophic risk is generally managed with the assistance of underwri- ting methods and tools which monitor and control the company’s total risks, both gross and net. Catastrophe risk is also managed by the effective use of retrocession. In order to ensure consistency in the underwriting process, all under- writing within Sirius complies with specific routines. Detailed Underwriting Guidelines comprise the framework for all risk acceptances, and these guidelines contain sections regarding, for example, Limits, Underwriting Authorities and Restricted Business. A Four-Eyes Underwriting System, that is, a system in which at least two individuals participate in each decision, is 31 Note 2 • Information on risks Risk management The company’s risk management – also referred to as Enterprise risk management, ERM – is at the heart of Sirius’ thinking. Sirius defines ERM as the discipline by which Sirius assesses, controls, exploits, finances and monitors risks from all sources for the purpose of increasing Sirius’ short- and long-term value to Sirius stakeholders. ERM is, in essence, an ongoing process with the objective of creating a risk management culture that emanates from top management and which permeates throughout the entire organization. The management’s role is to communicate, implement, monitor and nurture this culture. The objectives of Sirius’ work with ERM are: • Secure existing high profitability through better risk management. • Obtain better information for strategic management decisions. • Demonstrate strong risk management vis à vis rating agencies and other interested parties. • Provide stakeholders with transparent risk management information. • Comply with Solvency II requirements. Risk strategy and the company’s risk appetite Risk strategy and risk appetite comprise the foundation of the risk manage- ment processes and risk management infrastructure. Sirius' risk strategy and risk appetite have been established by the Sirius Board which aims to secure a balance between risk, return and capital requirements. As part of the planning process, strategic limits are explicitly discussed and specified. The strategic risk appetite is expressed either in quantitative terms – for example an aggregate risk limit for storms in Europe – or in qualitative terms – for example in relation to operational risk. From these overall risk appetite statements, operational limits are suc- cessively applied at detail level throughout the organization in the form of operational risk limits, maximum risk exposure, retrocession limits, foreign exchange exposure limits, maximum equity exposure in the investment portfolio, etc. As part of the ERM culture, Sirius embraces the following qualitative principles: • Controlled/moderate risk taking and adequate capitalization. • All insurance transactions are to yield positive technical results. • Active use of retrocession as part of business and capital planning. • Strive for diversification. • Strong accumulation control. • Strong and independent risk control functions. • Inspire and motivate employees to further develop their risk management capabilities. applied for the majority of all business. The Guidelines are updated continu- ously and reviewed annually. There are several levels of control functions, as well as technical systems, which are in place to monitor and ensure that policies and procedures are followed. An underwriting control group reports to the Chief Underwriting Officer. This group focuses in detail on the manner in which the underwriting takes place and the underwriters follow these policies and procedures. Another group monitors the underwriting system, in which all contracts are registered, and ensures that the system is used correctly and that the data is accurate. Finally, internal audit and Group risk management also monitor and supervise the other control groups to ensure that suf- ficient controls are being undertaken. Sensitivity to risks attributable to insurance agreements Within the insurance operations, property insurance (wind, flooding, and earthquakes) constitutes the company’s greatest risk. In order to manage this catastrophe risk, and the resulting accumulated risks, the company uti- lizes a number of different models. Within the Property Insurance, the area with the highest level of catastrophe risk, the company utilizes a system linked to the underwriting system. In this system, all business is registe- red and the company’s exposure is measured via a number of predefined catastrophe scenarios. The total exposure limits per country are also registered. The primary tools, however, are the so-called catastrophe models which the company has at its disposal via licensing agreements with AIR and RMS. Based on these models, reports and analyses can be produced on a regular basis demonstrating the various degrees of likelihood of estimated claims. Everything from average claims per year to claims that are only expected to occur once every 10,000 years can be estimated using these models. Aside from the possibility of modeling single events, aggregate claims are also modeled. Different levels of claims can also be modeled to varying degrees of likelihood, from expected claims per year, to the worst level of annual claims in 10,000 years. Sensitivity analyses are undertaken based on a comparison of claims estimated by various models, but also through changes to the assumptions applied by the different models, such as, return periods. Concentrations and sensitivity analysis The table below shows a summary of the manner in which the company analyses catastrophe risks, divided by geographical area and return peri- ods. The figures show the situation as per 31 July 2008, when the company experienced its highest level of exposure during 2008. Sensitivity analysis – losses divided by geographical area and return periods (MSEK) Global - Gross Global - Net Europe - Gross Europe - Net Once per Once per 100 years 250 years 3,351 2,042 2,617 1,399 4,206 2,599 3,399 1,848 Through the use of these simulation models, the company can obtain an estimation of catastrophe risk, both prior to and after retrocession. The lar- gest single catastrophe risk in the current portfolio is a storm (“windstorm”) in Europe. An estimation of the maximum loss an individual windstorm in Europe, expected to occur only once every 250 years, can result, ac- cording to the table above, in an estimated net loss of MSEK 1,848 (gross claims MSEK 3,399). In order to estimate how claims of this size affect solvency capital, the company makes an estimation of the so-called net financial impact, which is based on the estimated net claims adjusted for the reinstatement premium (premium to reinstate cover after a loss) from the covered clients and from the profit from other lines of business and areas. The deficit is then compared to the solvency capital in order to find whether the losses in relation to solvency capital are acceptable in relation to the company’s risk tolerance. Within the area Aviation reinsurance, the company applies another licensed third-party model, ALPS, in which the exposure per airline company can be followed on-line. Within the insurance class Accidents, the company has a model which it has developed itself. Reserve risk The reserving risk, i.e. the risk that insurance technical provisions will be insufficient to settle incurred and future claims, is foremost handled by actuarial methods and a careful continuous review of reported claims. Risks are also limited by reinsurance. Provisions are made to obtain a correct balance sheet and match revenues and costs with the period in which they emerged. The amount of the provision shall correspond to the amount that is required to fulfill all expected obligations and reflect the best knowledge available to Sirius. Acknowledged and appropriate methods are used in these estimations. Sirius supports its decisions on provisions by a combination of several actuarial methods, such as the Chain Ladder method, the Bornhuetter- Ferguson method and the Benktander method. A combination of bench- marks and underwriting judgment is used for the most recent years. The provisions are further annually reviewed by independent actuaries. Regarding run-off results and claims development from previous years please refer to Note 4 Claims incurred and Note 25 Claims Outstanding, where a specification of claims costs and expenses relating to the current year, respectively prior years is made. Objectives, principles and methods for managing financial risks In the company’s operation various types of financial risks arise, such as market risks, credit risks, liquidity risks and operational risks. In order to limit and control the risk taking in the operations, Sirius’ Board of Directors has, as ultimately responsible for the internal control in the company, deter- mined guidelines and instructions for the financial operations. The overall investment objective is to achieve consistent positive returns and to maximize long-term after-tax return on invested assets within prudent levels of risk, through a diversified portfolio of high-quality fixed income and equity investments. Sirius makes an important distinction between Policyholder Funds Invest- ments and Owners’ Funds Investments. Policyholder Funds are defined as policyholder liabilities plus statutory minimum capital and surplus, less policyholder assets. Policyholder liabilities are Net Technical Reserves as defined by The Swedish Financial Supervisory Authority. As regards Policyholder Funds Investments, at least 95 percent shall be invested in fixed income securities at all times. Furthermore, at least 80 percent of the fixed income portfolio must be creditworthy and liquid; i.e. consisting of securities with high credit ratings (investment grade). To limit concentration risk (the risk of large losses) the guidelines also include size limits, industry limits and rating limits. The balance of Sirius' investable assets (Owners' Funds Investments) may utilize a mixture of fixed income, equity and private investments with a focus on maximizing total return and preserving capital. Market risk Market risk is the risk that an actual value on current or future cash flows from a financial instrument varies due to changes in market prices and due to changes in their respective volatilities. There are three types of market risk: interest rate risk, currency risk and other price risk, primarily equity risk. The company’s investment operations during 2008 amounted to a return 32 Annual Report 2008 of 2 percent, expressed in SEK. The duration in the portfolio with interest- bearing investments decreased during the year to 1.55 years. During the year, the percentage of equities in the investment portfolio decreased to approximately 26 percent. The table below shows the investment assets di- vided by class of asset, excluding deposits in companies that are reinsured by Sirius. Investment assets, division by class of asset Bonds and other interest-bearing securities Shares and participations in associated companies Shares and participations - whereof venture capital companies Cash and bank balances Total 58.23% 13.93% 11.57% 1.54% 16.27% 100% Below, the company’s exposure and sensitivity to respective market risk is described. The descriptions are made on the basis of the company’s reporting of the Traffic Light model to the Swedish Financial Supervisory Authority as per 31 December 2008 with its sensitivity analyses in the form of stress tests and subsequent capital requirements. Interest rate risk The company is exposed to the risk that the market value on its fixed- interest assets decreases as market interest rates increase, or alternati- vely, that the market value increases as the interest rates decreases. The level of interest rate risk, or price risk, increases with the asset’s duration. The following table illustrates, in absolute figures, the company’s exposure to interest rate risk in accordance with the Traffic Light model as per 31 December 2008. Investment assets, interest rate risk according to the Traffic Light model Exposure Scenario, Corresponding requirements requirements (MSEK) stress test basis points (MSEK) (MSEK) Capital Reduced capital Nominal interest rate risk in SEK Nominal interest rate risk in EUR Nominal interest rate risk in USD and other currencies Total 4,312 1,557 2,822 8,691 30% 25% 30% - 74 74 66 - 60 17 39 116 36 10 24 70 33 Annual Report 2008 Equity risk The equity risk is the risk that the market value of an equity will decrease as a result of factors related to the external economic climate and factors related specifically to the company in question. Equity risks are mainly miti- gated by a diversification of the share portfolio. The table below shows the equity risk in accordance with the Traffic Light model as per 31 December 2008. Investment assets, equity risk according to the Traffic Light model Capital Reduced capital Exposure Scenario, requirements requirements (MSEK) stress test (MSEK) (MSEK) Swedish shares and participations Foreign shares and participations Foreign associated companies Total - 1,294 2,714 4,008 - 35% 35% - 453 950 1,403 - 274 575 849 Currency risk Currency risk arises if assets and liabilities in the same foreign currency vary in amounts. Sirius’ total net currency exposure is divided into two categories, exposure related to Policyholders Funds, which is matched with the corresponding assets, and exposure related Owner’s Funds. Sirius’ net Policyholders Funds exposure for currency risk is marginal as the company’s strategy for managing currency risk is to match net insurance debts in foreign currency with corresponding assets. The company’s total net exposure for currency risk, i.e. including both Policyholder and Owners Funds, before and after any hedging by derivative is shown in the table below. Exchange rate exposure – Group (MSEK) USD EUR GBP Other Shares and participations Bonds and other interest-bearing securities Other financial investment assets Other assets and liabilities, net Total assets Technical provisions, net Total liabilities and provisions Net exposure before financial hedging with derivatives Nominal value currency forwards Net exposure after financial 3,376 2,894 914 2,059 9,243 5,271 5,271 3,972 0 107 1,849 263 498 2,717 1,769 1,769 948 0 hedging with derivatives 3,972 948 20 90 76 -2 184 156 156 28 0 28 0 0 49 60 109 91 91 18 0 18 A general unfavorable change of 25 basis points, alternatively 10 percent unfavorable change, in the respective foreign currencies toward SEK has been calculated to affect the company’s equity and results as shown in the table below. The analysis below assumes that the changes in exchange rates do not affect other risk parameters, such as interest rates. The sensitivity analysis takes into consideration existing financial hedges with currency related derivatives. Sensitivity analysis per currency USD EUR GBP Other Total Change 25 basis points Change 10% 128 398 22 96 1 3 - 2 151 499 34 Annual Report 2008 Credit risk Credit risk, or counterparty risk, refers to the risk that the company will not receive agreed payment and/or will make a loss due to the counterparty’s inability to fulfill its obligations. A substantial portion of the credit risk to which the company is exposed, arises as a result of established reinsurance agreements. Credit risk in investment management The company’s policy in the investment management is to allow only invest- ments in securities with very high credit quality. The credit/counterparty risk in this part of the operations is therefore assessed to be relatively limited, except for the price effects on securities arising due to increases in credit risk spreads as a result of the turbulence in the credit and financial markets, a phenomenon which was clearly manifested during 2008. The table below shows the exposure of Sirius’ investment assets divided per class of asset. Maximum exposure (MSEK) - Group Bonds & other interest-bearing assets - Governments - Swedish mortgage institutions - Other issuers Shares & participations Total 8,782 5,704 455 2,623 1,745 10,527 The figures below show fixed income investments and equity investments per geographical area and credit rating classes. Fixed income investments are also presented per sector. Group and/or parent company Credit quality on classes of financial assets, % AAA AA Bonds and other interest-bearing securities Swedish government Swedish mortgage institutions Foreign governments Other foreign issuers 79 100 100 86 44 4 0 0 9 6 A 5 0 0 5 9 BB BBB Total 1 0 0 0 4 11 0 0 0 37 100 100 100 100 100 Equity investments, divided by geographical area Interest-bearing investments, divided by geographical areas Western Europe North America Scandinavia Asia Eastern Europe Other Total 27.18% 71.12% 0% 1.70% 0% 0% 100% Western Europe North America Scandinavia Other Total Interest-bearing investments, divided by sector Governments Swedish mortgage institutions Other Swedish issuers Other foreign issuers Total 22.81% 34.28% 41.95% 0.96% 100% 64.95% 5.18% 1.18% 28.69% 100% 35 Annual Report 2008 Credit risk on receivables with reinsurers The credit risk resulting from reinsurance ceded by Sirius can be divided into two separate components; reinsurers’ share of technical provisions as recorded on an ongoing basis under assets in the balance sheet, and the potential exposure that would emerge in the event of large claims on insurance portfolio, for example, in the case of a severe European wind- storm. An event like this would trigger major portions of Sirius’ purchased reinsurance cover. To manage the risk of reinsurer insolvency, Sirius’ Security Commit- tee assigns and monitors ratings of all counterparties according to Sirius internal rating scale and reinsurance analysis model. For each rating there is a corresponding maximum limit for the total exposure per reinsurer and per program. If a retrocessionaire’s credit worthiness deteriorates into unacceptable status (in bankruptcy, liquidation, insolvent run-off scheme of arrangement, or is, by other reasons, deemed to be unable or unwilling to honor its obligations), the counterparty is classified as an IDC company (Insolvent or Doubtful Company). Counterparties which are classified as IDC companies are regularly monitored by the company’s Credit Control Committee. For IDC companies, a provision is made to a credit risk reserve, which is esta- blished based on the company’s Bad Debt Reserving Policy. The credit risk reserve for these bad debts amounted, as per 31 Decem- ber 2008, to MSEK 73. Receivables regarding both direct insurance as well as assumed reinsurance are followed up on a monthly basis and outwards reinsurance is followed-up on a quarterly basis. Outstanding receivables are analyzed on the basis of the length of time that has passed since the due date with the following distribution: From up to 1 month, 2-3 months, 4-6 months, 7-9 months, 10-12 months and over 1 year. These analyses comprise the basis for various collection activities, as does the supporting documentation regarding the assessment of the counterparty’s credit risk status and any write-down requirements. At the end of 2008, total outstanding receivables exceeding 1 year past-due amounted to MSEK 90. If IDC companies are excluded, this amount corresponds to MSEK 56. Outstanding receivables for IDC companies are included in the credit risk reserve mentioned above. In accordance with Sirius’ policy for write-downs of receivables outstanding for more than 1 year, there is a specific reserve for counterparties which are not classified as IDC companies which totals MSEK 23. Reinsurers’ share of technical reserves consists of outstanding claims including IBNR reserves, as well as a provision for unearned premiums and remaining risks. The total amount as per 31 December 2008, was MSEK 4,973. The credit rating distribution for this exposure is shown in the table below. Credit Rating: Standard & Poor's MSEK Percentage 154 0 20 92 208 17 152 0 462 216 24 3.1 0 0.4 1.9 4.2 0.3 3.1 0 9.3 4.3 0.5 3,628 4,973 72.9 100.0 AAA AA+ AA AA- A+ A A- BBB+ BBB or lower Fully collateralized Special approval Internal reinsurance Total 36 The item Internal reinsurance above, refers to the majority of ceded reinsu- rance to White Mountains Life Re. This receivable is 100% guaranteed with investment assets. Except for the credit exposure above, reported as an asset in the balance sheet, significant credit losses can potentially arise for large claims. Such credit losses can arise if two different events occur at the same time, that is, if a large catastrophe event occurs at the same time as a reinsurer to which Sirius has ceded business defaults. The table below describes the assumed liabilities (excluding costs for reinstatements) and the distribution of credit ratings for Sirius’ 2008 Retrocession Program. Credit rating: Standard & Poor’s Assumed liabilities MSEK Percentage AA+ AA AA- A+ A A- BBB+ Fully collateralized BBB of lower Special approval Total 0 191 469 684 23 751 0 125 44 80 0 8.1 19.8 28.9 1.0 31.7 0 5.3 1.8 3.4 2,367 100.0 Liquidity risk Liquidity risk is the risk that the company will have difficulties fulfilling payment obligations, mainly those related to insurance liabilities. Liquidity risk can also be expressed as the risk of loss or impaired earning potential as a result of the company not being able to fulfill payment obligations in due time. Liquidity risks arise as assets and debts including derivates instruments have different durations. The company’s strategy for dealing with liquidity risk aims to, in the greatest extent possible, match expected payments and receipts of payment (so called asset-liability management, ALM). This is accomplished through advanced liquidity analysis of financial assets and insurance liabili- ties. At the end of 2008, the duration of interest-bearing investment assets was 1.55 years and the duration of insurance liabilities was 1.81 years. The liquidity is monitored continuously and stress tests are performed for different scenarios. The company’s claims payment capabilities are further strengthened with its high portion of cash and bank deposits of the total investment assets, The cash flow analysis also provides an illustration of the company’s liquidity situation. Operational risks Operational risk refers to the risk that errors or deficiencies in administra- tive routines will lead to unexpected financial and reputational losses. These can be caused by such aspects as insufficient internal control or defective systems or technical equipment. The risk of internal or external irregula- rities is included in the operational risk. Operational risks are mitigated through internal control. The maintenance of satisfactory internal control is a continuous process in the company and includes, among other things: • requirements for the existence of appropriate routines and instructions, • clearly defined segregation of duties, roles and responsibilities for employees, • IT support with integral mechanical reconciliations and controls, • authority systems, • internal information and reporting system, among other things, to meet management’s requirements for information regarding, for example, risk exposure, and • information security. Annual Report 2008 Sirius Group's Risk Management department performs, on a regular basis, internal governance and control reviews, using a self assessment approach based on interviews with process ow- ners. The identified risks (including all risk types) are classified according to probability of occurrence and severity. The result of the review is presented and discussed with the management of Sirius and suitable actions are decided. In addition, compliance with the Sarbanes-Oxley Act compri- ses an important aspect of internal control. Sirius has prepared plans for the continuity of its operations in the event of various catastrophe scenarios, a so-called Business Continuity Plan. These plans are tested regularly and updated for changing conditions. An important aspect of Sirius’ catastrophe planning is its fully integrated branch office network which enables Sirius to conduct its operations from any office without delay. Solvency and capital requirements The new Swedish solvency regulation, the so-called Traffic Light system, takes into account the company’s risks in the areas financial risks, insurance risk and operating expense risk. The model results in a total capital net requirement which is compa- red to a so called buffer capital in order to asses the company’s capital strength. The table below shows the result in accordance with the Traffic Light model as per 31 December 2008. Total capital requirement according to the Traffic Light model Total capital net requirement Capital buffer Surplus MSEK 2,622 10,925 8,303 Credit rating The financial strength of Sirius International has been rated by Standard & Poor’s, A M Best and Moody’s. Credit rating as per 31 December 2008 Credit rating Outlook S&P's A M Best Moody’s A- Stable A Stable A3 Stable 37 Annual Report 2008 Note 3 • Premium income Premium income, geographical allocation Group Parent Company 2008 2007 2008 2007 Direct insurance, Sweden Direct insurance, other EEA Direct insurance, other countries Premiums for accepted reinsurance Premium income before ceded reinsurance Premium for ceded reinsurance Premium income after ceded reinsurance -79 106 529 6,127 6,683 -1,081 5,602 0 208 502 5,942 6,652 -842 5,810 -79 106 529 6,127 6,683 -1,081 5,602 0 208 502 5,942 6,652 -842 5,810 Note 4 • Claims incurred for own account Claims incurred for the year´s operations 2008 2007 Group Gross Ceded Net Gross Ceded Net Claims paid Loss portfolios Change in provision for incurred and reported claims Change in provision for incurred but not reported claims (IBNR) Claims handling expenses -1,531 45 -1,284 -843 -241 Total claims incurred for the year’s operations -3 854 99 9 165 55 0 328 2008 -1,432 54 -1,119 -788 -241 -3,526 -1,461 44 -1,066 -1,096 -163 -3,742 Group -1,316 44 -891 -992 -163 -3,318 145 0 175 104 0 424 2007 Claims incurred for previous year’s operations Gross Ceded Net Gross Ceded Net Claims paid Loss portfolios Change in provision for incurred and reported claims -2,518 -76 995 Change in provision for incurred but not reported claims (IBNR) -1,860 Total claims incurred for the previous year’s operations -3,459 380 73 -273 3,143 3,323 -2,138 -3 722 1,283 -136 -2,225 -72 1,134 957 -206 264 14 -243 8 43 -1,961 -58 891 965 -163 Total claims incurred -7,313 3,651 -3,662 -3,948 467 -3,481 2008 2007 Group Gross Ceded Net Gross Ceded Net -4,049 -31 -241 -4,321 479 82 0 561 2008 -3,570 51 -241 -3,760 -3,686 -28 -163 -3,877 Group 409 14 0 423 2007 Gross Ceded Net Gross Ceded -289 -2,703 -2,992 -108 3,198 3,090 -397 495 98 68 -139 -71 -68 112 44 -3,277 -14 -163 -3,454 Net 0 -27 -27 Total claims paid Claims paid Loss portfolios Claims handling expenses Total claims paid Change in Provision for outstanding claims Change in provision for incurred and reported claims Change in provision for incurred but not reported claims (IBNR) Total 38 Annual Report 2008 Claims incurred for the year´s operations Gross Ceded Net Gross Ceded Net 2008 2007 Parent Company Claims paid Loss portfolios Change in provision for incurred and reported claims Change in provision for incurred but not reported claims (IBNR) Claims handling expenses -1,531 45 -1,284 -843 -241 Total claims incurred for the year´s operations -3,854 99 9 165 55 0 328 2008 -1,432 54 -1,119 -788 -241 -3,526 -1,439 44 -1,065 -1,074 -163 -3,697 Parent Company -1,294 44 -890 -970 -163 -3,273 145 0 175 104 0 424 2007 Claims incurred for previous year’s operations Gross Ceded Net Gross Ceded Net Claims paid Loss portfolios Change in provision for incurred and reported claims -2,518 -76 995 Change in provision for incurred but not reported claims (IBNR) -1,860 Total claims incurred for previous year's operations -3,459 380 73 -273 3,143 3,323 -2,138 -3 722 1,283 -136 -2,226 -72 1,138 957 -203 264 14 -243 8 43 -1,962 -58 895 965 -160 Total claims incurred -7,313 3,651 -3,662 -3,086 274 -2,812 Total claims paid Claims paid Loss portfolios Claims handling expenses Paid claims Change in Provision for outstanding claims 2008 2007 Parent Company Gross Ceded Net Gross Ceded Net -4,049 -31 -241 -4,321 479 82 0 561 2008 -3,570 51 -241 -3,760 -3,665 -28 -163 -3,856 Parent Company -3,250 -14 -163 -3,433 409 14 0 423 2007 Gross Ceded Net Gross Ceded Net Change in provision for incurred and reported claims Change in provision for incurred but not reported claims (IBNR) Total -289 -2,703 -2,992 -108 3,198 3,090 -397 495 98 73 -117 -44 -68 112 44 5 -5 0 39 Annual Report 2008 Note 5 • Operating costs Specification of income statement item operating costs Group Parent Company 2008 2007 2008 2007 Acquisition costs -1,239 -1,621 -1,239 -1,620 Change in prepaid acquisition costs (+/–) Administrative expenses Provisions and profit shares in ceded reinsurance (–) -100 -260 196 -83 -238 97 -100 -265 196 -83 -255 97 Total -1,403 -1,845 -1,408 -1,861 Other operating costs Group Parent Company 2008 2007 2008 2007 Claims handling expenses included in claims paid Costs for treasury management included in Return on capital, costs Costs for property management included in Return on capital, net Other operating costs Total operating costs -241 -45 -2 -1,403 -1,691 -163 -44 -2 -1,845 -2,054 -241 -45 -1 -1,408 -1,695 -163 -42 -2 -1,861 -2,068 Total operating costs by type Direct and indirect personnel costs Premises costs Depreciation/Amortisation Other expenses related to operations Total Group Parent Company 2008 2007 2008 2007 -318 -46 -7 -1,320 -1,691 -290 -34 -7 -1,723 -2 054 -305 -44 -7 -1,339 -1,695 -285 -33 -7 -1,743 -2,068 Note 6 • Investment, income Dividend income from: Swedish shares and participations Foreign shares and participations Interest income Bonds and other interest-bearing securities Other interest income - of which from financial assets not valued at fair value with changes in value reported in the income statement Exchange rate profit (net) Capital gains and reversed write-downs (net) Foreign shares Interest-bearing securities Property Group Parent Company 2008 2007 2008 2007 2 48 339 85 85 913 0 0 0 415 16 449 115 115 0 133 8 0 2 33 338 85 85 595 0 0 0 415 16 371 115 115 0 94 5 0 Total return on capital, income 1,386 1,136 1,053 1,016 40 Annual Report 2008 Note 7 • Unrealised gains on investments Group Parent Company 2008 2007 2008 2007 Swedish shares and participations Foreign shares and participations Derivatives Total unrealised gains on investments 2 167 1 170 0 121 2 123 2 167 1 170 0 135 2 137 Note 8 • Investment expenses and charges Operating expenses for land and buildings Asset management costs Interest expenses Other interest expenses - of which from financial assets not valued at fair value with changes in value reported in the income statement Capital losses on foreign exchange, net Swedish shares and participations Foreign shares and participations Subsidiaries & associated companies Bonds and other interest-bearing securities Group Parent Company 2008 2007 2008 2007 -2 -49 -2 -2 0 -4 -259 -232 -15 -2 -44 -1 -1 -116 -1 0 -348 0 -2 -49 -2 -2 0 -4 -258 0 -15 -2 -42 -2 -2 -102 -1 0 -54 0 Write-down of investment assets 0 -411 0 -411 Total -563 -923 -329 -614 Note 9 • Unrealised losses on investments Group Parent Company 2008 2007 2008 2007 Swedish shares and participations Foreign shares and participations Derivatives, forward exchange agreements Total unrealised losses on investments -8 -889 -1 -899 -2 -125 0 -128 -8 -610 -1 -620 -2 -125 -1 -128 41 Annual Report 2008 Note 10 • Net profit or net loss per category of financial instrument Group Financial assets Financial assets identified as items valued at fair value in Available-for- the income sale financial statement instruments Total Shares and participations Bonds and other interest-bearing securities Total -1,222 0 1,222 0 527 527 -1,222 527 -695 Parent Company Financial assets Financial assets identified as items valued at fair value in Available-for- the income sale financial statement instruments Total Shares and participations Bonds and other interest-bearing securities Total -710 0 -710 0 527 527 -710 527 -183 Note 11 • Taxes Group Parent Company 2008 2007 2008 2007 Current tax expense (-) [/tax revenue (+)] Current tax expenses(-) [/tax revenue] Tax adjustment attributable to previous years Deferred tax expense (-) [/tax revenue (+)] Deferred tax regarding temporary differences Total reported tax expense -341 278 -69 -132 -211 23 -129 -317 -338 278 -233 -293 -211 25 19 -167 Tax adjustment attributable to previous years includes MSEK 299 regarding a tax credit for foreign taxes which has been reclassified from deferred tax regarding temporary differences by MSEK -299. 42 Annual Report 2008 Reconciliation of effective tax Reconciliation of effective income tax for the Group and Parent Company with the Swedish income tax rate as follows: Group Parent Company 2008 2007 2008 2007 Tax according to applicable tax rate for the Parent Company Non-deductible expenses Non-taxable income Utilisation of previously non-capitalised loss carry-forward Tax regarding previous years Other -28,0% -8,6% 7,6% 0 -5,5% 18,6% -28,0% -15,3% 5,5% 0,9% 0,9% 0,5% -28,0% -0,1% 4,4% 0 -4,5% -0,2% -28,0% -22,9% 19,6% 1,3% 1,3% 0,7% Reported effective tax -15,9% -35,5% -28,4% -28,0% "Other" refers mainly to the effect of the change in the tax rate in Sweden for income year 2009 to 26.3% Profit before tax for the Parent Company refers to profit after transfer to safety reserve. The total provision for 2008 amounts to 0 (537). Group Parent Company Intangible assets -IT Capitalized Acquired expenditure for intangible development assets Intangible assets -IT Capitalized Acquired expenditure for intangible development assets work Goodwill Total work Goodwill Total Note 12 • Intangible assets Accumulated acquisition value Opening balance, 1 Jan 2007 Closing balance, 31 Dec 2007 Opening balance, 1 Jan 2008 Closing balance, 31 Dec 2008 Accumulated amortisation Opening balance, 1 Jan 2007 Amortisation for the year Closing balance, 31 Dec 2007 Opening balance, 1 Jan 2008 Amortisation for the year Closing balance, 31 Dec 2008 Carrying amount Per 1 Jan 2007 Per 31 Dec 2007 Per 1 Jan 2008 Per 31 Dec 2008 Amortisation for the year is included in the following rows of the income statement for 2007: Operating costs Other costs Total Amortisation for the year is included in the following rows of the income statement for 2008: Operating costs Other costs Total 65 65 65 66 -64 -1 -65 -65 0 -65 1 0 0 1 -1 0 -1 0 0 0 615 615 615 615 -270 -27 -297 -297 -27 -324 345 318 318 291 0 -27 -27 0 -27 -27 680 680 680 681 -334 -28 -362 -362 -27 -389 346 318 318 292 -1 -27 -28 0 -27 -27 IT-related intangible assets include capitalised expenditure for development work of critical business systems. All intangible assets are amortised. Refer to the accounting principles for information on amortisation. 65 65 65 66 -64 -1 -65 -65 0 -65 1 0 0 1 -1 0 -1 0 0 0 460 460 460 460 -197 -17 -214 -214 -17 -231 263 246 246 229 0 -17 -17 0 -17 -17 525 525 525 526 -261 -18 -279 -279 -17 -296 264 246 246 230 -1 -17 -18 0 -17 -17 43 Annual Report 2008 Note 13 • Land and Buildings Group Parent Company Acquisition cost Opening balance, 1 January 2007 Closing balance, 31 December 2007 18 18 18 18 Opening balance, 1 January 2008 18 18 Disposals 0 0 Closing balance, 31 December 2008 Depreciation Opening balance, 1 January 2007 Depreciation for the year Closing balance, 31 December 2007 Opening balance, 1 January 2008 Depreciation for the year Disposals Closing balance, 31 December 2008 Carrying amount 1 January 2007 31 December 2007 1 January 2008 31 December 2008 Assessed value 18 -12 -1 -13 -13 -1 0 -14 7 5 5 4 18 -12 -1 -13 -13 -1 0 -14 7 5 5 4 Group Parent Company 2008 2007 2008 2007 Assessed value, buildings (in Sweden) Assessed value, land (in Sweden) Total 1 1 2 1 1 2 1 1 2 1 1 2 Note 14 • Shares and participations in Group companies Name of subsidiary Registered offices, country Participating interest, % Sirius Rückversicherungs Service GmbH Hamburg, Germany Sirius Belgium Réassurances S.A Liège, Belgium Sirius International Holding (NL) B.V Amsterdam, The Netherlands 2008 2007 100 100 100 100 100 - Accumulated acquisition cost Beginning of year Acquisition Disposals Closing balance, 31 December Accumulated write-downs Beginning of year Acquisition Disposals Write-downs for the year Closing balance, 31 december Carrying amount 31 December 44 Parent Company 2008 2007 609 643 0 1,252 2,990 0 -2,382 609 -596 -1,487 0 0 0 -596 656 0 891 0 -596 13 Annual Report 2008 Subsidiaries' equity 2008 Name of subsidiary Equity Share % Number of Book value Profit/loss shares 2008 Sirius Rückversicherungs Service GmbH, Hamburg, Germany Sirius Belgium Réassurances S.A., Liège, Belgium 14 15 100 100 0 13 2 0 I share nom. Value EUR 51,129 Share capital total EUR 1,245,681 consisting of 700,000 shares with nom. value EUR 100 per share Sirius International Holding (NL) B.V.,Amsterdam, The Netherlands 467 100 643 Share capital total -241 EUR 18,000 consisting of 180 shares with nom. value EUR 100 per share Total 496 656 -239 2007 Name of subsidiary Equity Share % Number of shares Book value Profit/loss 2007 Sirius Rückversicherungs Service GmbH, Hamburg Sirius Belgium Réassurances S.A, Liège Belgien 10 13 100 1 share nom.value 0 1 EUR 51,129 100 Share 13 0 capital total EUR 1,245,681 consisting of 700,000 shares without nom. value Total 23 13 1 45 Annual Report 2008 Note 15 • Shares and participations in associated companies Carrying amount at start of year Acquisitions of associated companies Share of associated company's profit/loss Translation differences Other changes in associated company's equity Group 2008 2007 1,652 1,673 385 -249 296 17 0 14 -17 -18 Carrying amount at end of year 2,101 1,652 Carrying amount at start of year Acquisition of associated company Carrying amount at end of year Parent Company 2008 2007 1,673 385 2,058 0 1,673 1,673 Associated Companies Assets Liabilities Equity Net income Share of capital % 1) Number of shares White Mountains International S.a.r.l., Luxemburg Total 27,461 27,461 20,001 20,001 7,460 7,460 -1,549 -1,549 28,2 28,2 2,461,000 2,461,000 1) The participating interest in the company's total equity at the end of the year was 28.2%, with the equivalent figure at the beginning of the year at 20.4%. The participating interest in terms of outstanding shares at the end of the year was 22.0%, with the equivalent figure at the beginning of the year at 17.4%. Note 16 • Investments in shares and participations Group 1,745 2,196 2,338 2,072 Fair value Acquisition cost 2008 2007 2008 2007 Fair value Acquisition cost 2008 2007 2008 2007 Parent Company 1,294 2,191 1,595 2,069 Further information on financial instruments can be found in Note 31. 46 Annual Report 2008 Note 17 • Bonds and other interest-bearing securities Group Swedish government Swedish mortgage institutions Other Swedish issuers Foreign governments Other foreign issuers Total Fair value Acquisition cost 2008 2007 2008 2007 3,126 1,089 2,578 1,989 8,782 2,780 1,477 1,441 1,964 7,662 2,982 1,121 2,523 2,089 8,715 2,794 1,511 1,444 1,965 7,714 of which listed 8,782 7,662 8,715 7,714 Average difference compared to nominal value Total excess amount Total shortfall 365 200 159 53 166 68 183 25 Parent Company Swedish government Swedish mortgage institutions Other Swedish issuers Foreign governments Other foreign issuers Total Fair value Acquisition cost 2008 2007 2008 2007 3,126 1,089 2,578 1,989 8,782 2,780 1,447 1,441 1,964 7,662 2,982 1,121 2,523 2,089 8,715 2,794 1,511 1,444 1,965 7,714 of which listed 8 782 7 662 8,782 7,714 Average difference compared to nominal value Total excess amount Total shortfall 365 200 159 53 166 68 183 25 Note 18 • Other financial assets Fair value Acquisition cost 2008 2007 2008 2007 Group Derivative currency forward agreements Total 0 0 2 2 0 0 0 0 Fair value Acquisition cost 2008 2007 2008 2007 Parent Company Derivative currency forward agreements Total 0 0 2 2 0 0 0 0 47 Annual Report 2008 Note 19 • Debtors arising out of direct insurance and other debtors Debtors arising out of direct insurance Amounts due from intermediaries Total debtors arising out of direct insurance Other debtors Group companies Income taxes recoverable Deferred tax assets – see Note 29 Other debtors Total other debtors Group Parent Company 2008 2007 2008 2007 37 37 30 30 37 37 30 30 Group Parent Company 2008 2007 2008 2007 0 766 21 55 842 2 269 320 63 654 0 753 21 40 814 2 269 320 39 630 Note 20 • Categories of financial assets and liabilities and their fair values Group 2008 Financial assets Available- valued at fair value via the income statement for-sale financial assets Total carrying amount Acquisition Fair value value Financial assets Shares and participations Bonds and other interest-bearing securities Accrued income Total 1,745 0 629 2,374 0 8,782 0 1,745 8,782 629 1,745 8,782 629 2,099 8,234 629 8,782 11,156 11,156 10,962 Parent Company 2008 Financial assets Available- valued at fair value via the income statement for-sale financial assets Total carrying amount Acquisition Fair value value Financial assets Shares and participations Bonds and other interest-bearing securities Accrued income Total 1,294 0 628 1,922 0 8,782 0 1,294 8,782 628 1,294 8,782 628 1,359 8,234 628 8,782 10,704 10,704 10,221 Group 2008 Financial liabilities liabilities amount Fair value Other Carrying Other liabilities Accrued expenses Total Parent Company 2008 546 122 668 546 122 668 546 122 668 Financial liabilities liabilities amount Fair value Other Carrying Other liabilities Accrued expenses Total 554 122 676 554 122 676 554 122 676 48 Annual Report 2008 Group Equipment Parent Company Equipment 88 9 -3 2 -3 93 93 7 -28 72 -75 -6 3 -1 2 -77 -77 -7 28 -56 13 16 16 16 86 9 -3 0 0 92 92 7 -28 71 -74 -6 3 0 0 -77 -77 -7 28 -56 12 15 15 15 Note 21 • Tangible assets Acquisition cost Opening balance 1 January 2007 Acquisitions Disposals Acquisition of subsidiary Sale of subsidiary Closing balance 31 December 2007 Openinge balance 1 January 2008 Acquisitions Disposals Closing balance 31 December 2008 Depreciation Opening balance 1 January 2007 Depreciation for the year Disposals Acquisition of subsidiary Sale of subsidiary Closing balance 31 December 2007 Opening balance 1 January 2008 Depreciation for the year Disposals Closing balance 31 December 2008 Reported values 1 January 2007 31 December 2007 1 January 2008 31 December 2008 Note 22 • Deferred acquisition costs Opening balance Capitalisation for the year Depreciation/amortisation for the year Exchange rate gains/losses Closing balance Note 23 • Untaxed reserves Parent Company Group Parent Company 2008 2007 2008 2007 464 341 -441 77 441 569 468 -551 -22 464 464 341 -441 77 441 569 468 -551 -22 464 Accumulated accelerated depreciation regarding goodwill and equipment 2008 2007 Opening balance 1 January Change for the year Exchange rate fluctuation for the year Closing balance as of 31 December Safety reserve Opening balance 1 January Provisions for the year Closing balance 31 December 81 -20 0 61 9,136 0 9,136 81 0 0 81 8,599 537 9,136 Total untaxed reserves 9,197 9,217 49 Annual Report 2008 Note 24 • Provisions for unearned premiums and unexpired risks Provisions for unearned premiums Opening balance Insurance policies signed during the period Earned insurance premiums for the period Reclassification to return on capital Currency effect Closing balance Provisions for unexpired risks Opening balance Current year’s provisions included in profit/loss Previous yerar´s provisions included in profit/loss Currency effect Closing balance Provisions for unearned premiums Opening balance Insurance policies signed during the period Premiums earned during the period Currency effect Closing balance 2008 2007 Group Gross Reinsurer's Net Gross Reinsurer's Net share 161 200 -135 0 48 274 -1,775 -1,468 1,697 0 -363 -1,909 -1,936 -1,668 1,832 0 -411 -2,183 share 167 144 -144 0 -6 -2,103 -1,710 1,951 8 79 -2,270 -1,854 2,095 8 85 -1,936 161 -1,775 2008 2007 Group Gross Reinsurer's Net Gross Reinsurer's Net share 93 0 -1 19 111 -125 -9 1 -27 -160 -32 -9 0 -8 -49 share 3 89 0 1 93 -3 -121 0 -1 -125 0 -32 0 0 -32 2008 2007 Parent Company Gross Reinsurer's Net Gross Reinsurer's Net share 161 200 -135 48 274 -1,775 -1,468 1,697 -363 -1,909 -1,936 -1,668 1,832 -411 -2,183 share 167 144 -144 -6 161 -2,095 -1,710 1,951 79 -1,775 -2,262 1,854 2,095 85 -1,936 Provisions for unexpired risks Opening balance Current year’s provisions included in profit/loss Previous year´s provisions included in profit/loss Currency effect Closing balance 2008 2007 Parent Company Gross Reinsurer's Net Gross Reinsurer's Net share 93 0 -1 19 111 -125 -9 1 -27 -160 -32 -9 0 -8 -49 share 3 89 0 1 93 -3 -121 0 -1 -125 0 -32 0 0 -32 50 Annual Report 2008 Note 25 • Claims outstanding Provisions for outstanding claims 2008 2007 Group Gross Reinsurer's Net Gross Reinsurer's Net Opening balance, reported claims Opening balance, incurred but not reported claims (IBNR) Opening balance Cost for claims incurred during the current year Change in estimated cost for claims incurred in previous years (close-down profit/loss) Claims handling expenses -3,898 -2,321 -6,219 -3,853 -3,460 -241 Paid/transferred to insurance liabilities or other current liabilities -4,080 Currency effect Sale of company Closing balance Closing balance, reported claims Closing balance, incurred but not reported claims (IBNR) -1,296 0 -10,507 -4,861 -5,646 share 712 395 1,107 , 329 3,322 0 561 392 0 4,588 698 3,890 -3,186 -1,926 -5,112 -3,524 -138 -241 -3,519 904 0 -5,919 -4,163 -1,756 share 804 295 1,099 424 43 0 423 -36 0 1,107 712 395 -4,057 -3,678 -7,735 -3,742 -206 -163 -3,714 191 1,396 -6,219 -3,898 -2,321 -3,253 -3,383 -6,636 -3,318 -163 -163 -3,291 155 1,396 -5,112 -3,186 -1,926 Provisions for outstanding claims 2008 2007 Parent Company Gross Reinsurer's Net Gross Reinsurer's Net Opening balance, reported claims Opening balance, incurred but not reported claims (IBNR) Opening balance Cost for claims incurred during the current year Change in estimated cost for claims incurred in previous years (close-down profit/loss) Claims handling expenses -3,898 -2,321 -6,219 -3,853 -3,460 -241 Paid/transferred to insurance liabilities or other current liabilities -4,080 Currency effect Closing balance Closing balance, reported claims Closing balance, incurred but not reported claims (IBNR) -1,296 -10,507 -4,861 -5,646 share 712 395 1,107 329 3,322 0 561 392 4,588 698 3,890 -3,186 -1,926 -5,112 -3,524 -138 -241 -3,519 904 -5,919 -4,163 -1,756 share 804 295 1,099 424 43 0 423 -36 1,107 712 395 --4,058 -2,266 -6,324 -3,697 -203 -163 -3,693 149 -6,219 -3,898 -2,321 -3,254 -1,971 -5,225 -3,273 -160 -163 -3,270 113 -5,112 -3,186 -1,926 51 Annual Report 2008 Note 26 • Equalisation provision Group Parent Company 2008 2007 2008 2007 Opening balance Dissolution of provisions made in previous years Exchange rate gain/loss Closing balance 5 -3 1 3 15 -10 0 5 5 -3 1 3 20 -15 0 5 Note 27 • Claims handling provision Group Parent Company 2008 2007 2008 2007 Opening balance Dissolution of provisions made in previous years Provisions for the year Closing balance 77 -77 113 113 21 -21 77 77 77 -77 113 113 0 0 77 77 Note 28 • Pension provisions and similar items Pension provisions Group Parent Company 2008 2007 2008 2007 Total amount * 15 13 0 0 * Employees in Germany are covered by a defined benefit pension plan. The plan is funded by Sirius. Pension claims are reported as liabilities on the company’s balance sheet. 52 Annual Report 2008 Note 29 • Tax Provisions Tax items accounted for directly against shareholders’ equity Group Parent Company 2008 2007 2008 2007 Deferred taxes attributable to available-for-sale financial assets Total tax items reported directly against equity -33 -33 -4 -4 -33 -33 1 1 Reported tax liabilities Current tax liability Deferred tax liability Total tax liabilities Group Parent Company 2008 2007 2008 2007 429 2,419 2,848 225 2,616 2,841 427 0 427 224 33 257 Reported deferred tax receivables and tax liabilities Reported deferred tax receivables and tax liabilities related to the following: Group Pension provisions Other provisions Surplus value of securities Safety reserve and accelerated depreciation Foreign tax credits Net tax receivables/tax liabilities Parent Company Pension provisions Other provisions Surplus value of securities Foreign tax credits Net tax receivables/tax liabilities Unreported deferred tax receivables Deferred tax assets Deferred income tax liabilities Net 2008 2007 2008 2007 2008 2007 8 13 0 0 0 21 6 0 15 0 299 320 0 0 0 -2,419 0 -2,419 0 0 -35 -2,581 0 8 13 0 -2,419 0 -2,616 -2,398 6 0 -20 -2,581 299 -2,296 Deferred tax assets Deferred income tax liabilities Net 2008 2007 2008 2007 2008 2007 8 13 0 0 21 6 0 15 299 320 0 0 0 0 0 0 0 -33 0 -33 8 13 0 0 21 6 0 -18 299 287 Deductible temporary differences and fiscal loss carry forward for which deferred tax receivables have not been reported in the income statement and balance sheet. 53 Annual Report 2008 Changes in deferred tax in temporary differences and loss carry-forward Group Balance per the income against Balance per 1 Jan 2008 statement equity 31 Dec 2008 Recorded in Recorded Pension provisions Other provisions 6 0 2 0 13 0 8 13 Surplus value of securities -20 53 -33 0 Safety reserve and accelerated depreciation -2,581 162 0 -2,419 Foreign tax credits 299 0 0 299 Reclassification Total 0 -2,296 -299 -69 0 -33 -299 -2,398 Group Balance per the income against Balance per 1 Jan 2007 statement equity 31 Dec 2007 Recorded in Recorded Receivables Reclassification Pension provisions Other provisions Surplus value of securities Safely reserve and accelerated depreciation Foreign tax credits Total 47 -47 3 0 0 3 0 0 0 47 -47 6 -2 2 0 0 0 -2,430 266 -2,163 -16 -151 33 -129 -4 0 0 -4 -20 -2,581 299 -2,296 Parent Company Balance per the income against Balance per 1 Jan 2008 statement equity 31 Dec 2008 Recorded in Recorded Pension provisions Other provisions Surplus value of securities Foreign tax credits Reclassification Total 6 0 -18 299 0 287 2 13 51 0 -299 -233 0 0 -33 0 0 -33 8 13 0 299 -299 21 Parent Company Balance per the income against Balance per 1 Jan 2007 statement equity 31 Dec 2007 Recorded in Recorded Receivables 47 Reclassification -47 Pension provisions Surplus value of securities 0 0 Foreign tax credits 266 Total 266 0 0 6 -19 32 19 0 0 0 1 0 1 47 -47 6 -18 299 287 There is no loss carry-forward included in the change of deferred tax. 54 Annual Report 2008 Note 30 • Creditors arising out of direct insurance and other creditors Creditors arising out of direct insurance Group Parent Company 2008 2007 2008 2007 Amounts due to intermediaries Total creditors arising out of insurance 25 25 23 23 25 25 23 23 Other creditors Amounts due to group companies Other creditors Total other creditors 1) Group Parent Company 2008 2007 2008 2007 484 62 546 225 76 301 496 58 554 231 75 306 1) The majority of the receivables has a duration less than one year Note 31 • Derivatives with negative values Derivatives with negative values Fair value Acquisition cost Group 2008 2007 2008 2007 Currency forwards Total 0 0 -1 -1 0 0 0 0 Derivatives with negative values Parent Company Fair value Acquisition cost 2008 2007 2008 2007 Currency forwards Total 0 0 -1 -1 0 0 0 0 Note 32 • Contingent liabilities and commitments In the form of pledged assets for own liabilities and provisions Bonds and other interest-bearing securities Accrued interest Cash and bank Assets for which policy holders have Group Parent Company 2008 2007 2008 2007 8,527 8,343 0 183 7,714 7,570 0 144 8,527 8,343 0 183 7,714 7,570 0 144 preferential rights 8,527 7,714 8,527 7,714 On the basis of the stipulations in Chapter 7, Section 11 of the Insurance Business Act, registered assets amount to MSEK 8,027. In the case of insolvency, the insured has preferential rights to the registered assets. During the course of operations, the Company has the right to register and de-register assets from the register, provided that all insurane commitments are covered by technical provisions in accordance with the Insurance Business Act. The summary in the annual report for 2007 did not include registered assets in their entirety. For the purpose of comparability between the years, the disclosures for 2007, therefore, have been updated. Group Parent Company MSEK (nominal amount) 2008 2007 2008 2007 Guarantee issued on behalf of subsidiaries Future commitments for investments in venture capital company Total 0 79 79 0 76 76 0 79 79 0 76 76 55 Annual Report 2008 Note 33 • Associated parties Summary of transactions with associated parties Associated parties within the White Mountains Group Group and Parent Company 2008 Premium Services purchased from income, Indemni- associated Receivables Liabilities, associated associated parties per parties per net fication parties Dividends Other 31 Dec. 31 Dec. Other associated parties Folksamerica Reinsurance Co. Esurance, OneBeacon WM Life Re - ceded reinsurance White Mountains Re Underwriting Services Ltd. White Mountains Financial Services LLC Sirius Insurance Holding Sweden AB - group contribution Fund American Holdings AB - group contribution White Mountains Advisors LLC Total 336 1,850 -179 0 0 0 0 0 -313 -1,780 3,299 0 0 0 0 0 2,007 1,206 -2 0 0 0 -23 0 0 -24 -49 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 914 540 0 0 0 0 0 0 1,454 1 13 0 23 11 280 186 7 521 Group and Parent Company 2007 Premium Services purchased from income, Indemni- associated Receivables Liabilities, associated associated parties per parties per net fication parties Dividends Other 31 Dec. 31 Dec. Other associated parties Folksamerica Reinsurance Co. Esurance, One Beacon WM Life Re – ceded reinsurance White Mountains Financial Services LLC Sirius Insurance Holding Sweden AB Fund American Holdings AB – group contribution White Mountains Advisors LLC Total 637 1,476 -152 0 0 0 0 -332 -1,632 -6 0 0 0 0 1,961 -1,970 0 0 0 -21 0 0 -27 -48 0 0 0 0 414 -235 0 179 0 0 0 0 -411 0 0 -411 610 393 0 0 0 0 0 1,003 0 0 26 7 0 211 6 250 56 Annual Report 2008 Note 34 • Average number of employees, salaries and other remuneration Average number of employees - Group Men Women Total Men Women Total 2008 2007 Parent Company Germany Bermuda Total, Group 238 10 0 248 117 1 2 120 111 3 0 114 127 7 0 134 2008 244 3 2 249 127 2 0 129 2007 Average number of employees – Parent Company Men Women Total Men Women Total Sweden UK Belgium Switzerland Singapore Denmark 54 23 23 4 5 2 73 19 21 3 9 2 Total, Parent Company 111 127 127 42 44 7 14 4 238 59 25 22 4 6 1 77 19 20 3 8 0 117 127 136 44 42 7 14 1 244 Senior management in the Group and Parent Company Men Women Total Men Women Total 2008 2007 Board and CEO Other senior members of management Total Group/Parent Company 4 3 7 0 0 0 4 3 7 4 3 7 0 0 0 4 3 7 Remuneration to employees Salaries including bonuses Of which paid out bonuses Pension expenses Social security contributions, special employer’s contributions, pensions Total remuneration to employees Group Parent Company 2008 2007 2008 2007 207 41 41 55 303 191 25 37 52 280 196 39 40 55 291 185 24 37 52 274 Of which paid remuneration for the year to: Group Parent Company CEO 2008 2007 2008 2007 Salaries including bonuses Of which paid out bonuses Pension expenses Total remuneration to CEO The board and other senior members of management Salaries including bonuses Of which paid out bonuses Pension expenses Total remuneration to the board and other senior members of management 8 5 3 11 9 4 2 11 6 3 3 9 7 2 2 9 8 5 3 11 9 4 2 11 6 3 3 9 7 2 2 9 57 Annual Report 2008 Salaries and other remuneration, divided by country – Group 2008 2007 Of which bonuses Salaries and paid for Saleries and Of which bonuses paid for remuneration the year remuneration the year Total, Parent Company Germany (1 October – 31 December 2007) Bermuda (1 January – 30 September 2007) Total salaries and other remuneration 196 11 0 207 39 2 0 41 185 2 4 191 24 0 1 25 Salaries and other remuneration, divided by country – Parent Company 2008 2007 Of which bonuses Salaries and paid for Saleries and Of which bonuses paid for remuneration the year remuneration the year 104 33 40 9 7 3 196 22 4 10 2 1 0 39 99 28 43 8 7 0 185 13 2 7 1 1 0 24 Sweden Belgium UK Switzerland Singapore Denmark Total, Parent Company Salaries and remuneration Belgium: All employees are covered by a pension plan in which Sirius pays 4.5 The Board receives remunerations in accordance with the resolutions of the percent or 6.5 percent of the salary, depending on the employee category. The Annual General Meeting. Board fees are not paid to individuals employed in employee pays 2 percent. the company. No Board fees were paid in 2008. Remuneration to the CEO and Possible changes to the plan must be approved by local unions. The other senior members of management consists of basic salary, bonuses and premiums are invested by an insurance company and the employee cannot other compensations such as car benefits and pensions. influence how the money is invested. At the time of retirement, the employee has the option of either receiving the money as a lump sum or as a series of Variable remuneration payments over time. The Annual General Meeting has resolved upon a variable remuneration plan for Germany: Employees are covered by a defined benefit pension plan. The the CEO and senior members of management. pension receivables are reported as liabilities on the balance sheet. Other employees are also covered under a variable remuneration plan. Switzerland: Employees are covered by pension plans according to the Levels of variable remuneration are based upon the Group’s profit/loss as well industrial sector to which they belong. as individually set goals. The plan is a combination of a defined benefit and fee based pension plan. Sirius pays for 60 percent of the premiums while the employee pays for the Pensions remaining 40 percent. Sweden: Sirius applies the pension agreement signed with FAO/FTF/Saco. The Singapore: The Company is not required to pay pensions. agreement comes into effect as of 1 January 2008 and implies that employees Denmark: All employees are covered by a mandatory pension plan with born 1971 and earlier have a benefit defined pension plan, whereas employees Danica pension. Sirius pays the agreed upon percentage rate stated in the born 1979 and earlier are offered a premium defined solution. emplyee´s employment contract, however, this percentage shall be at a Employees born between 1 January 1972 and 31 December 1978 have minimum, 15 % of the employee´s salary. Thereafter, this amount is distributed the option, until 31 March 2008, to decide to which of these plans they wish to to cover other aspects such as life insurance and disability benefits. belong. The pension benefits are safeguarded by insurance. The Company’s CEO has a premium based executive pension plan. Three Severance pay additional senior members of management subscribe to special premium based Upon termination initiated by the Company, the CEO is entitled to severance pay pension plans. Both plans are safeguarded by insurance. during the termination period of 12 months. A 6 month termination period is The CEO is entitled to a life long pension from the age of 65. required if termination is initiated by the CEO. UK: The pension plan covers all employees over 21 years of age and who are employed with conditional tenure. The plan is premium based. The employee Drafting and decision-making process pays 1.5 percent or more of his/her salary and Sirius pays 12 percent of the Decisions regarding remuneration for the CEO are resolved upon by the Board. employee’s salary. In terms of salary, no upper limit exists. The money is in- Decisions regarding remuneration for other senior members of management vested in funds of the employee’s choosing. The plan is optional and employees are made by the CEO, in some cases after consultation with the Chairman of may choose not to participate. the Board. Loans to senior members of management – none. 58 Annual Report 2008 Absence due to illness in the Parent Company 2008 2007 Total absence due to illness as a percentage of ordinary working hours Share of total absence due to illness regarding continuous absence due to illness of 60 days or more 1.98% 11.90% 2.20% 15.40% Absence due to illness as a proportion of each group’s standard working hours Absence due to illness divided by gender: Men Women Absence due to illness divided by age category: Younger than 30 years 30 - 49 years 50 years and older 1.71% 2.18% 2.32% 1.81% 2.20% 1.85% 2.48% 1.10% 2.49% 1.87% Note 35 • Fees and reimbursement to auditors Group Parent Company 2008 2007 2008 2007 Öhrlings PricewaterhouseCoopers - audit engagement 5 6 5 6 Audit assignment refers to the examination of the annual report and accounting records, as well as the administration of the Board of Directors and CEO, other duties which are the responsibility of the Company’s auditors to execute and the provision of advisory services or other assistance resulting from observations made during such an examination or the implementation of such other duties. All other undertakings are classified as other assignments. Note 36 • Operational leasing Leasing contracts in which the Company is the lessee Group Parent Company 2008 2007 2008 2007 Non-cancellable leases amount to: Due for payment within one year Due for payment later than one year but within five years Due for payment after five years Total 25 57 3 85 24 72 4 100 24 51 0 75 23 67 0 90 59 Annual Report 2008 Note 37 • Class analysis Profit/loss per insurance class 2008 Parent Company Personal Maritime, Fire and other accident and aviation and property Credit Total direct Assumed health transport damage insurance Miscellaneous insurance reinsurance Total Premium income, gross Premium earned, gross Incurred claims, gross Operating expenses, gross Result, ceded reinsurance Equalisation provision Technical result 507 498 -268 -209 -23 0 -2 19 41 -5 -20 -3 0 13 43 49 -114 -35 2 0 -98 -80 2 -2 1 0 3 4 67 66 -45 -33 -2 0 -14 556 656 -434 -296 -26 3 -97 6,127 6,183 -6,879 -1,295 2,843 0 852 6,683 6,839 -7,313 -1,591 2,817 3 755 2007 Parent Company Personal Maritime, Fire and other accident and aviation and property Credit Total direct Assumed health transport damage insurance Miscellaneous insurance reinsurance Total Premium income, gross Premium earned, gross Incurred claims, gross Operating expenses, gross Result, ceded reinsurance Equalisation provision Technical result 464 459 -267 --201 -6 0 -15 67 64 -67 -22 -4 0 -29 71 70 10 -39 0 0 41 0 0 -1 --4 0 3 -2 108 108 -51 -47 --4 3 9 710 701 -376 -313 -14 6 4 5,942 6,071 -3,524 -1,646 -174 9 736 6,652 6,772 -3,900 -1,959 -188 15 740 60 Annual Report 2008 Stockholm, March 9, 2009 Allan Waters Chairman of the Board of Directors Brian Kensil Göran Thorstensson President & CEO Jan Silverudd Employee Repr esentative Our Auditors’ Report was submitted on March 16, 2009 Catarina Ericsson Authorized Public Accountant Anna Hesselman Authorized Public Accountant 61 Annual Report 2008 Audit Report To the general meeting of the share- holders of Sirius International Insurance Corporation (publ) Corporate identity number 516401-8136. We have audited the annual accounts, the consolidated accounts, the accounting records and the administration of the board of directors and the managing director of Sirius International Insurance Corporation (publ) for the year 2008. These accounts and the ad- ministration of the company and the applica- tion of the Annual Accounts Act for Insurance Companies when preparing the annual ac- counts and the consolidated accounts are the responsibility of the board of directors and the managing director. Our responsibility is to express an opinion on the annual accounts, the consolidated accounts and the administra- tion based on our audit. We conducted our audit in accordance with generally accepted auditing standards in Sweden. Those standards require that we plan and perform the audit to obtain high but not absolute assurance that the annual accounts and the consolidated accounts are free of ma- terial misstatement. An audit includes examin- ing, on a test basis, evidence supporting the amounts and disclosures in the accounts. An audit also includes assessing the accounting principles used and their application by the board of directors and the managing director and significant estimates made by the board of directors and the managing director when preparing the annual accounts and the con- solidated accounts as well as evaluating the overall presentation of information in the an- nual accounts and consolidated accounts. As a basis for our opinion concerning discharge from liability, we examined significant deci- sions, actions taken and circumstances of the company in order to be able to determine the liability, if any, to the company of any board member or the managing director. We also examined whether any board member or the managing director has, in any other way, act- ed in contravention of the Insurance Business Act, the Annual Accounts Act for Insurance Companies or the Articles of Association. We believe that our audit provides a rea- sonable basis for our opinion set out below. The annual accounts and the consolidat- ed accounts have been prepared in accord- ance with the Annual Accounts Act for Insur- ance Companies and give a true and fair view of the company’s and the group’s financial position and results of operations in accord- ance with generally accepted accounting prin- ciples in Sweden. The statutory administration report is consistent with the other parts of the annual accounts and consolidated accounts. We recommend to the general meeting of shareholders that the income statement and balance sheet for the company and the group be adopted, that the profit be dealt with in accordance with the proposal in the admin- istration report and that the members of the board of directors and the managing director be discharged from liability for the financial year. S t o c k h o l m , March 16, 2 0 0 9 Catarina Ericsson Authorized Public Accountant Anna Hesselman Authorized Public Accountant 62 Annual Report 2008 DEFINITIONS Combined Ratio Net claims incurred in relation to net premiums earned and operating expenses (both commissions and own expenses) in relation to net premiums earned. Net Technical Provisions Total technical provisions (premium & claims provisions) less reinsurers’ share of technical provisions. Solvency Capital Total of shareholders’ equity + deferred taxes (or untaxed reserves in the parent company) + excess values of investment assets. Solvency Ratio Solvency capital in relation to net premium income. This is an unaudited translation of Sirius International´s Annual Report 2008. The audited Swedish version is the binding version. 63 Annual Report 2008 64 Annual Report 2008 hEAD OFFICE Sirius International Insurance Corporation (publ) SE-113 96 Stockholm, Sweden. Visiting address: Birger Jarlsgatan 57B Telephone: +46 8 458 5500 Telefax: +46 8 458 5599 (Reinsurance) +46 8 458 5595 (Corp. Accounting & Control) Sirius International Insurance Corporation (publ) Belgian Branch Mont Saint Martin 62B/2 BE-4000 Liège, Belgium Telephone: +32 4 220 8611 Telefax: +32 4 232 1999 (Underwriting) +32 4 232 1998 (Accounting/Claims) +32 4 232 1994 (Finance) Sirius International Danish Branch, filial av Sirius International Försäkringsaktiebolag (publ), Nyhavn 43, 2 sal DK-1051 Copenhagen, Denmark Telephone: +45 88 807 100 Telefax: +45 88 807 111 www.siriusaviationinsurance.com Sirius Rückversicherungs Service Gmbh Neuer Wall 52/Entrance: Bleichenbrücke 1-7 DE-20354 hamburg, Germany Telephone: +49 40 30 95 19-0 Telefax: +49 40 30 95 19-21 Sirius International Insurance Corporation (publ) UK Branch The London Underwriting Centre, 3 Minster Court, Mincing Lane London EC3R 7DD, Great Britain Telephone: +44 20 7617 4900 +44 20 7617 4919 Telefax: Sirius International Insurance Corporation (publ) (Asia Branch) Singapore 24 Raffles Place #10-01/02, Clifford Centre 048 621 Singapore, Singapore Telephone: +65 6435 0052 +65 6435 0053 Telefax: Sirius International Insurance Corporation (publ) Labuan Branch c/o MNI Offshore Insurance (L) Ltd Level 11 (B) Block 4 Office Tower Financial Park Labuan Complex Jalan Merdeka 87000 FT Labuan, Malaysia Telephone: +60 87 417 672 73 Telefax: +60 87 417 675 Sirius International Insurance Corporation (publ), Stockholm, Zurich Branch Bellerivestrasse 49 Ch-8008 Zurich, Switzerland Telephone: +41 43 443 0180 +41 43 443 0189 Telefax: www.siriusgroup.com 65 

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