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White Mountains Insurance Group LtdHEAD 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) Sirus Internationl Insurance Corporation (publ) Bermuda Branch Hamilton HMJX, Bermuda Visiting address; 14 Wesley Street; 5th floor Telephone: +1 441 278 3140 Telefax: +1 441 278 3145 Sirius International Danish Branch, filial av Sirius International Försäkringsaktiebolag (publ), Sverige Nyhavn 43, 2nd floor 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 Telefax: +44 20 7617 4919 Sirius International Insurance Corporation (publ) (Asia Branch) Singapore 24 Raffles Place #10-01/02, Clifford Centre 048 621 Singapore, Singapore Telephone: +65 6435 0052 Telefax: +65 6435 0053 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 P.O. Box 2807 CH-8022, Zurich, Switzerland Visiting address: Dreikönigstrasse 12 Telephone: +41 43 443 0180 Telefax: +41 43 443 0189 www.siriusgroup.com 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 1 2 Contents White Mountains Insurance Group Comments from the President and CEO Board of Directors’ Report Income Statement - Group Statement of Comprehensive Income - Group Balance Sheet - Group Change in Shareholders’ Equity - Group Cash flow Statement - Group Performance Analysis – Group Income Statement – Parent Company Statement of Comprehensive Income – 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 Unrealized gains and losses on investments Note 8 Investment expenses and charges Note 9 Net profit or net loss per category of financial instruments Note 10 Taxes Note 11 Intangible assets Note 12 Land and buildings Note 13 Shares and participations in group companies Note 14 Investments in shares and participations Note 15 Bonds and other interest-bearing securities Note 16 Derivative financial instruments Note 17 Other debtors Note 18 Categories of financial assets and liabilities and their fair value Note 19 Tangible assets Note 20 Deferred acquisition costs Note 21 Untaxed reserves Note 22 Provisions for unearned premiums and unexpired risks Note 23 Claims reserve Note 24 Equalization provision Note 25 Claims handling provision Note 26 Employee benefits Note 27 Other creditors Note 28 Contingent liabilities and commitments Note 29 Associated parties Note 30 Average number of employees, salaries and other remunerations Note 31 Fees and reimbursements to auditors Note 32 Operational leasing Note 33 Class analysis Auditor’s report Definitions History 1 2 5 12 13 14 16 18 19 20 21 22 24 26 27 28 36 51 51 53 53 54 54 55 56 57 58 58 59 61 61 62 62 67 67 67 68 69 69 70 70 72 73 73 75 76 77 77 79 81 85 1 Annual Report 2012 White Mountains, our owners White Mountains Insurance Group, Ltd. Sirius International Insurance Group Ltd. A financial services holding company with A Bermuda-domiciled holding company primary business interests in property and whose operating companies offer capacity casualty insurance and reinsurance. for property, accident & health, trade credit, White Mountains´corporate headquarters and aviation, marine and other exposures. Our its registered office are located in Hamilton, principal operating companies are: Bermuda, and its principal executive office is located in Hanover, New Hampshire. Sirius International Insurance Corporation White Mountains conducts its principal A Swedish-based international reinsurer that businesses through: focuses mainly on property and other short- tailed lines. Sirius International is the largest Sirius International Insurance Group Ltd. reinsurance company in Scandinavia and a Global reinsurance. OneBeacon leading reinsurer in Europe. Sirius Interna- tional’s home office is in Stockholm, and it has offices in Australia, Bermuda, Copenha- Specialty insurance. OneBeacon’s common gen, Hamburg, Liège, London, Singapore shares are listed on the New York Stock and Zürich. Exchange under the symbol “OB”. White Mountains owns 75% of OneBeacon. Sirius America Insurance Company HG Global A U.S.-based, international, (re)insurance company that focuses on the property and U.S. municipal bond reinsurance. accident & health lines in North and Latin White Mountains Advisors New York with branch offices in Miami and America. Sirius America’s home office is in Investment management with $34 billion of Toronto. assets under management. Sirius Syndicate 1945 White Mountains’ common shares are listed A Lloyd’s syndicate that began writing busi- on the New York Stock Exchange and the ness at July 1, 2011 with initial stamp capac- Bermuda Stock Exchange under the symbol ity of £93 million and focus on accident & “WTM”. Market capitalization as of December health, contingency, property and marine. 31, 2012 was $3.2 billion. As of December 31, 2012, White Mountains reported total White Mountains Solutions Inc. assets of $12.9 billion, adjusted shareholders’ A Connecticut-based professional team spe- equity NGM of $3.7 billion, and adjusted book cializing in opportunistic structured acquisi- value per share NGM of $588. tions of run-off property and casualty insur- ance liabilities. The team further enhances transaction returns via effective post-acquisi- tion management of the run-off process. 1 Annual Report 2012 Comments from the President and CEO Last year saw a marked improvement in the natural catastrophes in the United States. business environment for the reinsurance This was the first full year since Sirius industry. Whereas total losses in 2011 had America became part of the Sirius internation- been the second highest ever, 2012 proved al Group, making a direct comparison with to be relatively benign at a time of slightly previous results more complicated. Nonethe- harder rates. Sirius International was able less, there is no disguising the fact that we to increase its underwriting profits sig- were successful, with a combined ratio of nificantly despite some heavy claims from 90% and an underwriting profit of $89 million. 2 Annual Report 2012 Although 2012 was better than our Sirius America has since added direct Ac- long-term average, it should be seen as cident and Health to its book, and we see part of a pattern of profitability. We have this becoming an important pillar of the now returned positive figures for every business. one of the last eleven years, even when We appear to be further away from im- things have been difficult. In the period plementation of Solvency II than we were since 1997 our combined ratio has been this time last year, now that the measure 93%. As I have said before, this stability is has been put back yet again, probably at one of the factors that make Sirius Interna- least to 2016. We continue, though, to be tional a reliable long-term trading partner. well prepared for the changes when they At $1,197 m, premium income was eventually arrive. flat in comparison with last year if one Looking ahead to the rest of 2013, we includes Sirius America for the full year, saw a very small increase in rates overall reflecting our selective underwriting and at the end-of-year renewal after taking the shortage of profitable opportunities in into account the usual variations between what continues to be a soft market. The different classes and geographies. Yet it increase in profits was driven by a drop is very difficult to see the hard market re- in claims. The only two losses of any size turning in the immediate future. The rein- were from storm Sandy (nearly $100 m) surance industry continues to attract new and the drought in Mid-West United States entrants, and there is already too much ($35 million). capital chasing too little premium. As ever, our diversity and spread of Nonetheless, our track record speaks risk have made possible our consistently for itself and justifies our confidence that strong performance. Whereas in 2011 a we can meet whatever challenges may benign loss experience in the western lie ahead. As ever, I would like to thank hemisphere kept us profitable at a time of all our staff for their loyalty and profes- heavy losses elsewhere, this time it was sionalism, and our brokers and customers the other way around. for enabling us to build strong long-term Our new Lloyd’s operation Syndicate relationships for our mutual benefit. 1945 completed its first full year in good shape, achieving the primary objective of modest profitable growth. We have now added our London Marine book and some Property business to the portfolio, which already included Accident and Health and Contingency. The integration of Sirius America into the group has gone to plan. Last year I wrote that a top priority was to ensure that their arrival benefited customers, bro- kers and shareholders alike, enabling us to provide an enhanced, seamless service. I believe this objective has been achieved. 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 3 Annual Report 2012 At a glance (Parent) 2012 2011 Net premium income $595 million $583 million Claims net of reinsurance $315 million $419 million Underwriting profit $122 million $14 million Combined Ratio 80% 97% Income before tax $183 million $68 million Combined Ratio (Parent) 96% 93% 99% 80% 88% 87% 86% 89% 97% 80% 2 0 0 3 2 0 0 4 2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0 2 0 1 1 2 0 1 2 Solvency Capital (Group), MSEK 8 780 9 364 8 182 9 893 10 399 10 455 16 011 14 150 12 544 12 516 2 0 0 3 2 0 0 4 2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0 2 0 1 1 2 0 1 2 4 Annual Report 2012 Board of Directors’ Report The Board of Directors and Managing from these two events will, in total, cost Director of Sirius International Försäkrings- approximately MSEK 800. Further cata- aktiebolag (publ), (Sirius International), strophe events which have taken place are Corporate Identity Number 516401-8136, the two earthquakes in Italy, which it is hereby present the Annual Report for 2012. estimated to cost the Group approximately MSEK 50. General information regarding The major catastrophe claims from the the company previous accident years have had a posi- Sirius International operates within inter- tive development during the year, with a national insurance and reinsurance. Sirius positive run-off result for 2012. The price International was established in 1989. Ho- levels in the insurance portfolio have been wever, the operations were initially started satisfactory on the majority of markets and within Sirius Insurance in 1945. In 1989, classes of business. The portion of the the reinsurance operations were transferred insurance portfolio renewed at the begin- to Sirius International. Sirius International ning of 2013 show continued satisfactory has been the Parent Company in the Group pricing. since 1992. 2012 was the first full year of operation for Syndicate 1945 at Lloyd’s. Syndicate Development of the Company’s operations, 1945 writes primarily Accident & Health in- income and financial position surance. In 2012, The Syndicate has enab- After 2011, which was one of the most led us to write profitable new business that expensive years for insurance companies, earlier was out of reach as Lloyd’s security 2012 proved to be favorable for the in- was required. In 2013 Syndicate 1945 is dustry. This is, of course, primarily due planned to expand its business portfolio, to the absence of any major earthquakes, mainly into assumed Property and Marine hurricanes, typhoons or floods during the reinsurance. year. Only two major catastrophe events of Furthermore, the integration of the significance affecting the market and the subsidiary WM Phoenix acquired in 2011, industry as a whole took place during the with insurance business mainly concentra- year, which also impacted Sirius Interna- ted to the Group company, Sirius America tional. These were the crop losses in a Insurance Company, continued in 2012, number of states in the American Midwest, focusing on the adoption on systems and which were hit by major droughts during on business and administrative processes long periods of consistently high tempera- alignments. tures without precipitation, as well as the Gross premium income amounted to “Superstorm”, Hurricane Sandy, which rip- MSEK 8,081 (5,955) for the Group and ped through, mainly, New York and New MSEK 5,779 (5,347) for the Parent Com- Jersey during the final days of October, pany. The Group’s premium income for causing huge material damages. For the own account amounted to MSEK 6,304 Group, it is estimated that claims arising (4,363), and MSEK 4,014 (3,768) for the 5 Annual Report 2012 Parent Company. The increase in premium through the American Taxpayer Relief Act, volume compared with the previous year is which subdued the concerns in the market. due, primarily, to the fact that the Group The stock markets have been characte- company, WM Phoenix, contributed with rized by an upswing during the year, with 12 months’ earnings in 2012, while in the exception of the US stock markets, 2011, only earnings from the acquisition which stagnated somewhat during the final date on September 30, 2011 were reported. quarter. S&P 500 in the US increased by Discounting these one-off effects, gross 13%, and the leading continental European premium income increased by approxima- stock markets rose by between 15-29%, es- tely 5% compared with the previous year. pecially the German DAX exchange, which Increases have been noted, primarily, increased by 29% compared with December within the traditionally dominant classes of 2011. The Swedish OMX30 increased by business assumed Property reinsurance and 12% during the year. The Japanese Nikkei direct Accident & Health insurance, while 225 increased by 23% during 2012 thanks the volumes for assumed Credit and Avia- to the new government’s introduction of tion reinsurance have decreased somewhat. reforms to increase exports and to improve The Group’s operating profit from insu- the business climate in the country. The rance operations amounted to MSEK 1,058 British FTSE 100 increased by 6% which is (223) and to MSEK 1,104 (266) for the Pa- slightly lower than the rest of Europe. rent Company. The combined ratio amoun- In terms of the bond portfolio, the US, ted to 90% (99%) for the Group and 80% Swedish, German and British markets are (97%) for the Parent Company. The strong the most important. The interest levels on insurance operating result is very gratify- government securities have experienced ing and reflects the Company’s successful a further decrease in 2012, with a slight strategy, with a well-diversified insurance recovery during the fourth quarter; the US portfolio and good spread of risk. government bonds in particular, have seen The financial markets in 2012 were a rise in interest rates at the end of the characterized by concerns regarding the year. Greek economy and its effect on the rest Overall, yield on the bond portfolio was of Europe. Ireland, Spain and Portugal’s 4.3% adjusted for exchange rate effects. budget deficits also had a big impact on As regards the share portfolio, including the outlook for the European economy at investments in Hedge Funds and Private the beginning of the year. Following the Equity investments, the yield amounted to successful introduction of fiscal and struc- 7.9%, adjusted for exchange rate effects. tural reforms in these countries, the situa- The realized and unrealized exchange rate tion stabilized and the European interest result, net after currency hedging and in- rates went down, leading to a more posi- cluding translation differences from foreign tive development in the Eurozone during subsidiaries, amounted to a loss of MSEK the second part of the year. There have 333. The exchange rate loss is mainly due also been considerable concerns regarding to the strengthening of the SEK against the US economy, with elections in Novem- the USD and EUR. During the year, further ber and the impending risk of the fiscal exchange rate hedging against the USD cliff which was averted at the last minute has been undertaken. The nominal value 6 Annual Report 2012 of the currency hedges is now MUSD 600. White Mountains Re Bermuda Ltd., Hamil- The portion of the solvency capital that is ton, Bermuda, was completed in January exposed to foreign currency is somewhat 2012. In December 2012, Sirius Internatio- lower than during the previous year. nal received a capital contribution from its The Investment result for the Group, parent company Fund American Holdings after exchange rate hedging including AB, consisting of the remainder of the out- unrealized gains and losses from the bond standing shares in White Sands Holdings portfolio accounted for in Other compre- (Luxembourg) S.à r.l. with the wholly-ow- hensive income but before allocation of ned subsidiary S.I. Holdings (Luxembourg) interest to the insurance operations, shows S.à r.l. a profit of MSEK 1,413 (MSEK 542). The At the end of the year 2012, the Group Group’s direct yield was 2.3% (2.2%) and comprised the Parent Company, Sirius the total yield was 5.4% (2.2%). The direct International Försäkringsaktiebolag (publ), and total yields are calculated according to with the subsidiaries Sirius Belgium Ré- the recommendations of The Swedish Fi- assurances S.A. (in liquidation), Liège, nancial Supervisory Authority. The invest- Belgium, Sirius Rückversicherungs Service ment portfolio’s concentration and com- GmbH, Hamburg, Germany, Sirius Inter- position are largely unchanged compared national Holdings (NL) BV, Amsterdam, with the previous year. At year-end, the Holland, Passage2Health Ltd, London, UK, consolidated investment portfolio had the White Mountains Re Sirius Capital Ltd, following composition: Bonds and other London, UK, WM Phoenix (Luxembourg) interest bearing securities 76%, Shares and S.à r.l. and White Sands Holdings (Luxem- participations 15%, Bank funds 8% and bourg) S.à r.l. Currency related derivatives 1%. In addition, Sirius International has Other events regarding the changes in eight branch offices outside Sweden. These the Group’s structure are described prima- are Sirius International Insurance Corpora- rily under the section “Ownership struc- tion (publ) UK branch, London, UK, Sirius ture” below. International Insurance Corporation (publ) Stockholm Zürich branch, Zürich, Switzer- Ownership structure land, Sirius International Insurance Corpo- Sirius International Försäkringsaktiebolag ration (publ) Asia branch, Singapore, Sirius (publ) is a wholly-owned subsidiary of International Insurance Corporation (publ) Fund American Holdings AB (Corporate Labuan branch, Labuan, Malaysia, Sirius Identity Number 556651-1084), Stockholm, International Insurance Corporation (publ) Sweden. Fund American Holdings AB is a Belgian branch, Liège, Belgium, Sirius wholly-owned subsidiary of Sirius Insuran- International Danish Branch, filial af Sirius ce Holding Sweden AB (Corporate Identity International Försäkringsaktiebolag (publ), Number 556635-9724), Stockholm, Sweden, Copenhagen, Denmark, Sirius Internatio- which is the ultimate entity in the Swedish nal Insurance Corporation (publ) Bermuda Group structure and which is, in turn, ow- Branch, Hamilton, Bermuda and Sirius ned by White Mountains Insurance Group International Insurance Corporation (publ) Ltd, Hamilton, Bermuda. Australian Branch, Australia. The previously initiated liquidation of During 2001, Sirius Belgium Réassuran- 7 Annual Report 2012 ces S.A. (in liquidation), Liège, Belgium Financial instr uments and risk management commenced voluntary liquidation procee- See Note 1, Accounting Principles, and dings, as the company had ceased to con- Note 2, Information on Risks. duct operations. The liquidation remains incomplete, as the result of a tax dispute. Remuneration and benefits to senior The outcome of the dispute will not impact executives the company’s financial position. See Note 30, Average number of employ- ees, salaries and other remuneration. Significant events during and after the financial year Insurance contracts with insufficient In March 2012, Sirius International received insurance risk a shareholders’ contribution of MSEK 245 The Company retains only a few contracts which was subsequently contributed down- in which insufficient insurance risk is as- stream to its subsidiary Sirius International sessed to exist, and which, thereby, do not Holdings (NL) BV. qualify as insurance contract. These cont- As part of the continuing restructuring racts are classified as investment contracts. work within the Group, on December 21, For further details, refer to Note 1, Accoun- 2012, Sirius International received, in the ting Principles. form of a shareholders’ contribution, the outstanding shares in White Sands Hol- Expected future developments dings (Luxembourg) S.à r.l. These shares The underlying profitability in the insu- were valued at fair value. The total value rance operations is good, despite increased of the transaction amounted to MSEK 714. competition on the market, and the diver- The valuation of the shares is based on a sified investment portfolio is expected to projection of the entity’s discounted future provide a stable yield. However, the fierce cash flows, whereby the discount rate has competition requires stringent pricing and been determined based on the Company’s underwriting, continued efficiency im- Weighted Average Cost of Capital (WACC). provements and sound balancing of risks On January 25, 2013, Sirius Internatio- between the insurance and investment nal, acquired the outstanding shares in S.I. operations, in order to ensure long-term Holdings (Luxembourg) S.à r.l. from White profitability. Sirius International’s targets Sands Holdings (Luxembourg) S.à r.l. On for 2013 are to achieve a combined ratio the same day Sirius International contribu- below 91% and an Underwriting Return On ted MSEK 1,955 to S.I. Holdings (Luxem- Capital (UROC) of 10%. bourg) S.à r.l. in exchange for new prefe- rence shares in the company. Infor mation regarding risks and factors of uncer tainty See Note 1, Accounting Principles, and Note 2, Information on Risks. 8 Annual Report 2012 Five-year Summary GROUP (MSEK) Net premium income Net premiums earned Other technical income Allocated investment return Net claims incurred Net operating expenses Insurance operating result Investment operating result Other expenses Net income for the year 2012 2011 2010 20093) 2008 6,304 6,293 0 547 -3,692 -2,090 1,058 784 0 2,831 4,363 4,584 0 225 -3,125 -1,461 223 219 0 320 5,608 5,742 0 214 -3,428 -1,690 838 235 0 879 6,957 6,867 0 369 -4,164 -1,755 1,317 289 0 1,302 5,602 5,822 0 168 -3,659 -1,403 928 -74 -27 695 Net technical provisions Market value on investment assets4) 13,347 25,601 14,743 26,094 7,221 18,480 7,883 18,449 7,992 16,743 Insurance operating profit, for own account Claims ratio Cost ratio Combined ratio Investment result Investment yield Total yield Solvency capital Shareholders’ equity Deferred tax on untaxed reserves Deferred tax on reserve for unrealized capital gains Other adjustment items Total solvency capital Solvency ratio Capital base 1) Required solvency capital Group based values2) Capital base Solvency requirement 59% 32% 90% 2% 5% 13,828 2,128 55 0 16,011 254% 15,185 1,621 68% 31% 99% 2% 2% 11,560 2,547 43 0 14,150 324% 13,644 1,755 60% 29% 89% 3% 1% 9,950 2,548 18 0 12,516 223% 11,735 958 61% 25% 86% 2% 3% 9,945 2,548 53 -2 12,544 180% 12,149 1,030 63% 24% 87% 3% 2% 8,017 2 420 18 0 10,455 187% 10,013 956 17,698 1,621 13,792 1,872 16,315 2,255 17,544 2,350 17,236 2,566 1) Include Sirius International with subsidiaries. 2) Include WM Caleta (Gibraltar) Ltd. For 2011-2008 the Group-based values include Sirius International Insurance Group Ltd. 3) For the comparison year 2009 IFRS has been applied. Solvency capital and required solvency capital have not been converted. 4) Includes Investment assets and Cash and bank balances. PARENT COMPANY (MSEK) Net premium income Net premiums earned Allocated investment return Net claims incurred Net operating expenses Insurance operating result Investment operating result Other expenses Net income for the year 2012 2011 2010 2009 2008 4,014 4,196 280 -2,126 -1,221 1,104 129 -4 932 3,768 4,037 225 -2,708 -1,239 266 175 -4 321 5,608 5,742 214 -3,421 -1,687 839 -128 -4 522 6,957 6,867 369 -4,164 -1,761 1,311 -139 -17 490 5,602 5,822 168 -3,659 -1,408 923 106 -17 738 Net technical provisions Market value on investment assets1) 6,048 20,692 6,922 19,678 7,233 18,155 7,886 18,379 7,992 16,882 Insurance operating profit, for own account Claims ratio Cost ratio Combined ratio Investment Result Investment yield Total yield Solvency Capital Shareholders’ equity Untaxed reserves Deferred tax on Reserve for unrealized capital gains Total solvency capital Solvency ratio Capital base Required solvency capital 1) Include Investment assets and Cash and bank balances. 51% 29% 80% 1% 2% 5,117 9,672 54 14,843 370% 14,265 710 67% 30% 97% 3% 3% 4,335 9,682 43 14,060 373% 13,648 765 60% 29% 89% 3% 0% 2,564 9,687 18 12,269 219% 11,603 958 61% 25% 86% 2% 3% 2,654 9,691 53 12,398 178% 12,021 1,030 63% 24% 87% 3% 2% 1,295 9,197 18 10,510 188% 9,968 956 9 Annual Report 2012 Proposed appropriation of profits For 2012, the Parent Company recorded income of MSEK 1,229 (MSEK 437) before appropriations and taxes. Net income for the year amounted to MSEK 932 (MSEK 321). As of December 31, 2012 retained earnings in the Group amounted to MSEK 5,484. The following profits are at the disposal of the general meeting of shareholders in the Parent Company Sirius International: - Retained earnings - Non-Restricted reserves - Dividends paid, as resolved by the general meeting of shareholders and extraordinary general meeting of shareholders - Received shareholders’ contribution - Group contribution - Net income for the year - Total The Board of Directors and the President propose that the amount be appropriated as follows: - Dividend to the owner - To be carried forward SEK in thousands 3,534,512 71,345 -652,442 959,326 -527,642 932,058 4,317,157 325,000 3,992,157 4,317,157 The Company’s financial position does not Regarding the Company’s and the Group’s give rise to any assessment other than that results and financial position, please refer to the Company can be expected to fulfill the attached income statements and balance its obligations in both the short-term and sheets, cash flow statements and statements in the long-term. It is the opinion of the of changes in shareholders' equity, with ac- Board of Directors that the solvency capital companying notes. of 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 2012 "We have now returned positive figures for every one of the last eleven years, even when things have been difficult" 11 Annual Report 2012 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 Claims incurred, for own account Claims paid - Gross amount - 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 Operating costs Operating profit/loss of technical account Balance of technical account Investment income/expenses - Investment income - Unrealised gains - Investment expenses and charges - Unrealised losses - Share of associated company’s profit/loss Investment income allocated to the technical account Total investment income/expenses Result before taxes Taxes Net income of the year Net income attributable to: Owner of the parent Minority interest Total 12 Note 2012 2011 3 3 4 4 5 9 6 7 8 7 10 8,081 -1,777 -47 36 6,293 5,955 -1,592 194 27 4,584 547 225 -5,261 763 -4,498 2,673 -1,867 -3,692 -2,090 1,058 1,058 1,047 652 -368 - - -547 784 1,842 987 2,829 2,831 -2 2,829 -4,190 736 -3,454 -330 659 -3,125 -1,461 223 223 764 - -132 -269 81 -225 219 442 -123 319 320 -1 319 Annual Report 2012 Statement of Comprehensive Income - Group January 1 - December 31 (MSEK) Net income for the year Other comprehensive income - Items to be reclassified to income statement: - Change in fair value on bonds - Currency translation differences - Tax on items to be reclassified to income statement - Items reclassified to income statement: - Change in fair value on bonds - Tax on items reclassified to income statement Other comprehensive income for the year, net of tax Total comprehensive income for the year Comprehensive income attributable to: Owner of the parent Minority interest Total Note 10 10 2012 2,829 184 -413 -36 -102 26 -341 2,488 2,490 -2 2,488 2011 319 141 84 -37 -43 11 156 475 476 -1 475 13 Annual Report 2012 Balance Sheet - Group December 31 (MSEK) ASSETS Intangible assets Goodwill Other intangible assets Total intangible assets Investment assets Land and buildings Investments in group companies and participating interests - Shares and participations in associated companies - Interest bearing investments emitted by, and loans to, group companies Total investments in group companies and participating interests Other financial investments - Shares and participations - Bonds and other interest bearing investments - Derivative financial instruments Total other financial investments Deposits with cedents Total investment assets 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 Current tax receivables Deferred tax receivables Other debtors Total debtors Other assets Tangible assets Cash and bank balances Total other assets Prepayments and accrued income Accrued interest Deferred acquisition costs Other prepayments and accrued income Total prepayments and accrued income Note 2012 2011 11 291 124 415 296 47 343 12 13 11 - 966 966 3,567 18,235 326 22,128 543 23,650 524 4,942 5,466 105 1,993 330 2,668 312 5,408 54 1,951 2,005 191 439 19 649 0 1,021 1,021 3,300 18,819 30 22,149 624 23,805 526 7,585 8,111 2 2,423 274 1,233 189 4,121 47 2,289 2,336 203 471 21 695 14, 18 15, 18 16, 18 22 23 10 17 19 20 TOTAl ASSETS 37,593 39,411 14 Annual Report 2012 December 31 Note 2012 2011 ShAREhOlDERS’ EQUITY AND lIABIlITIES Shareholders’ equity Shareholders’ equity attributable to the owner of the parent - Share capital (8 million shares of nom. value SEK 100) - Additional paid in capital - Reserves - Retained earnings – restricted - Retained earnings – non-restricted, including net income for the year 800 5,318 -564 7,544 730 800 4,359 -266 7,135 -468 Total shareholders’ equity attributable to the owner of the parent 13,828 11,560 Minority interest Total shareholders’ equity liabilities Technical provisions Provisions for unearned premiums Claims outstanding Total technical provisions Other liabilities Employee benefits Current tax liabilities Deferred tax liabilities Deposits received from reinsurers Creditors arising out of direct insurance operations Creditors arising out of reinsurance operations Other liabilities Accrued expenses and deferred income Total other liabilities 2 4 13,830 11,564 2,201 16,612 18,813 2,300 20,554 22,854 5 14 2 - 2,422 2,820 158 48 582 1,400 321 4,950 201 1 805 814 350 4,993 22 23, 25 26 10 18, 27 18 TOTAl ShAREhOlDERS’ EQUITY AND lIABIlITIES 37,593 39,411 Pledged assets and other comparable collaterals for own debts and provisions recorded as insurance liabilities Other pledged assets and comparable collaterals Contingent liabilities Commitments 28 28 28 28 8,870 - 1,970 161 9,751 - 1,458 174 15 Annual Report 2012 Change in Shareholders’ Equity - Group (MSEK) Amount January 1, 2012 Comprehensive income Net profit/loss for the year Other comprehensive income, after tax Change of fair value on bonds Reclassification within shareholders’ equity Currency translation differences Total other comprehensive income Total comprehensive income Transactions with owners Capital contribution received 1) Group contribution provided 3) Dividend paid 2) Total transactions with owners Amount January 1, 2011 Comprehensive income Net profit/loss for the year Other comprehensive income, net after tax Change of fair value on bonds Reclassification within shareholders’ equity Currency translation differences Total other comprehensive income Total comprehensive income Transactions with owners Capital contribution received 5) Group contribution provided 3) Dividend paid 2) Effects from internal restructuring 5) Transaction with owners of the minority Total transactions with owners Share Additional Reserves Retained Capital 4) paid in capital earnings – restricted 4) Retained earnings – non- restricted Total Minority interest Total Share- holders’ equity 800 4,359 -266 7,135 -468 11,560 4 11,564 - - - - - - - - - - - - - - - - 959 - - 959 - 72 43 -413 -298 -298 - - - - - - 409 - 409 409 - - - - 2,831 2,831 - -452 - -452 2,379 - -528 -653 -1,181 72 0 -413 -341 2,490 959 -528 -653 -222 800 1,424 -354 7,139 941 9,950 - - - - - - - - - - - - - - - - - - 2,935 - - - - 2,935 4,359 - 72 -1 84 155 155 - - - -67 - -67 - - -4 - -4 -4 - - - - - - -266 7,135 320 - 5 - 5 325 - -414 -1,143 -177 - -1,734 -468 320 72 0 84 156 476 2,935 -414 -1,143 -244 - 1,134 11,560 -2 - - 0 0 -2 - - - - 2 - -1 - - 0 0 -1 - - - - 5 5 4 2,829 72 0 -413 -341 2,488 959 -528 -653 -222 13,830 9,950 319 72 0 84 156 475 2,935 -414 -1,143 -244 5 1,139 11,564 Amount December 31, 2012 800 5,318 -564 7,544 730 13,828 Amount December 31, 2011 800 1) Capital contributions received from Fund American Holdings AB in form of shares in White Sands Holdings (Luxembourg) S.à r.l. and shares in Symetra Financial Corporation. 2) Dividend paid to the parent company Fund American Holdings AB. The dividend is equal to 82 SEK (143 SEK) per share. 3) Group contribution provided to Fund American Holdings AB and Sirius Insurance Holding Sweden AB. 4) Share capital and Retained earnings – restricted represents the restricted shareholders’ equity. 5) During the fourth quarter 2011 Sirius International received and purchased the remaining shares in WM Phoenix (Luxembourg) S.à r.l. The shares have therefore been reclassi fied from associated company to a group company and were consolidated at December 31, 2011 for the first time. The MSEK -244 is the effect from this restructuring. 16 Annual Report 2012 ShARE CAPITAl Number of shares Issued per January 1 Issued per December 31 2012 2011 8,000,000 8,000,000 8,000,000 8,000,000 Per December 31, 2012 the share capital comprised 8,000,000 (8,000,000) ordinary shares. The shares have a nominal value of 100 (100) SEK ADDITIONAl PAID IN CAPITAl Opening additional paid in capital Capital contribution Closing additional paid in capital RESERvES 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 Effect from change in tax rate Change for the year Closing tax on fair value reserve fair value reserve after tax Opening fair value reserve after tax Change for the year Closing fair value reserve after tax Translation difference Opening translation difference Reclassification within shareholders’ equity Effects from internal restructuring Change for the year Closing translation difference RETAINED EARNINGS - RESTRICTED Opening retained earnings - restricted Effect from change in tax rate Change in excess depreciations Closing retained earnings – restricted RETAINED EARNINGS – NON-RESTRICTED Opening retained earnings – non-restricted Net profit/loss for the year Effects from internal restructuring Reclassification within shareholders’ equity Effect from change in tax rate Dividend paid Group contribution provided 73.7% Closing retained earnings – non-restricted 2012 2011 4,359 959 5,318 1,424 2,935 4,359 165 82 247 -44 7 -17 -54 121 72 193 -387 43 - -413 -757 7,135 416 -7 7,544 -468 2,831 - -36 -416 -653 -528 730 67 98 165 -18 - -26 -44 49 72 121 -403 -2 -67 84 -387 7,139 - -4 7,135 941 320 -177 5 - -1,143 -414 -468 17 Annual Report 2012 Cash flow statement - Group (MSEK) Note 2012 2011 OPERATING ACTIvITIES Profit/loss before tax Interest income Interest expenses Dividends received Adjustment for non-cash items 1) 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 Acquisition of subsidiary, acquired Cash and cash equivalents Net investment of intangible assets Net investments of tangible assets Cash flow from investing activities fINANCING ACTIvITIES Dividends received Group contributions paid Cash flow from financing activities Cash flow for the year Cash and bank balances at beginning of year Cash flow for the year Translation difference on Cash and bank balances Cash and bank balances at end of year 2) 1) Specification of non-cash items Depreciations Capital gains on foreign exchange Capital losses on foreign exchange Capital gains Capital losses Unrealized gains Interest income Interest expenses Dividends received 11, 12, 19 6 8 6 8 7 6 8 6 1,842 514 -3 81 -30 -39 2,365 - 609 2,772 -5,130 616 1 -102 -33 -134 -163 -557 -720 -238 2,289 -238 -100 1,951 50 - 260 -453 73 -652 -514 2 -81 Change in provisions for outstanding claims 23 1,290 Pension provisions Effects from internal restructuring Translation difference Total 2) The following components are included in cash and cash equivalents: Cash and bank balances Short term investments, equivalent to cash and cash equivalents Total 18 3 -8 - -30 483 1,468 1.951 442 390 -43 113 -796 -65 41 -9 2,153 -770 1,428 2,843 76 -45 -28 3 -1,144 -495 -1,639 1,207 1,082 1,207 - 2,289 29 -126 - -135 20 -196 -390 43 -113 -237 - -244 84 -796 955 1,334 2,289 Annual Report 2012 Performance Analysis – Group ANAlYSIS Of INSURANCE RESUlT (MSEK) 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 Technical result of insurance operation Of which results from prior years, gross amounts 1) Technical provisions Unearned premiums and unexpired risks Outstanding claims Claims adjustment provision Technical provisions Reinsurers’ share of technical provisions Unearned premiums and unexpired risks Outstanding claims Reinsurers’ share of technical provisions Premiums earned, for own account Gross premium income Ceded reinsurance premium Change in gross provision for unearned premiums Reinsurers’ share of change in unearned premiums Premiums earned, for own account Claims incurred, for own account Claims paid Reinsurers’ share Claims handling expenses Change in provision for outstanding claims Reinsurers’ share Claims incurred, for own account 1) Defined as result from 2011 and earlier. Direct Swedish risks, Direct Swedish risks - aviation Financial 3 - -3 -1 -1 -1 -1 -1 - -2 - 0 0 3 -0 - - 3 -4 0 - 1 -0 -3 1 - 0 -0 1 -0 -0 -0 - -0 - - - 1 - -0 - 1 -0 - - - - -0 Direct Assumed Total foreign reinsurance risks 837 21 -499 -384 -25 -278 -468 -385 -13 -866 237 105 342 1,253 -413 -110 107 837 -570 128 -9 -72 24 5,452 526 -3,190 -1,705 1,083 2,259 6,293 547 -3,692 -2,090 1,058 1,980 -1,732 -2,201 -15,979 -16,365 -234 -247 -17,945 -18,813 287 4,837 5,124 6,824 -1,364 63 -71 524 4,942 5,466 8,081 -1,777 -47 36 5,452 6,293 -4,511 -5,085 635 -167 2,744 -1,891 763 -176 2,673 -1,867 -499 -3,190 -3,692 19 Annual Report 2012 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 - 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 Operating costs Note 2012 2011 3 3 4 4 5 5,779 -1,765 152 30 4,196 5,347 -1,579 249 20 4,037 280 225 -3,258 684 -2,574 2,167 -1,719 -2,126 -3,603 650 -2,953 -420 665 -2,708 -1,221 -1,239 Change in equalization provision 24 -25 Operating profit/loss of technical account NON-TEChNICAl ACCOUNT Balance of technical account Investment income/expenses - Investment income - Unrealized gains - Investment expenses and charges - Unrealized losses Investment income allocated to the technical account Total investment income/expenses Goodwill depreciation Result before appropriations and taxes Change in appropriations Result before taxes Taxes Net income for the year 1,104 1,104 467 363 -421 - -280 129 -4 1,229 9 1,238 -306 932 9 6 7 8 7 11 10 -49 266 266 515 - -56 -59 -225 175 -4 437 5 442 -121 321 20 Annual Report 2012 Statement of Comprehensive Income – Parent Company January 1 - December 31 (MSEK) Net income for the year Other comprehensive income - Items to be reclassified to income statement: - Change in fair value on bonds - Tax on items to be reclassified to income statement - Items reclassified to income statement: - Change in fair value on bonds - Tax on items reclassified to income statement Other comprehensive income for the year, net of tax Total comprehensive income for the year Note 10 10 2012 932 184 -36 -102 26 72 1,004 2011 321 141 -37 -43 11 72 393 21 Annual Report 2012 Balance Sheet - Parent Company December 31 (MSEK) ASSETS Intangible assets Goodwill Other intangible assets Total intangible assets Investment assets 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 - Derivative financial instruments Total other financial investments Deposits with cedents Total investment assets 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 Current tax receivables Deferred tax receivables Other debtors Total debtors Other assets Tangible assets Cash and bank balances Total other assets Prepayments and accrued income Accrued interest Deferred acquisition costs Other prepayments and accrued income Total prepayments and accrued income Note 2012 2011 11 12 13 14, 18 15, 18 16, 18 22 23 10 17 19 20 198 55 253 203 45 248 13 11 8,254 - 8,254 549 10,041 326 10,916 554 19,737 517 3,985 4,502 28 1,582 276 20 202 7,317 0 7,317 667 9,472 30 10,169 770 18,267 529 6,545 7,074 2 1,880 125 41 293 2,108 2,341 50 955 1,005 124 266 19 409 40 1,411 1,451 131 341 20 492 TOTAl ASSETS 28,015 29,873 22 Annual Report 2012 December 31 Note 2012 2011 ShAREhOlDERS’ EQUITY, PROvISIONS AND lIABIlITIES Shareholders’ equity Share capital (8 million shares of nom. value SEK 100) Other reserves 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 Total technical provisions Provisions for other risks and expenses Pension provisions Deferred tax liabilities 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 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 and other comparable collaterals for own debts and provisions recorded as insurance liabilities Other pledged assets and comparable collaterals Contingent liabilities Commitments 21 22 23, 25 24 26 10 18, 27 18 28 28 28 28 800 193 3,192 932 5,117 25 9,647 9,672 1,580 8,885 86 888 800 121 3,093 321 4,335 35 9,647 9,682 1,848 12,087 61 10,550 13,996 9 98 107 328 1 730 1,325 2,056 185 185 7 6 13 173 1 784 690 1,475 199 199 28,015 29,873 7,701 - 1,970 53 8,623 - 1,458 56 23 Annual Report 2012 Change in Shareholders’ Equity – Parent Company (MSEK) Share Capital Other Retained loss for the reserves 4) earnings 4) year 4) Net profit/ Amount January 1, 2012 800 121 Transfer of net result from previous year Comprehensive income Net profit/loss for the year Other comprehensive income, net after tax Change of fair value on bonds Total other comprehensive income Total comprehensive income Transactions with owners Capital contribution 1) Group contribution provided 2) Dividend paid 3) Total transactions with owners Amount December 31, 2012 Amount January 1, 2011 Transfer of net result from previous year Comprehensive income Net profit/loss for the year Other comprehensive income, net after tax Change of fair value on bonds Total other comprehensive income Total comprehensive income Transactions with owners Capital contribution 5) Group contribution provided 2) Dividend paid 3) Total transactions with owners Amount December 31, 2011 Total Shareholders’ equity 4,335 - 3,093 321 321 -321 - - - - 959 -528 -653 -222 932 932 - - 72 72 932 1,004 - - - - 959 -528 -653 -222 - - - - - - - - - - - 72 72 72 - - - - 800 193 3,192 932 5,117 800 49 - - - - - - - - - - - 72 72 72 - - - - 800 121 1,193 522 - - - 522 -522 321 - - 522 321 2,935 -414 -1,144 1,377 3,093 - - - - 321 2,564 - 321 72 72 393 2,935 -414 -1,144 1,377 4,335 1) Capital contribution received from Fund American Holdings AB in form of shares in White Sands Holdings (Luxembourg) S.à r.l. and shares in Symetra Financial Corporation. 2) Group contribution provided to Fund American Holdings AB and Sirius Insurance Holding Sweden AB. 3) Dividend paid to the parent company Fund American Holdings AB. Dividend is equal to SEK 82 (SEK 143) per share. 4) The columns Other reserves, Retained earnings and Net profit/loss for the year together represents the non-restricted shareholders’ equity for the parent company. 5) Capital contribution received from Fund American Holdings AB in form of shares in WM Phoenix (Luxembourg) S.à r.l. 24 Annual Report 2012 ShARE CAPITAl Number of shares Issued per January 1 Issued per December 31 2012 2011 8,000,000 8,000,000 8,000,000 8,000,000 Per December 31, 2012 the share capital comprised 8,000,000 (8,000,000) ordinary shares. The shares have a nominal value of 100 (100) SEK. OThER RESERvES 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 Effect from change in tax rate Change for the year Closing tax on fair value reserve fair value reserve after tax Opening fair value reserve after tax Change for the year Closing fair value reserve after tax RETAINED EARNINGS Opening retained earnings Transfer of net result from previous year Capital contribution Dividend paid Group contribution provided 73.7% Closing retained earnings NET PROfIT/lOSS fOR ThE YEAR Net profit/loss for the year 2012 2011 165 82 247 -44 7 -17 -54 121 72 193 3,093 321 959 -653 -528 3,192 67 98 165 -18 - -26 44 49 72 121 1,193 522 2,935 -1,144 -414 3,093 932 321 25 Annual Report 2012 Cash flow Statement – Parent Company (MSEK) Note 2012 OPERATING ACTIvITIES Profit/loss before tax Interest income Interest expenses Dividends received Adjustment for non-cash items 1) 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 fINANCIAl ACTIvITIES Acquisition of subsidiary, effect on liquidity Net investment of intangible assets Net investments of tangible assets Cash flow from investing activities INvESTING ACTIvITIES Shareholders´ contributions paid Capital repayment Dividend paid Group contributions paid Cash flow from financing activities Cash flow for the year Cash and bank balances at beginning of year Cash flow for the year Translation difference on Cash and bank balances Cash and bank balances at end of year 2) 1) Specification of non-cash items: Depreciations Capital gains on foreign exchange Capital losses on foreign exchange Capital gains Capital losses Unrealized gains Interest income Interest paid Dividends received Change in provisions for outstanding claims Pension provisions Total 2) The following components are included in Cash and cash equivalents: Cash and bank balances Short term investments, equivalent to cash and cash equivalents Total 26 11,12,19 6 8 6 8 7 6 8 6 23 1,228 265 -2 - 300 -167 1,624 - -254 3,023 -4,009 384 - -37 -33 -70 - - -163 -557 -720 -406 1,411 -406 -50 955 73 - 262 -203 160 -363 -265 3 - 631 2 300 238 716 955 2011 442 314 -2 1 -547 -63 145 -9 1,406 -855 1,568 2,255 -64 -39 -22 -125 -92 34 - 1,144 -495 -1,697 432 979 432 - 1,411 33 -130 - -70 - -34 -314 2 -1 -126 - -547 498 913 1 411 Annual Report 2012 Performance analysis - Parent Company ANAlYSIS Of INSURANCE RESUlT (MSEK) Direct Swedish risks - Aviation Direct Assumed 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 equalization provision Technical result of insurance operation Of which results from prior years, gross amounts 1) Technical provisions Unearned premiums and unexpired risks Outstanding claims Claims adjustment provision Equalization provision Technical provisions Reinsurers’ share of technical provisions Unearned premiums and unexpired risks Outstanding claims Reinsurers’ share of technical provisions Premiums earned, for own account Gross premium income Ceded reinsurance premium Change in gross provision for unearned premiums Reinsurers’ share of change in unearned premiums Premiums earned, for own account Claims incurred, for own account Claims paid Reinsurers’ share Claims handling expenses Change in provision for outstanding claims Reinsurers’ share Claims incurred, for own account 1) Defined as result from 2011 and earlier. 3 - -3 -1 - -1 -1 -1 -1 - -0 -2 0 0 0 3 -0 0 0 3 -4 0 - 1 -0 -3 664 21 -377 -295 - 13 -254 -393 -326 -11 - -730 185 99 284 957 -349 3 53 664 -507 128 -7 -8 17 -377 3,529 259 -1,746 -925 -25 1,092 2,148 -1,186 -8,426 -121 -86 4,196 280 -2,126 -1,221 -25 1,104 1,893 -1,580 -8,753 -132 -86 -9,819 -10,551 332 3,886 4,218 4,819 -1,416 149 -23 517 3,985 4,502 5,779 -1,765 152 30 3,529 4,196 -2,619 -3,130 556 -121 2,174 -1,736 -1,746 684 -128 2,167 -1,719 -2,126 27 Annual Report 2012 Note 1 • Accounting Principles General information This annual report was issued per December 31, 2012 and refers to Sirius International Försäkringsaktiebolag (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. The Group’s ultimate owner is White Mountains Insurance Group Ltd, Hamilton, Bermuda. The Group writes property and casualty insurance and reinsurance, see Note 33 Class analysis for further information. Compliance with standards and law The Company's annual report has been prepared 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) with the amendments in FFFS 2009:12 and FFFS 2011:28 as well as the Swedish Financial Reporting Board RFR 2. The Sirius International Group’s annual report has been prepared in ac- cordance 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) with the amendments in FFFS 2009:12 and FFFS 2011:28, the Swedish Financial Reporting Board RFR 1 Supplementary Accounting Rules for Groups, as well as International Financial Reporting Standards (IFRS) and IFRIC interpretations as adopted by the EU. 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. 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 December 31, 2012 but have not yet come into force. In addition, certain standards, statements and interpretations currently in force have been chan- ged, and certain standards, statements and interpretations have come into force during 2012. 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. New and amended standards applied by the Group None of the IFRS of IFRIC interpretations which are mandatory for the first time for the financial year beginning January 1, 2012 have had any signifi- cant impact on the Group, or when applicable, on the Parent company. New standards, amendments and interpretations of existing stan- dards which have not yet entered into force and which have not been adopted in advanced by the Group • IAS 19 “Employee Benefits”, was amended in June 2011. The amendment implies that the Group will stop applying the "corridor method" and instead recognize all actuarial gains and losses in Other comprehensive income as incurred. Expenses for past employment will be reported immediately. Inte- rest expenses and expected return on plan assets will be replaced by a net interest calculated using the discount rate, based on the net surplus or net deficit in the defined benefit plan. The Group intends to apply the amended standard for the financial year beginning January 1, 2013 and assesses that it will have an adverse effect on shareholders equity of approximately MSEK 5. The standard has not yet been adopted by the EU. • IFRS 9 “Financial instruments” addresses the classification, valuation and accounting of financial liabilities and assets. IFRS 9 was published in November 2009 regarding financial assets and in October 2010 regarding financial liabilities and replaces the parts of IAS 39 which are related to the classification and measurement of financial instruments. IFRS 9 stipulates that financial assets are to be classified in two different categories; valued at fair value or valued at amortized cost. The classification is established the first time that the liability or asset is reported in accordance with the standard, on the basis of the company’s business model and the charac- teristic features in the cash flows according to the agreement. In terms of financial liabilities, there are no major changes compared with IAS 39. The largest change addresses changes in liabilities which are valued at fair value. To such liabilities, the following is applied: the portion of the change in fair value which is attributable to the company’s own credit risk is to be reported in the statement of Other comprehensive income instead of the in- come statement, so long as this does not result in an accounting mismatch. The Group intends to apply the new standard no later than the financial year beginning on January 1, 2015 and has not yet assessed the effects. The standard has not yet been adopted by the EU. • IFRS 10 “Consolidated financial statements” builds on existing principles by identifying the concept of control as the determining factor in whether an entity should be included within the consolidated financial statements. The standard provides additional guidance to assist in the determination of control where this is difficult to assess. The Group intends to apply IFRS 10 for the financial year beginning on January 1, 2014 and has not yet assessed the full effects on the financial statements. • IFRS 12 “Disclosures of Interests in Other entities” includes disclosure requirements for subsidiaries, joint arrangements, associated companies and “structured entities” which have not been consolidated. The Group shall evaluate the full impact of IFRS 12 on the consolidated financial statements and intend to apply IFRS 12 on financial years starting on January 1, 2014. • IFRS 13 “Fair value measurement” aims at more consequent and less complex valuations at fair value by providing an exact definition and a com- mon source in IFRS for valuations at fair value and associated disclosures. The requirements do not extend to the area of application for when the fair value should be applied but provides guidance regarding the manner in which it should be applied in areas where other IFRS already require or allow valuation at fair value. The Group has not yet assessed the full effect of IFRS 13 on the financial statements. The Group intends to apply the new standard in the financial year starting on January 1, 2013. • IAS 32 “Financial instruments: Presentation” and IFRS 7 “Financial instruments: Disclosures”, amendments regarding the offsetting of financial assets and financial liabilities. The amendments provide more detailed cla- rification of when financial assets and financial liabilities may be offset and introduce new disclosure requirements for offset assets and liabilities. The Group has not yet assessed the full effect of the amendments. The Group intends to apply the disclosure requirements in the financial year starting on January 1, 2013 and the more detailed clarification regarding offsetting no later than the financial year beginning January 1, 2014. No other of the IFRS or IFRIC interpretations which have not yet entered into force are expected to have any significant impact on the Group, or when applicable, on the Parent company. Assessments and estimates in the financial statements The preparation of financial statements in conformity with International Financial Reporting Standards requires the Company’s management to make assessments and estimates, as well as assumptions impacting the 28 Annual Report 2012 application of the accounting principles and the recorded values of assets, provisions, liabilities, income and expenses. These estimates and assump- tions are based on historical experience and a number of other factors con- sidered reasonable in the current situation. The results of these estimates and assumptions are, subsequently, used to assess the recorded values of assets, provisions 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. Significant assessments in the application of the Accounting principles have been made in conjunction with the decision to report financial instru- ments at fair value, as well as in conjunction with the decision to classify insurance contracts as insurance or investment contracts. 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. Important sources of uncertainty in estimates The Company makes assessments and estimates forming the basis for the valuation of certain assets, provisions 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, forming 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. For a sensitivity analysis of interest- and equity risk, see note 2 Information on risks. 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 statements, unless stated otherwise below. Approval The annual accounts were approved for publication by the Board of Direc- tors on March 5, 2013. The income statement and balance sheet will be adopted at the General Meeting held in May 2013. Consolidation principles Subsidiaries Subsidiaries are companies in which the Parent Company has a control- ling 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. Acquisitions of subsidiaries are reported according to the purchase method, as described in IFRS 3, with the exception of intra-group acquisitions of subsidiaries under common control. The application of the purchase method implies requirements for the identification of the purchaser and the establishment of the acquisition date. The purchase method further implies that the acquisition of subsidiaries is considered to be a transaction through which the Group indirectly acquires the subsidiary’s assets and assumes its provisions, liabilities and contingent liabilities. The Group acquisition value is determined through an acquisition analysis of the identifiable acquired assets and the assumed provisions and liabilities, as well as any contingent liabilities 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 provisions and liabilities and contingent liabilities, the difference is recorded as goodwill. When the difference is negative, this is recorded directly in the income statement. The subsidiary’s financial reports are included in the consolidated financial state- ments as of the acquisition date, until such date as the controlling influence is transferred from the Parent Company. As IFRS 3 is not directly applicable on intra-group business combina- tion under common control, such acquisitions are reported according to the “predecessor accounting method” or at fair value. The “Predeces- sor accounting method” implies that the acquirer assumes the acquired company’s reported book values as presented in the divested entity’s accounts. Adjustment of the acquired values is to be carried out in the case that these accounts are not prepared in accordance with IFRS. Furthermore, the method implies that goodwill is not reported; any possible difference between the consideration paid and the acquired values is reported directly against shareholders equity. Intra-group business combinations are valued and accounted for according to IFRS 3. Subsidiaries’ financial statements 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. The Group’s participations in the associate’s net profit after taxes and minority interests, adjusted for any amortization, impairment or dissolution of acquired surplus or deficit value, are reported in the consolidated income statement under the item ”Share of associated companies’ income”. Dividends received from associated companies decrease the book 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. 29 Annual Report 2012 Transactions eliminated on consolidation Receivables and liabilities, income and expenses, and unrealized gains and losses arising on internal transactions between Group companies are eliminated in their entirety when the consolidated financial statements are prepared. Unrealized gains arising from transactions with associated companies and joint ventures are eliminated to the extent corresponding to the Group’s participating interest in the company. Unrealized losses are eliminated in the same manner as unrealized gains, but only to the extent there is no write-down 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 Parent Company’s, including the branch offices, and the Group’s, functional currency is the Swedish krona and the closing rate on the balance sheet date has been used in the valuation of assets, provisions and liabilities in foreign currency. Exchange rate fluctuations are recorded net in the income statement on the lines, Investment, income or Investment, expenses. financial statements 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 translation of foreign net investments and the associated effects of the hedging of net investments are recorded in other comprehensive income. Upon disposal of a foreign operation, accumulated translation differences attributable to the operation, less any currency hedging, are realized in the Group’s income statement. Rates for the most important currencies Closing Average USD EUR GBP 6.50 8.59 10.56 6.75 8.72 10.71 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-determined insured event occurs are recorded as insurance contracts. Financial instruments 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 suffi- cient insurance risk exists in written 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, recor- ding 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. estimates of premiums due but not yet receivable or notified, less an allowance for cancellations. The gross premium income also includes the net of entered and withdrawn premium portfolios. Gross premiums written are stated before deduction of brokerage, taxes, duties levied on premiums and other deductions. Premiums are earned on a pro rata temporis basis over the term of the related contract, except for those contracts where the period of risk differs significantly from the contract period, or where the ex- posure vary during the contract period. In these circumstances, premiums are recognized as earned over the period of risk in proportion to the amount of insurance protection provided. Reinstatement premiums receivable are recognized and fully earned latest when fallen due. Premium revenue cor- responds to the portion of premium income that has been earned. Acquisition costs By acquisition costs are meant such external operating expenses, such as commissions, that directly vary with the acquisition or renewal of insurance contracts. The deferred acquisition costs are amortized in the same way as corresponding premiums are earned. Technical provisions Technical provisions consist of the Provisions for unearned premiums and unexpired risks, Provisions for outstanding claims, claims handling provision and equalization provision (in the Parent Company). 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. “Policies in force” refers to insurance policies in accordance with entered agreements irrespective if they wholly or in part relates to later insurance period. In calculating these provisions, an estimate is made of anticipated costs 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 considers both the observed and the forecasted development of relevant costs. These future costs are tested quarterly against the unexposed portion of the premium for the contracts in force and if the latter exceeds the costs, the unexposed portion of the written premium will form an unearned premium reserve. If the future costs exceed the unexposed portion of the written premium, the deferred acquisition costs are written down, but if that is insufficient, an unexpired risk provision will also be set up. The unexposed premium is also in this case recorded as a provision for unearned premium. The income statement recognizes the change in provision for unearned premium reserve and unexpired risks. Provision for outstanding claims This balance sheet item comprises of estimated nominal 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 nominal cash flows regarding future external 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 costs for incurred but, to date, unknown claims and not yet fully reported claims. This amount is an estimate based on historic experience and outcome of claims. The income statement recognizes the change in provision for in outstan- ding claims for the period. Recording of insurance contracts Revenue recognition/Premium income Gross premiums written relate to insurance contracts incepted during the financial year, together with any differences between booked premiums for prior financial years and those premiums previously accrued, and include Claims adjustment provision The amount of this provision is based on outstanding claims. The provision is equal to a percentage of reported unpaid claims and a percentage of incurred unreported and not yet fully reported claims. The claims handling reserve for catastrophe insurance is calculated in the same way, but with 30 Annual Report 2012 the difference that they are calculated on an average of four to five years for those provisions. The period’s change in the claims adjustment provision is recorded in the income statement within the items Claims handling expen- ses and Operating costs. Deferred acquisition costs for 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 external deferred acquisition costs. Other costs for insurance contracts are recorded as costs when they arise. 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. Operating costs All operating costs are allocated in the income statement according to their functional nature, acquisition, 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 policyholders, due to insurance contracts or incurred claims, during the financial year, are recorded as claims paid, regardless of when the claim was incurred. Ceded reinsurance As premiums for ceded reinsurance are recorded amounts paid during the financial year and amounts recorded as liabilities to the company that have assumed the reinsurance, in accordance with entered reinsurance agreements. Deductions are made for amounts credited due to portfolio transfers. Adjustments are also made for change in the reinsurer’s share of proportional reinsurance contracts. The premiums are periodized so that costs are allocated to the corresponding period of the insurance cover. All items relating to ceded reinsurance are shown on separate lines in the income statement. The reinsurers’ share of technical provisions are recorded as an asset in the balance sheet and corresponds to the reinsurers’ liability for technical provisions in accordance with entered agreements. The Company assesses any required impairment for assets referring to reinsurance agreements bi- annually. 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. Reporting of investment return Investment income allocated to the technical account Investment return is transferred from the non-technical account to the technical 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 weighted average interest rate for 2012 amounted to 5.43%. Applied interest rates % EUR GBP SEK USD 2012 2011 10.35% 8.75% 1.65% 3.85% 4.99% 0.61% 3.87% 3.75% 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, 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 expenses and charges. The item comprises operating costs for land and buildings, asset management costs, interest expense, net foreign exchange losses, depreciations and impairments and net capital losses. Changes in realized and unrealized gains and losses For investment assets valued at acquisition value, capital gain com- prises 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 amortized cost value and, for other investment assets, it is the historical acquisition value. At the sale of investment assets, previously unrealized changes in value are recognized as adjustment entries under the item Unrealized profits from investment items or Unrealized losses from investment items, as appropriate. As regards interest-bearing securities classified as available-for-sale financial assets, previously unrealized changes in value are recognized as adjustment entries in Other comprehensive income. Capital gains from assets other than investment assets are recorded as Other income. Unrealized 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. Share of associated company´s profit or loss Share of associated company’s profit or loss represents Sirius’ share of the associated company’s result, accounted for according to the equity accounting method. Currency translation effects are recorded in Other comprehensive income. Income tax Income taxes are accounted according to IAS 12 and consist of cur- rent tax and deferred tax. Income taxes are recorded in the income statement, except when the underlying transaction is recorded in Other comprehensive income, whereupon the pertaining tax effect is recorded in Other comprehensive income. Current tax 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. Deffered tax 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 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 participations in subsidiaries or associated companies that are not expected to be reversed within the foreseeable future are not considered either. The valuation of deferred tax is based on the extent to which underlying assets and liabilities are expected to be realized 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. The Group recognizes deferred tax assets on each closing day to 31 Annual Report 2012 the extent that it is probable that they can be used against future taxable income. This is based on assumptions on future profitability and earnings. If these assumptions change it could imply future reductions in deferred tax assets. Estimating future earnings, historical experience and assumptions of the future development of the underlying asset is considered. Intangible assets Goodwill Goodwill comprises the amount by which the acquisition cost exceeds the fair value of the Group’s participation in the acquired subsidiary’s or associate’s identifiable net assets at the point in time of the acquisition. Goodwill on the acquisition of subsidiaries is recognized as an intangible asset. Goodwill is tested annually for impairment and is recognized at acquisition cost less accumulated impairment losses. Impairment losses of goodwill are not reversed. Profit or loss on the sale of a unit includes the remaining carrying value of goodwill referring to the unit sold. Goodwill is distributed to cash-generating units upon testing of any write-down requirement. Other intangible assets Other intangible assets which have been acquired separately are reported at acquisition cost. Other intangible assets acquired through a business acquisition are reported at fair value as per the acquisition date. Acquired Other intangible assets are capitalized on the basis of the costs arising at the point in time in which the asset in question was acquired and put into operation. Accounting of an intangible asset is based on it useful life. An intangible asset with a finite useful life is amortized while an intangible asset with an indefinite is not amortized. Establishing the useful life is based on an analysis of each acquired intangible asset. The amortized amount of an intangible asset is periodized over the useful life. Self-developed software Costs for maintenance of software are charged at the time at which they arise. Development costs directly attributable to the development and tes- ting of identifiable and unique software products controlled by the Company are reported as intangible assets when the following criteria are fulfilled: • it is technically possible to prepare the software for use, • the Company’s intention is to complete the software and to put it into use, • the conditions for the use of the software are in place, • the manner in which the software can generate probable future economic benefits can be demonstrated, • adequate technical, financial and other resources for the completion of development and for the use of the software are accessible, and • expenditure attributable to the software during its development period can be calculated in a reliable manner. Other development costs, which do not fulfill these criteria, are charged at the time at which they arise. Development costs which have pre- viously been charged are not reported as an asset in the following period. Development costs for software reported as an asset are amortized during their assessed useful life, which does not exceed three years. Licenses Licenses, acquired or otherwise received, are accounted as an intagible asset in accordance with IAS 36. land and buildings All properties owned by the Company are operational properties and are valued using the acquisition cost method, in accordance with IAS 16. The Company owns three properties located in Sweden and Belgium. Sirius reports its properties in accordance with the acquisition cost method and the capitalized costs are depreciated over 50 years. No depreciation is carried out on land. financial instruments Financial instruments recorded in the balance sheet include, on the asset side, shares and participations, loan receivables, bond and other interest- bearing securities as well as derivatives. Where appropriate, derivatives with negative market value are included among liabilities, other 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 an asset and thus gains or looses control of the asset. Classification and valuation Financial instruments are initially recorded at acquisition value correspon- ding 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, 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. Financial assets valued at fair value via the income statement This category consists of two sub-groups: financial assets held for trading and other financial assets that the Company had initially designated on initial recognition as an asset to be measured at fair value trough the income statement (according to the so-called Fair Value Option). Fair Value Option is used in order to reduce mismatch between valuation and accounting of financial assets. (i.e.accounting mismatch). 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. The first sub-group includes derivatives with a positive fair value. The second sub-group consists of financial investments in bonds and other interest-bearing securities along with shares and participations, with the exception of shares in subsidiaries or associated companies. Calculation of fair value 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 and Bonds and other interest-bearing securities. 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 observa- ble current market transactions in the same instrument. 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 a loss of MSEK 254, while the recorded value per balance sheet date of December 31, 2012 amounted to MSEK 1,205. 32 Annual Report 2012 Loans receivables and Account receivables Account receivables are non-derivative financial assets which are not listed on an active market and with fixed or determinable payments. Accounts receivables are reported in the amounts which are expected to be received, that is, after deductions for bad debt provisions. The major posts are Interest bearing investments emitted by, and loans to, group companies and Other debtors. Available-for-sale financial assets The category available-for-sale financial assets include 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 other comprehensive income, except for changes in value due to impairment or to foreign exchange rate differences on monetary items recorded in the income statement. 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, thereaf- ter, be assessed on an ongoing basis at fair value, to be included in other comprehensive income, until that point in time the instruments in question mature or are disposed. At disposal of the assets, the accumulated profit/ loss 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 fair value including transaction costs and are subsequently accounted at amortized 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. 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 assumptions forming the basis of the estimation of the impaired amount. The impairment of loans receivable and account receivables, recorded at amortized cost, is reversed if a later increase of the recoverable amount can be objectively related to an event occurring after the impairment has been performed. The impairment of interest-bearing instruments, classified as available- for-sale financial assets, is reversed via Other comprehensive income if fair value increases and this increase can objectively be related to an event occurring after the write-down 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 for equipment such as cars, furniture and computer equipment amounts to 3 - 10 years. Depreciation of tangible and amortization 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 recognized when the reported value of an asset or cash-generating unit exceeds its recoverable amount. An impairment loss is recognized 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. Reversals are 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 amortization when appropriate, if no impairment had been carried out. Dividends Dividends are recorded as liabilities after approval of the dividend by the General Meeting of Shareholders. Other provisions A provision is recognized 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 Group companies’ pension plans differ. The pension plans are usually financed through payments to insurance companies or managed funds. These payments are determined based on periodic actuarial calculations. The Group has both defined benefit and defined contribution pension plans. A defined contribution plan is a pension plan under which the Group pays fixed contributions into a separate legal entity. The Group has no legal or constructive obligations to pay further contributions if this legal entity does not hold sufficient assets to pay all employees the benefits relating to 33 Annual Report 2012 employee service in the current and prior periods. A defined benefit plan is a pension plan that is not a defined contribution plan. A characteristic of defined benefit plans is that they indicate a level for the pension benefit an employee receives after retirement, usually based on one or several factors, such as age, duration of employment and salary. The liability reported in the balance sheet regarding defined benefit pension plans is the current value of the defined benefit obligation at the end of the period, reduced with the fair value of the managed assets, with adjustments for unreported gains and losses, as well as for unreported costs for service during earlier periods. The defined benefit pension plan obligation is calculated annually by independent actuaries applying the so-called projected unit credit method. The current value of the defined benefit obligation is determined through discounting of expected future cash flows, with the application of the interest rate for first-class mortgage bonds issued in the same currency as that in which the remuneration will be paid, with durations comparable with that of the current pension obligation. Costs referring to service during earlier periods are reported directly in the income statement, unless the changes in the pension plan are conditional on the employee remaining employed during a given period (earning period). In this case, the cost referring to service during earlier periods is distributed on a straight-line basis over the earning period. For defined contribution pension plans, the Group pays fees to publicly or privately administered pension insurance plans on an obligatory, contractual or voluntary basis. The Group has no further payment obligations when all fees are paid. The fees are reported as personnel costs at the point in time at which they fall due for payment. Prepaid fees are reported as an asset to the extent that cash repayment or reduction of future payments may benefit the Group. The group has defined benefit plans in Sweden (collective agreement) and Germany which are based on the employees’ pension entitlements and length of employment. In Germany all employees are included in the plan. In Sweden only employees born 1971 or earlier are covered by defined benefit plans and, thus, form part of the FTP2. Furthermore, there are two variations of retirement earlier than at the age of 65. Employees born 1955 and earlier have the possibility to retire between the ages of 62 and 65 according to local agreement. Staff employed before January 1, 2004 have the right to retire from the age of 64. These plans are also defined benefit plans and are reflected in financial statements of both the Group and the Parent Company. Remuneration upon termination of employment Remuneration upon employment of contract is payable when an employee’s employment is terminated by the Group before the normal retirement age or when an employee voluntarily accepts the termination of employment in exchange for such remuneration. The Group reports severance payments when it is demonstrably obliged to terminate employees’ employment in accordance with a detailed formal plan, without possibility of revocation. In the case that the Company has submitted an offer to encourage voluntary termination of employment, the calculation of severance payment is based on the number of employees which it is estimated will accept this offer. Contingent liabilities A contingent liability is recognized when there is a possible obligation which ari- ses 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 a 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, as well as its financial statements in ge- neral, has been prepared using the same accounting principles and calculation methods used in the most recent annual report. 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. Goodwill Goodwill represents the difference between acquisition cost for business acquisitions and the fair value of acquired assets, assumed liabilities and contingent liabilities. In the Parent Company, goodwill is amortized in accordance with the Swedish Annual Account Act and is reported in the balance sheet on a straight-line basis over the estimated useful life of the asset. The estimated useful life is reviewed annually. The estimated useful life for goodwill, and goodwill arising from the purchase of the net assets of a business, amounts to 20 years. Amortization which deviates from plan is handled as an appropriation and is reported under the heading Difference between reported depreciation/amortization and depreciation/ amortization according to plan. 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 recognized 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. In the Parent company’s financial statements transaction costs are ca- pitalized in the balance sheet and are added to the total acquisition amount booked as shares in subsidiaries. In the consolidated accounts transaction costs are expensed according to IFRS 3. 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 deci- sion 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 accounts are allocated between deferred income tax liabilities and share- holders' equity. Pensions The Parent Company applies a different form of reporting of defined bene- fit pension plans than stipulated in IAS 19. The Parent Company’s reporting of defined benefit pension plans follows the Pension Obligations Vesting Act and the regulations of the Swedish Financial Supervisory Authority, as it is stated in RFR 2 that it is not necessary to apply the regulations in IAS 19 regarding defined benefit pension plans in legal entities. Pension costs are reported as Operational expenses in the Parent Company’s income statement and a provision referring to individuals with the option of retiring at the ages of 62 and 64 is found on the line Pension provisions in the Parent Company’s balance sheet. Appropriations and untaxed reserves Appropriations and untaxed reserves are only recorded in the Parent Company. 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 become subject to taxation upon resolution. In accordance with Swedish practice, 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 22% of the untaxed reserves can be considered as a defer- red tax liability and 78% as shareholders' equity. The deferred tax liabilities 34 Annual Report 2012 can be described as an interest-free liability with a non-defined duration. In the group accounts, 22% of the untaxed reserves are allocated to deferred tax liabilities and 78% 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 attribu- table 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 authorization. Equalization provision The Parent Company’s balance sheet includes an Equalization provision within Technical provisions, and any changes for the period in this provision are reported in the income statement. The amount of the provision is calculated as the equivalent of 150 % of the highest net premium income for Class 14, credit insurance, with equivalent reinsurance, for the five most recent financial years. The provisions for each financial year are equivalent to 75 % of the technical surplus in the credit insurance operations. However, in the consolidated balance sheet, the Equalization provision is allocated into deferred tax liabilities and shareholders’ equity. Group contributions and shareholders’ contributions for legal entities The Company reports group contributions and shareholders' contributions in accordance with the Swedish Financial Reporting Board (RFR2). 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 contributions are recorded according to their financial signi- ficance. This implies that group contributions provided and received for the purpose of minimizing 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. 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. 35 Annual Report 2012 Note 2 • Information on risks Risk management The company’s Enterprise Risk Management, ERM, is at the heart of Sirius’ thinking. Sirius defines ERM as the discipline by which the company identifies, as- sesses, controls, monitors, and discloses risks from all sources for the purpose of increasing Sirius’ short- and long-term value to its stakeholders. ERM is an ongoing process with the objective of creating a risk management culture that emanates from top management and which permeates throughout the entire organization. Sirius strives to maintain a risk culture where employees are aware of and measure, assess and communicate risk as part of their respon- sibilities. Management’s role includes communicating, implementing, monitoring and nurturing this culture. The objectives of Sirius’ work with ERM are: - Define Sirius’ risk tolerance and develop appropriate operating guidelines consistent with that framework - Optimize profitability within the established risk tolerance framework - Provide clear information for strategic management decisions - Demonstrate strong risk management through a well defined process including identification, quantification, monitoring, and appropriate management response - Provide stakeholders with transparent risk management information - Comply with Solvency II and other regulatory requirements Risk strategy and the company’s risk tolerance Risk strategy and risk tolerance comprise the foundation of the risk management processes. Sirius' risk strategy and risk tolerance have been established by Sirius’ Board of Directors, which aims to secure a balance between risk, return and capital requirements. As part of the planning process, strategic limits are ex- plicitly discussed and specified. The strategic risk tolerance is expressed either in quantitative terms (e.g., an aggregate risk limit for windstorms in Europe) or in qualitative terms (e.g., in relation to operational risk). From these overall risk tolerance statements, operational limits are applied at a 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 risk taking and appropriate capitalization • Insurance transactions are expected to yield positive technical results • Active use of retrocessional protections as part of business and capital planning • Reduce risk by proper risk selection and active portfolio diversification • Strong accumulation control • Strong and independent risk control functions • Motivate employees to further develop their risk management capabilities Risk governance The risk management processes within Sirius are supported by a risk mana- gement infrastructure consisting of the Board of Directors, an experienced management team, various risk committees, risk control functions, policies and procedures, risk models and reporting routines. This is described in further detail in the risk sections below. Sirius’ Board of Directors is ultimately responsible for the company’s risk management strategy, risk tolerances and policies and Sirius’ management has the day-to-day responsibility for all ERM activities. To deploy these responsibili- ties, different risk committees carry out certain pre-defined duties. The Risk Management Committee has the objective of formalizing the over- sight of critical risks, including the following risk management processes: • Establishment of risk tolerances • Identification and management of emerging risks • Quantification and subsequent monitoring of exposures • Implementation of risk reduction/reward expansion strategies • Risk reporting Sirius’ functions for risk control and compliance are responsible for the inde- pendent monitoring of Sirius’ risks. The functions submit quarterly risk control and compliance reports to the CEO, the Management Group and to the Board of Directors. A summary risk and governance report is submitted annually to the Board of Directors. Additionally, ad hoc reporting is done when deemed neces- sary. Internal Audit fulfils an important role in the independent evaluation of risk management and control systems. This includes the evaluation of the reliability of reporting, the effectiveness and efficiency of operations, and compliance with laws and regulations. The Internal Audit department reports directly to the Board of Directors. Sirius’ ultimate owner is listed on the New York Stock Exchange and, consequently, is required by the Sarbanes-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 retrocessional protections) that Sirius is willing to assume. Sirius divides insurance risk management into two principal areas; underwri- ting 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 underwriting risk assessment is performed by underwriters on each individual risk and the Chief Underwriting Officer is ultimately responsible for managing these risks. The goal for all underwriting is to maximize profitability for each selected risk level. The anticipated profitability of each contract which is entered into shall comprise the basic ground for decision making regarding all underwriting. Other underwriting guiding principles include diversification, strong accumulation controls and an active use of reinsurance in order to adjust risks to acceptable risk tolerance levels. At Sirius America the ultimate responsibility for managing these risks is assigned by underwriting unit. For property it is the Property Chief Underwriting Officer, and for A&H it is the Global A&H Head in conjunction with the America Underwriting Manager. They are ultimately responsible for managing these risks. Sirius America is governed by similar underwriting guidelines as Sirius Internatio- nal, as appropriate. The insurance premiums for assumed business are to cover expected losses and expenses as well as provide a reasonable return on deployed 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 restructuring of under-performing business, or through declining to accept such business. If a larger, catastrophic event occurs, simultaneously impacting a large number of cedants, this may result in a single loss that could offset the expected annual profit, or, even consume a portion of the solvency capital. This catastrophic risk is managed with the assistance of underwriting methods and tools which monitor and control the company’s total aggregate risks, both gross and net. Catastrophe risk is also managed by the effective use of retrocessional protections. In order to ensure consistency in the underwriting process, all underwriting within Sirius complies with specific rules and procedures. 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 applied for the majority of the business. The underwriting guidelines are reviewed at least annually and 36 Annual Report 2012 updated when appropriate. There are several levels of control functions as well as technical systems, which are in place to monitor and control that underwriting policies and procedures are followed. At Sirius International, there is an underwriting control group reporting to the Chief Underwriting Officer. This group focuses in detail on how the business is underwritten and that the underwriters follow issued policies and procedures. Another group controls the underwriting system and ensures it is used correctly and that input data is accurate. Finally, Risk Control, Compliance and Internal Audit also monitor these control groups, carrying out random inspections/tests, in detail ensuring they use sufficient control. Retrocession Sirius International uses retrocessional reinsurance as a tool to manage net risk and has a centralized unit responsible for the purchasing and administration of its outwards reinsurance. The implementation of reinsurance purchases is based on the strategic direction of the inwards portfolio, overall risk tolerances and the search for an optimal portfolio mix. Catastrophe models and capital modeling tools are used in the analytical and decision making process. Sensitivity to risks attributable to insurance agreements Within the insurance operations, natural catastrophe exposure (wind, flooding, and earthquakes) constitutes the company’s greatest risk. In order to manage this catastrophe risk, and the resulting accumulated risks, the company utilizes a number of different models. Sirius has developed a proprietary tool to price and manage accumulations of global property catastrophe risk. The underlying model assumptions are taken from third party catastrophe models and inter- nally developed loss curves. There is a process in place to evaluate and select a model of choice per territory and peril. Based on the new tool, reports and analyses can be produced on an as required 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 stochastically estimated using these models. Aside from the possibility of modeling single events, multiple occurrences within one calendar year are also modeled. Sensitivity analyses are undertaken based on a comparison of claims esti- mated by various models, but also through changes to the assumptions applied by the different models, such as, return periods. In addition, Sirius utilizes a system linked to the underwriting system. In this system, all business is registered and the company’s exposure is measured via a number of predefined catastrophe scenarios. Sirius also registers and monitors total exposed limits to wind and earth- quake losses per country and/or zone. Concentrations and sensitivity analysis The table below shows a summary of the manner in which Sirius analyzes cata- strophe risks, divided by geographical area and return periods. Sirius analyzes catastrophe risks each quarter during the financial year. The figures show the situation at the end of Q4 2012 and 2011. Through the use of these simulation models, the company can obtain an estimation of catastrophe risk, both prior to and after retrocession. Sensitivity analysis – losses divided by geographical area and return periods for the Group 2012 2011 Once per 100 years Once per 250 years Once per 100 years Once per 250 years Global – Gross Global – Net 3,734 3,169 Europe – Gross 3,108 Europe – Net US – Gross US – Net 1,432 3,277 3,103 4,206 3,641 4,019 1,865 3,725 3,590 3,667 2,793 3,204 1,348 2,964 2,737 4,509 3,247 4,429 1,854 3,476 3,221 In addition, to manage its aggregate exposure to very large catastrophe events, among other measures Sirius has been monitoring the largest net financial impact (“NFI”) that third-party models predict it would suffer in the worst modeled aggregate loss year (i.e., the 10,000-year global annual ag- gregate probable maximum loss (“PML”)). The calculation of the NFI begins with the modeled 10,000-year global annual aggregate PML and takes account of estimated reinstatement premiums, reinsurance recoverables net of estimated uncollectible balances, and tax benefits. This amount is deducted from Sirius’ planned legal entity comprehensive net income for the year (before any planned losses for catastrophe events) to arrive at the NFI. The NFI does not include the potential impact of the loss events on Sirius' investment portfolio. In 2012, Sirius started using a new proprietary property underwriting and pricing tool (“GPI”), which consolidates and reports on all its worldwide property exposures. GPI is used to calculate individual and aggregate PMLs by statistical blending of multiple third-party and proprietary models. Sirius monitors multiple indicators of catastrophe tail risk to measure its financial exposure to such scenarios. Sirius focuses on monitoring NFI TVaR, including the 100, 250, 500 and 1,000 year return periods in order to manage the potential impact of remote events on the Sirius financial position. Within Aviation reinsurance, the company applies another licensed third- party model, ALPS, in which the exposure per airline company can be modeled and monitored. Within the insurance classes Accident & Health, Property and Trade Credit, the company has models which it has developed internally. Reserve risk The reserving risk, i.e. the risk that insurance technical provisions will be insuf- ficient to settle incurred and future claims, is foremost handled by actuarial methods and a careful continuous review of reported claims. 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 appro- priate 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 benchmarks and under- writing judgment is used for the most recent years. Regarding run-off results and claims development from previous years please refer also to Note 4 Claims incurred and Note 25 Claims Outstanding, where a specification of claims costs and expenses relating to the current year and prior years is made. The acquisition of Sirius America has entailed an increase of asbestos and environmental claims. These claims are actively managed and have been subject to recurrent in depth analyses, the latest in the third quarter 2010. Reserves for these claims are included at MSEK 1,117 net in the consolidated balance sheet. historical loss Reserve Trends The table below shows historical loss reserve trends. When reading the table it should be noted that amounts in other currencies are converted to the closing exchange rate for 2011. The table below is thus not directly comparable to the income statement. The increases in claims costs shown in the table should be seen in relation to earned exposure. The amounts shown do not include internal claims adjustment expenses. During 2004 two larger operations were acquired. These operations were accounted for in a way that does not make amounts fully available, thus we show the annual development starting with underwriting year 2005. For the Group, the last diagonal includes claims from the new subsidiaries acquired in 2011. This implies that the table only shows the loss development from the date of acquisition, which is the point of time when controlling influence was obtained. 37 Annual Report 2012 Group Claims, gross 2004 and Underwriting year prior years 2005 2006 2007 2008 2009 2010 2011 2012 Total Estimated claims: at the close of the calendar year 1 year later 2 years later 3 years later 4 years later 5 years later 6 years later 7 years later Current estimate of total claims Total paid 3,128 3,632 3,531 3,506 3,493 3,488 1,024 1,075 15,075 14,530 2,420 3,044 6,263 5,575 6,717 9,633 8,024 8,024 4,808 3,387 3,922 3,914 3,838 7,213 7,196 3,430 4,243 4,244 7,344 7,377 3,340 4,847 7,574 7,523 2,836 7,096 7,018 4,060 5,729 2,998 7,196 6,817 7,377 6,864 7,523 6,950 7,018 5,643 5,729 3,846 2,998 640 Claims outstanding1) 5,522 545 3,217 380 513 573 1,375 1,883 2,358 16,365 Claims net of reinsurance 2004 and underwriting year prior years 2005 2006 2007 2008 2009 2010 2011 2012 Total Estimated claims: at the close of the calendar year 1 year later 2 years later 3 years later 4 years later 5 years later 6 years later 7 years later Current estimate of total claims Total paid 2,616 3,054 2,966 2,955 2,944 2,939 7,981 7,535 7,535 7,135 2,145 2,729 2,783 2,764 2,740 4,847 4,629 4,629 4,287 2,982 3,468 3,439 3,363 6,628 6,315 3,128 3,736 3,706 6,843 6,244 2,873 3,772 6,323 5,972 2,312 6,372 6,156 3,598 4,893 2,627 6,315 5,969 6,244 5,800 5,972 5,468 6,156 4,957 4,893 3,300 2,627 558 Claims outstanding1) 4,527 400 342 346 443 504 1,199 1,593 2,069 11,423 Parent Company Claims, gross 2004 and underwriting year prior years 2005 2006 2007 2008 2009 2010 2011 2012 Total Estimated claims: at the close of the calendar year 1 year later 2 years later 3 years later 4 years later 5 years later 6 years later 7 years later Current estimate of total claims Total paid 3,128 3,632 3,531 3,506 3,493 3,488 3,477 3,476 3,476 3,418 2,420 3,044 6,263 5,575 6,717 7,466 5,874 5,874 2,940 3,387 3,922 3,914 3,838 3,819 3,808 3,430 4,243 4,244 4,175 4,179 3,340 4,847 4,636 4,554 2,836 4,368 4,226 2,050 3,185 2,022 3,808 3,692 4,179 3,855 4,554 4,149 4,226 3,137 3,185 1,637 2,022 513 Claims outstanding1) 772 59 2,933 115 323 405 1,090 1,547 1,509 8,753 Claims net of reinsurance 2004 and underwriting year prior years 2005 2006 2007 2008 2009 2010 2011 2012 Total Estimated claims: at the close of the calendar year 1 year later 2 years later 3 years later 4 years later 5 years later 6 years later 7 years later Current estimate of total claims Total paid 2,616 3,054 2,966 2,955 2,944 2,939 2,929 2,928 2,928 2,871 2,145 2,729 2,783 2,764 2,740 2,733 2,722 2,722 2,663 2,982 3,468 3,439 3,363 3,340 3,330 3,128 3,736 3,706 3,633 3,643 2,873 3,772 3,594 3,576 2,312 3,629 3,481 1,589 2,461 1,670 3,330 3,245 3,643 3,427 3,576 3,283 3,481 2,583 2,461 1,200 1,670 448 Claims outstanding1) 677 57 59 85 216 293 898 1,261 1,222 4,768 1) For reconciliation against Balance Sheet, see Note 23. 38 Annual Report 2012 financial Risk Management Goals, principles and methods In the company’s operation various types of financial risks arise, such as market risks, credit risks and liquidity risks. In order to limit and control the risk taking in the operations, Sirius’ Board of Directors, being ultimately re- sponsible for the internal control in the company, has determined guidelines 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 Investments 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 (FSA), Finansinspek- tionen. 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 guidelines also include restrictions on exposures due to size, industry and financial strength rating. 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. internally. 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 Currency and Market Risk working group is responsible for the con- tinuous management of market risks. The development of the market risks is reported within the Currency and Market Risk working group on a monthly basis. The working group consists of CFO’s and investment officers from Investment assets, division by class of asset, percentage split Group Parent Company 2012 2011 2012 2011 Bonds and other interest-bearing securities 76.67 77.93 Shares in Associated companies - - Shares and participations 14.24 12.96 - whereof venture capital companies Derivatives Cash and bank balances 1.72 1.30 7.79 2.09 0.12 8.99 49.90 41.01 2.73 0.52 1.62 4.74 50.12 38.72 3.53 1.24 0.16 7.47 Total 100.00 100.00 100.00 100.00 Sirius International and Sirius America. The Currency & Market Risk working group is reporting to the Investment Committee of Sirius. The company’s investment operations during 2012 yielded a return of 2.3 percent (2.0 percent), expressed in SEK. The duration in the portfolio with interest-bearing investments at the end of 2012 was 2.63 years which was higher compared to 2011 (2.15 years). During the year, only minor changes between different asset classes have been made. The table below shows the investment assets divided by class of asset, excluding deposits in companies that are reinsured by Sirius. 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 FSA as per December 31, 2012 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 alternatively, that the market value increases as the interest rates decrease. The level of interest rate risk increases with the asset’s duration. The tables below il- lustrate, in absolute figures, the exposure to interest rate risk in accordance with the risk scenarios per the Traffic Light model as per December 31, 2012 and December 31, 2011. Investment assets, interest rate risk according to the Traffic light model risk scenarios / Group Exposure (MSEK) Scenario, stress test Corresponding Capital basis points requirements (MSEK) 2012 2011 2012 2011 2012 2011 2012 2011 Assets in SEK Assets in EUR 2,689 3,540 1,470 1,406 Assets in USD and other currencies 14,076 13,873 Total 18,235 18,819 30% 25% 30% 30% 25% 30% - 46 33 53 - 49 46 56 - 35 19 209 263 29 26 234 289 Investment assets, interest rate risk according to the Traffic light model risk scenarios / Parent Company Exposure (MSEK) Scenario, stress test Corresponding Capital basis points requirements (MSEK) 2012 2011 2012 2011 2012 2011 2012 2011 Assets in SEK Assets in EUR 2,690 3,540 1,471 1,409 Assets in USD and other currencies 5,885 4,550 Total 10,046 9,499 30% 25% 30% 30% 25% 30% - 46 33 53 - 49 46 56 - 35 19 88 29 26 82 142 137 39 Annual Report 2012 Equity risk The equity risk is the risk that the market value of equities 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 mitigated by a diversification of the share portfolio. The tables below show the equity risk in accordance with the risk scenarios per the Traffic Light model as per December 31, 2012 and December 31, 2011. Investment assets, equity risk according to the Traffic light model risk scenarios / Group Exposure (MSEK) Scenario, stress test Capital requirements (MSEK) Foreign shares and participations Total 2012 3,567 3,567 2011 3,300 3,300 2012 35% - 2011 35% - 2012 1,248 1,248 2011 1,155 1,155 Investment assets, equity risk according to the Traffic light model risk scenarios / Parent Company Exposure (MSEK) Scenario, stress test Capital requirements (MSEK) Foreign shares and participations Foreign subsidiaries and associated companies Total 2012 1,820 7,052 8,872 2011 1,702 6,324 8,026 2012 2011 35% 35% - 35% 35% - 2012 637 2,468 3,105 2011 596 2,213 2,809 Currency risk Currency risk arises if assets and liabilities in the same foreign cur- rency vary in amounts. The Currency and Market Risk working group meets at least monthly in order to monitor currency exposure and limit currency risk. Besides that, it is the responsibility of the working group to review and update the Currency Risk Policy and ensure it is approved by the Investment Committee and the Board of Directors on a yearly basis. Sirius’ total net currency exposure is divided into two categories, exposure related to Policyholders Funds, which is matched with the cor- responding assets, and exposure related to Owner’s Funds. Sirius’ net Po- Exchange rate exposure – Investment assets / Group licyholders Funds exposure for currency risk is marginal as the company’s objective for managing currency risk is to match net insurance liabilities in foreign currency with corresponding assets within very tight time frames. The group’s total net exposure for currency risk, i.e. including both Policy- holder and Owners Funds, before and after any hedging by derivatives is shown in the table below (the table is only presented for the Group since the exchange rate exposure, at large, is the same for the Parent company and the Group since the subsidiaries are treated on a look through basis where the subsidiaries’ valuation and exposure is taken into consideration). 2012 2011 Shares and participations USD 3,526 EUR 37 Bonds and other interest-bearing securities 14,109 1,579 Other financial investment assets Other assets and liabilities, net Total assets Technical provisions, net Total liabilities and provisions 1,309 2,304 86 230 21,248 1,932 -10,401 -1,295 -10,401 -1,295 Net exposure before financial hedging with derivatives 10,847 637 Nominal value currency forwards Net exposure after financial hedging with derivatives -3,945 6,902 44 681 GBP - 664 32 -31 665 -243 -243 422 -20 402 Other - 526 291 100 917 -736 -736 181 - 181 USD 3,244 EUR 71 14,308 1,471 1,739 2,550 81 325 21,841 1,948 -11,926 -1,400 -11,926 -1,400 9,915 548 -3,432 6,483 - 548 GBP 20 629 58 23 730 -189 -189 541 - 541 Other - 61 312 71 444 -437 -437 7 - 7 40 Annual Report 2012 In the table below, the effect on the group’s shareholders’ equity and income statement of two stress tests are shown: An unfavorable foreign exchange rate move of 25 basis points, in the respective foreign currencies towards SEK and an unfavorable change to fx rates by 10 percent in the respective foreign currencies towards SEK. The analysis below assumes that the changes in exchange rates do not affect other risk parameters, such as interest rate. The sensitivity analysis takes into consideration existing financial hedges with currency related derivatives. Sensitivity analysis per currency USD EUR GBP Other Total 2012 2011 Change 25 basis points Change 10% Change 25 basis points Change 10% 266 690 236 648 20 68 15 55 10 40 12 54 - 18 - 1 296 816 263 758 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 assets The credit risk in investment assets can be split into credit spread risk and counterparty risk. Credit spread risk in investment assets Credit spread risk results from the sensitivity of the value of fixed interest assets to changes in the level or in the volatility of credits spreads over the risk-free term structure. Assets sensitive to changes in credit spreads may also give rise to others risks, e.g. counterparty default risk, which is not covered below. The tables below show the credit spread risk in accordance with the risk scenarios per the Traffic Light model as per December 31, 2012 and December 31, 2011. Investment assets, credit spread risk according to the Traffic light model risk scenarios / Group Exposure (MSEK) Average credit spread Scenario impact Capital requirements (MSEK) 2012 2011 2012 2011 2012 2011 2012 2011 Assets in SEK Assets in EUR 791 852 1,304 1,262 Assets in USD and other currencies 9,557 9,050 1.04 1.24 1.13 1.37 2.74 1.82 -2.5% -3.4% -4.6% -10.3% -3.2% -5.5% Total 11,652 11,164 1.14 1.93 -3.3% -5.9% 20 61 304 385 29 130 496 655 Investment assets, credit spread risk according to the Traffic light model risk scenarios / Parent Company Exposure (MSEK) Average credit spread Scenario imapct Capital requirements (MSEK) 2012 2011 2012 2011 2012 2011 2012 2011 Assets in SEK Assets in EUR 791 852 1,304 1,264 Assets in USD and other currencies 4,284 3,223 1.04 1.24 1.22 1.37 2.74 1.77 -2.5% -3.4% -4.6% -10.3% -3.4% -5.7% Total 6,379 5,339 1.21 2.01 -3.6% -6.4% 20 61 147 228 29 130 183 342 41 Annual Report 2012 Counterparty risk in investment assets The company’s policy is to allow only investments in securities with high credit quality and therefore the counterparty risk in investment assets is assessed to be relatively limited. The table below shows the exposure of Sirius’ investment assets divided per class of asset. Group Parent Company Exposure Group 2012 2011 2012 2011 Bonds & other interest-bearing assets 18,235 19,840 10,041 - Governments 6,763 9,151 4004 - Swedish mortgage institutions - Other Swedish issuers - Other issuers 0 791 156 697 10,681 9,836 Shares in Associated Companies - - 9,472 4,840 156 697 3,779 7,317 667 30 0 791 5,246 8,254 549 326 Shares & participations Derivatives Total 3,567 3,300 326 30 22,128 23,170 19,170 17,486 The tables below lists the ten largest holdings. The table excludes government bonds and other similar interest-bearing securities but includes corporate bonds, shares and participations in associated companies. Group / 2012 Name of security Type of security Market value % of financial (MSEK) assets Sirius International Financial Services Loan note to group company Symetra Financial Corporation One Beacon Insurance Group Prospector Offshore Fund Share Share Share Sirius International Financial Services Currency Derivative Type Market value % of financial of security (MSEK) 966 949 662 346 326 264 197 178 178 177 4.4 4.3 3.0 1.6 1.5 1.2 0.9 0.8 0.8 0.8 4,243 19.3 assets 32.1 7.1 3.7 1.8 1.7 1.4 0.9 0.8 0.8 0.7 6,158 1,369 714 346 326 264 178 155 143 134 9,787 51.0 Bond Share Bond Bond Bond Total Capital Canada Ltd Ironshore Rio Tinto Fin USA Ltd Volkswagen Fin Serv. NV Volkswagen Auto Loan Enh Trust Total Parent Company / 2012 Name of security WM Phoenix (Luxembourg) S.à r.l. Shares in Subsidiary Sirius International Holdings (NL) BV Shares in Subsidiary White Sands Holdings (Luxembourg) S.à r.l. Shares in Subsidiary Prospector Offshore Fund Share Sirius International Financial Services Currency derivative Total Capital Canada Ltd Volkswagen Fin Serv NV BMW Finance NV Electrolux AB Citigroup Inc Total Bond Bond Bond Bond Bond 42 Annual Report 2012 Group / 2011 Name of security Type Market value % of financial of security (MSEK) assets Sirius International Loan note to Financial Services Group Company 1,021 One Beacon Insurance Group Symetra Financial Corporation Prospector Offshore Fund Total Capital Canada Ltd Ironshore Inc. Volkswagen Fin Serv NV Swedbank Hypotek AB BMW Finance NV Shering Plough Total Share Share Share Bond Share Bond Bond Bond Bond 785 501 336 263 188 177 156 156 143 4.3 3.3 2.1 1.4 1.1 0.8 0.7 0.7 0.7 0.6 Parent Company / 2011 Name of security WM Phoenix (Luxembourg) S.à r.l. Sirius International Holdings (NL) BV Prospector Offshore Fund Total Capital Canada Ltd Volkswagen Fin Serv NV Swedbank Hypotek AB BMW Finance NV Pentelia Ltd Permanent Master Issuer PLC Type Market value % of financial of security (MSEK) assets Shares in Subsidiary Shares in Subsidiary Share Bond Bond Bond Share Share Bond Bond 6,338 34.7 1,005 336 263 177 156 156 116 112 100 5.5 1.8 1.4 1.0 0.9 0.9 0.6 0.6 0.6 3,726 15.7 Atlas Copco AB Total 8,759 48.0 The tables below show fixed income investments and equity investments per geographical area and credit rating classes. Fixed income investments are also presented per sector (the table is only presented for the Group since the distribution, at large, is the same for the Parent company). Credit quality on classes 2012 2011 of investment assets, % AAA AA A BBB CCC Not Total AAA AA A BBB BB Not Total Rated Rated Bonds and other interest-bearing securities - Swedish government - Swedish mortgage institutions - Other Swedish institutions - Foreign governments - Other foreign issuers 27 100 - - 31 20 28 18 27 - - 34 69 9 - - 48 - 27 - - 18 - 44 - - - - - - - - - - - - 100 100 - 100 100 100 25 18 100 100 15 12 34 31 - - 84 10 15 51 - - 1 20 - - - - 25 41 1 - - - - 2 5 - - - - 10 100 100 100 100 100 100 Equity investments, divided by geographical area % Western Europe North America Other Total Group Parent company 2012 2.95 85.04 12.01 100 2011 2.60 79.13 18.27 100 2012 94.76 0.38 4.86 100 2011 92.69 0.12 7.19 100 Interest-bearing investments, divided by geographical areas % Western Europe North America Scandinavia Other Total Interest-bearing investments, divided by sector % Governments Swedish mortgage institutions Other Swedish issuers Other foreign issuers Total Group Parent company 2011 10.84 70.36 17.84 0.96 100 2012 20.64 47.40 26.78 5.18 100 2011 21.44 39.70 37.37 1.49 100 Group Parent company 2011 46.12 0.79 3.51 49.58 100 2012 39.88 0 7.88 52.24 100 2011 51.10 1.65 7.35 39.90 100 2012 11.36 71.00 14.75 2.89 100 2012 37.09 0 4.34 58.57 100 43 Annual Report 2012 Credit risk on receivables with reinsurers Ageing balances The credit risk resulting from reinsurance ceded by Sirius can be divided into two separate components; reinsurers’ share of techni- cal provisions as recorded on an ongoing basis under assets in the balance sheet, and the potential exposure that would emerge in the Receivables regarding both direct insurance as well as assumed and ceded reinsurance are 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 distribu- event of large claims in the insurance portfolio, for example, in the tion: Less than 1 month, 1-3 months, 3-6 months, 6-9 months, case of a severe European windstorm. An event like this would trig- ger major portions of Sirius’ purchased reinsurance programme. 9-12 months and over 1 year. These analyses, together with the assessment of the counterparty’s credit risk status, comprise the Sirius’ Security Committee is responsible for managing the risk basis for various collection activities and any write-down require- of reinsurer insolvency. To mitigate this risk, we annually review ments. and periodically monitor our reinsurers’ financial condition. The credit risk reserve for bad debts amounted, as per De- cember 31, 2012, to MSEK 58 for the group, whereof MSEK 38 at Sirius International (2011 MSEK 62 for the Group, MSEK 44 at Sirius International). Group Due for <1 Month 1-3 Months 4-6 Months 7-9 Months 10-12 Months >1 Year 2012 Net receivables 2011 Net receivables 556 580 79 185 36 60 8 -6 8 8 132 210 Total 819 1037 Parent Company Due for <1 Month 1-3 Months 4-6 Months 7-9 Months 10-12 Months >1 Year Total 2012 Net receivables 2011 Net receivables 276 114 34 58 11 40 5 -6 3 2 62 235 391 442 In accordance with Sirius International’s policy for write-downs of recei- vables outstanding for more than 1 year, there is a specific reserve for counterparties which are not classified as IDC companies (Insolvent and Doubtful Companies) which totals MSEK 6 at December 31, 2012. Retrocession credit risk Reinsurers’ share of technical provisions consists of outstanding claims including IBNR reserves, as well as a provision for unearned premiums and remaining risks. The credit rating distribution for this exposure is shown in the table below. Group Rating – Standard & Poor's equivalent AAA AA+ AA AA- A+ A A- BBB+ BBB or lower Special approval 2012 2011 Gross Collateral Net Percentage split Gross Collateral Net Percentage split 162 75 367 108 290 214 316 101 632 355 0 0 1 0 0 1 19 0 182 115 162 3 75 366 108 290 213 297 101 450 240 0 1 7 2 5 4 6 2 12 6 52 210 0 241 45 307 470 253 62 849 420 5,253 8,111 0 0 2 0 0 4 67 0 96 119 4,831 5,119 210 0 239 45 307 466 187 62 754 301 421 2,992 3 0 3 1 4 6 3 1 10 5 65 100 Internal reinsurance 2,845 2,845 Total 5,466 3,164 2,302 100 44 Annual Report 2012 Parent Company Rating – Standard & Poor's equivalent AAA AA+ AA AA- A+ A A- BBB+ BBB or lower Special approval 2012 2011 Gross Collateral Net Percentage split Gross Collateral Net Percentage split 0 75 156 108 290 66 403 91 113 355 0 0 0 0 0 0 19 0 10 115 2,845 0 0 75 156 108 290 66 384 91 103 240 0 2 3 2 6 1 9 2 3 8 63 118 0 173 45 307 109 222 59 369 420 5,253 7,074 0 0 0 0 0 0 66 0 11 119 4,831 5,027 118 0 173 45 307 109 155 59 358 301 421 2,047 2 0 2 1 4 2 3 1 5 6 74 100 Internal reinsurance 2,845 Total 4,502 2,989 1,514 100 The item Internal reinsurance above refers to ceded reinsurance to White Mountains Life Re. This receivable is collateralized with securities pertaining to the underlying liability to the original ceding company. Except for the credit exposure above, reported as an asset in the balance sheet, significant credit losses can potentially arise from unusually large and requent events. The table below describes the assumed liabilities from Retrocessionaires (excluding costs for reinstatements) and the distribution of credit ratings for Sirius’ 2012 Retrocession Program. (The table only presents the Parent Company since external reinsurance, at large, not exist in other parts of the group). Rating / Parent Company Standard & Poor's 2012 2011 or equivalent MSEK Percentage split MSEK Percentage split AA+ AA AA- A+ A A- BBB+ BBB or lower Fully collateralized Special approval Total 0 96 873 825 103 620 53 54 29 255 0 3 30 28 4 21 2 2 1 9 0 374 489 953 152 930 127 0 185 122 0 11 15 29 5 28 4 0 6 4 2,908 100 3,331 100 45 Annual Report 2012 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 derivatives instruments have different durations. interest-bearing investment assets was 2.63 years (2.15 years) and the duration of insurance liabilities was 2.14 years (2.18 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 The company’s strategy for dealing with liquidity risk aims to match liquidity situation. expected payments and receipts of payment (so called asset-liability mana- gement, ALM). This is accomplished through advanced liquidity analysis of financial assets and insurance liabilities. At the end of 2012 the duration of The tables below show a more detailed maturity profile for the Group and Parent Company in respect of both financial assets and debts. liquidity profile – financial assets (Contractual inflows) / 2012 Group On demand <3 months 3 months –1 year 1-5 years >5 years No duration Total Bonds and other interest-bearing securities (discounted amounts) Shares & participations Cash & bank balances Receivables, direct insurance Receivables, reinsurance Other debtors Prepayments and accrued income Total - - 1,951 - 311 - - 2,262 746 - - - 45 132 - 923 762 - - 77 1,589 68 208 2,704 9,781 6,946 - - - 50 69 2 - - - 1 - - - 3,567 - 28 -4 43 - 18,235 3,567 1,951 105 1,993 312 210 9,902 6,947 3,634 26,373 liquidity profile – financial assets (Contractual inflows) / 2011 Group On demand <3 months 3 months –1 year 1-5 years >5 years No duration Total 291 2,957 6,985 8,585 - - 762 117 9 - - 1,052 2 215 4,226 - - 211 - - - - - - - 1,021 3,300 2 398 70 - 19,839 3,300 2,289 2 2,423 189 224 7,196 8,585 5,791 28,266 Bonds and other interest-bearing securities (discounted amounts) Shares & participations Cash & bank balances Receivables, direct insurance Receivables, reinsurance Other debtors Prepayments and accrued income - - 2,289 - - - - Total 2,289 1,179 46 Annual Report 2012 liquidity profile – financial assets (Contractual inflows) / 2012 Parent Company On demand <3 months 3 months –1 year 1-5 years >5 years No duration Total Bonds and other interest-bearing securities (discounted amounts) Shares & participations in group companies Shares & participations Cash & bank balances Receivables, direct insurance Receivables, reinsurance Other debtors Prepayments and accrued income - - - 955 - - 77 - 36 587 6,734 2,684 - - - - - - - - - - - 1,605 56 141 2,389 - - - - - 69 2 - - - - - - - - 8,254 549 - 28 -23 - - 10,041 8,254 549 955 28 1,582 202 143 21,754 Total 1 032 36 6,805 2,684 8,808 liquidity profile – financial assets (Contractual inflows) / 2011 Parent Company On demand <3 months 3 months –1 year 1-5 years >5 years No duration Total Bonds and other interest-bearing securities (discounted amounts) Shares & participations in group companies Shares & participations Cash & bank balances Receivables, direct insurance Receivables, reinsurance Other debtors Prepayments and accrued income Total - - 1,411 - - 39 - 1,450 94 2,377 4,088 2,913 - - - - 172 17 9 292 - - - - 1,026 206 142 3,751 - - - - 235 - - - - - - - - - - 7,317 667 2 447 31 - 9,472 7,317 667 1,411 2 1,880 293 151 4,323 2,913 8,464 21,193 liquidity profile – financial debts (Contractual outflows) / 2012 Group On demand <3 months 3 months –1 year 1-5 years >5 years No duration Payables, direct insurance Payables, reinsurance Other creditors Accrued expenses and deferred income Total - - -26 - -26 - - 110 110 41 189 1 426 101 1 757 - - - 90 90 - - - 19 19 7 393 - 1 401 Total 48 582 1 400 321 2 351 liquidity profile – financial debts (Contractual outflows) / 2011 Group On demand <3 months 3 months –1 year 1-5 years >5 years No duration Total Payables, direct insurance Payables, reinsurance Other creditors Accrued expenses and deferred income Total - - - - - - - 57 132 189 - 437 701 111 1,249 - - 36 88 124 - - - 19 19 1 368 20 - 389 1 805 814 350 1,970 47 Annual Report 2012 liquidity profile – financial debts (Contractual outflows) / 2012 Parent Company On demand <3 months 3 months –1 year 1-5 years >5 years No duration Payables, direct insurance Payables, reinsurance Other creditors Accrued expenses and deferred income Total - - - - - - - - 104 104 - 337 1,325 35 1,697 - - - 45 45 - - - - - 1 393 - 1 395 Total 1 730 1,325 185 2,241 liquidity profile – financial debts (Contractual outflows) / 2011 Parent Company On demand <3 months 3 months –1 year 1-5 years >5 years No duration Total Payables, direct insurance Payables, reinsurance Other creditors Accrued expenses and deferred income Total - - - - - - - 53 51 - 453 591 112 104 1,156 - - 23 36 59 - - - - - 1 331 23 - 355 1 784 690 199 1,674 liquidity profile – Technical provisions Estimated claim payments, net, excluding ULAE Group 2012 2011 Parent Company <3 months 3 months–1 year 1-5 year >5 year Total 1,038 1,172 3,144 3,565 4,658 5,433 3,469 3,715 <3 months 3 months–1 year 1-5 year >5 year 2012 2011 552 628 1,684 1,935 2,219 2,599 907 1,113 12,309 13,885 Total 5,362 6,275 Operational Risk Management Sirius has defined operational risks as “the risk of loss arising from inade- quate or failed internal processes, personnel or systems or from external events. Operational risk includes legal risk and excludes risks arising from strategic decisions, as well as reputation risks". All employees within Sirius are responsible for the contribution to a well functioning process for operational risk management and shall see them- selves as risk managers. The function for Risk Control is responsible for developing and improving the operational risk methodology and thereby supporting the organization and the process owners with the tools needed to manage these risks. Operational risks within Sirius are identified through regularly conducted risk control reviews. Operational risks are also identified and managed by defining controls within the processes and through follow up and testing of the effectiveness of the key controls. Sirius always aims at reducing the operational risks to acceptable levels. 48 Annual Report 2012 Compliance Risk Management Compliance risk is “the risk of legal or regulatory sanctions, material financial loss or loss to reputation that Sirius may suffer as a result of not complying with laws, internal or external regulations and administrative provisions as applicable to Sirius’ activities.” The responsibility for Sirius’ compliance with internal and external regulation lies with all employees. Compliance risks are identified by all em- ployees on an ad hoc basis and more formally through the risk control and compliance reviews. The Compliance function supports the organization and processes by informing, advising, and monitoring compliance issues throughout the group. Solvency II Sirius is preparing for compliance with the upcoming Solvency II regulation. The company has a project in place with several defined subprojects. The subprojects are covering all three Pillars. The project has a dedicated Pro- ject Manager and the company’s group CFO is the chairman of the Steering Group and the sponsor of the project. Solvency II is discussed regularly at Board of Directors (Board) meetings. The group CFO reports to the Board on Solvency II matters, thus ensuring the Board’s involvement and oversight over the Solvency II project. The Solvency II manager reports about Solvency II at all Risk Management Committee meetings. Solvency and Capital requirements Sirius has continued to develop its internal Economic Risk Capital (ERC) model. The objectives for the internal ERC model are: • Stochastically calculate capital needed to be economically solvent over a one year period within specified probability level • Consolidate quantifiable risks into one model • Produce a realistic distribution of financial outcomes at various return periods • Allocate capital to key risks, business units and lines of business • Produce a streamlined and inclusive view of interdependencies of these risks The practical applications of the internal ERC model include the following: • Assess the amount of capital necessary to support the underwriting and investment operations over the course of a one-year period • Allocate deployed capital in the organization to key underwriting risk areas in order to establish appropriate risk-adjusted pricing targets • Monitor the risk according to the risk tolerance levels established by the Board of Directors • Measurement of key risks and their interaction • Evaluate reinsurance purchases Furthermore, the company uses the internal ERC model for stress testing and scenario analysis and it compares results from the internal ERC model with the Solvency II Standard Formula SCR. Sirius aims at maintaining a capital base corresponding to not less than an A-rating level as defined by the rating agencies. Sirius has during 2012 been participating in the Internal Model pre- application review process with the company’s regulator, the Swedish FSA, Finansinspektionen. By participating in this pre-application review process, the company will be well prepared before the final application shall be sub- mitted. The ultimate goal is to gain approval to use the company’s Internal Economic Risk Capital Model for the calculations of the solvency capital requirements under Solvency II. As a predecessor to Solvency II, the Swedish FSA has established a local solvency regulation, the Traffic Light system. It 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 compared to solvency capital (the so called “capital buffer”) in order to asses the company’s capital strength. The model is presented on a solo company basis with holdings in subsidiaries modeled with an equity risk charge of 35%. The table below shows the result in accordance with the Traffic Light model as per December 31, 2012 and 2011. Total capital requirement according to the Traffic light model Total capital net requirement Capital buffer Surplus 2012 4,065 14,973 10,908 2011 4,691 14,096 9,405 financial Strength Rating The financial strength of Sirius has been rated by Standard & Poor’s, A. M. Best and Moody’s. Group and Parent Company 2012 2011 S&P 1) A.M. Best 2) Moody’s 3) S&P 1) A.M. Best 2) Moody’s 3) Financial Strength Rating Outlook A- Stable A Stable A3 Stable A- Stable A Stable A3 Stable 1) "A-" is the seventh highest of twenty-one financial strength ratings assigned by Standard & Poor’s. 2) "A" is the third highest of fifteen financial strength ratings assigned by A.M. Best. 3) "A3" is the seventh highest of twenty-one financial strength ratings assigned by Moody’s. 49 Annual Report 2012 50 Annual Report 2012 Note 3 • Premium income Premium income, geographical allocation Group Parent Company 2012 2011 2012 2011 Direct insurance, Sweden Direct insurance, other EES Direct insurance, other countries Premiums for assumed reinsurance Premium income before ceded reinsurance Premium for ceded reinsurance Premium income after ceded reinsurance 4 339 915 6,823 8,081 -1,777 6,304 8 213 655 5,079 5,955 -1,592 4,363 3 221 736 4,819 5,779 -1,765 4,014 8 213 655 4,471 5,347 -1,579 3,768 Note 4 • Claims incurred for own account Claims incurred for the year´s operations / Group 2012 2011 Gross Ceded Net Gross Ceded Net Claims paid Loss portfolios Change in provision for incurred and reported claims -474 41 -695 Change in provision for incurred but not reported claims (IBNR) -1,729 Claims handling expenses Total claims incurred for the year’s operations -176 -3,033 64 0 117 177 0 358 -410 41 -578 -1,552 -176 -447 35 -832 -1,211 -170 -2,675 -2,625 73 0 194 210 0 477 -374 35 -638 -1,001 -170 -2,148 Claims incurred for previous years´operations / Group 2012 2011 Gross Ceded Net Gross Ceded Net Claims paid Loss portfolios Change in provision for incurred and reported claims -4,341 -311 1,127 699 0 -191 Change in provision for incurred but not reported claims (IBNR) 3,970 -1,970 -3,642 -3,105 -311 936 2,000 -503 1,554 159 Total claims incurred for previous year’s operations 445 -1,462 -1,017 -1,895 667 -4 -433 688 918 -2,438 -507 1,121 847 -977 Total claims incurred -2,588 -1,104 -3,692 -4,520 1,395 -3,125 Total claims paid / Group 2012 2011 Claims paid Loss portfolios Claims handling expenses Total claims paid Gross Ceded Net Gross Ceded Net -4,815 763 -4,052 -3,552 740 -2,812 -270 -176 0 0 -270 -176 -468 -170 -4 0 -472 -170 -5,261 763 -4,498 -4,190 736 -3,454 Change in provision for outstanding claims / Group 2012 2011 Gross Ceded Net Gross Ceded Net Change in provision for incurred and reported claims 432 -74 Change in provision for incurred but not reported claims (IBNR) 2,241 -1,793 Total change in provisions for outstanding claims 2,673 -1,867 358 448 806 722 -1,052 -330 -239 898 659 483 -154 329 51 Annual Report 2012 Claims incurred for the year´s operations / Parent Company 2012 2011 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 -362 40 -549 -991 -128 Total claims for the year’s operations -1,990 66 0 122 170 0 358 -296 40 -427 -821 -128 -273 35 -767 -1,074 -159 -1,632 -2,238 72 0 194 210 0 476 -201 35 -573 -864 -159 -1,762 Claims incurred for previous years´operations / Parent Company 2012 2011 Gross Ceded Net Gross Ceded Net Claims paid Loss portfolios Change in provision for incurred and reported claims -2,497 -311 679 618 0 -131 Change in provision for incurred but not reported claims (IBNR) 3,028 -1,880 Total claims incurred for previous year’s operations 899 -1,393 -1,879 -311 548 1,148 -494 -2,703 -503 1,355 66 -1,785 582 -4 -400 661 839 -2,121 -507 955 727 -946 Total claims incurred -1,091 -1,035 -2,126 -4,023 1,315 -2,708 Total claims paid / Parent Company 2012 2011 Claims paid Loss portfolios Claims handling expenses Total claims paid Gross Ceded Net Gross Ceded Net -2,859 684 -2,175 -2,976 654 -2,322 -271 -128 0 0 -271 -128 -468 -159 -4 0 -472 -159 -3,258 684 -2,574 -3,603 650 -2,953 Change in provision for outstanding claims / Parent Company 2012 2011 Gross Ceded Net Gross Ceded Net Change in provision for incurred and reported claims 130 -9 Change in provision for incurred but not reported claims (IBNR) 2,037 -1,710 Total change in provision for outstanding claims 2,167 -1,719 121 327 448 588 -1,008 -420 -205 870 665 383 -138 245 52 Annual Report 2012 Note 5 • Operating costs Specification of income statement item operating costs Group Parent Company 2012 2011 2012 2011 Acquisition costs -1,615 -1,136 -1,045 -1,015 Change in prepaid acquisition costs (+/–) Administrative expenses Provisions and profit shares in ceded reinsurance (–) -6 -871 402 -42 -573 290 -58 -518 400 -30 -509 315 Total operating costs -2,090 -1,461 -1,221 -1,239 Other operating costs Group Parent Company 2012 2011 2012 2011 Operating costs Claims handling expenses included in claims paid -2,090 -192 Asset management costs included in Investment expenses -79 Expenses for land and buildings included in Investment expenses, net Total other operating costs -2 -2,363 -1,461 -170 -64 -1 -1,696 -1,221 -144 -44 -2 -1,411 -1,239 -159 -53 -1 -1,452 Total operating costs per type Group Parent Company 2012 2011 2012 2011 Direct and indirect personnel costs Premises costs Depreciation/amortization Other expenses related to operations Total other operating costs -691 -68 -52 -1,552 -2,363 -469 -48 -31 -1,148 -1,696 -432 -44 -49 -886 -414 -41 -29 -968 -1,411 -1,452 Note 6 • Investment income Group Parent Company 2012 2011 2012 2011 Dividend income from: 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 Capital gains on foreign exchange, net Capital gains and reversed write-downs (net) Foreign shares Group and associated companies Interest-bearing securities Total return on capital, income 80 455 59 - - - 199 254 1,047 113 360 30 - 126 89 - 46 764 - 248 16 - - - 101 102 467 1 293 21 - 130 27 - 43 515 Realized gains from associated companies in the Parent company derive from sale of shares in IMG which per December 31, 2011 were written down and valued to MSEK 0. In the group accounts, gains from acquisition of subsidiareis have been realized and accounted in accordance with IFRS 3. 53 Annual Report 2012 Note 7 • Unrealised gains and losses on investments Group Parent Company 2012 2011 2012 2011 Foreign shares and participations Bonds and other interest-bearing securities Derivative financial instruments Total unrealized gains on investments 334 25 293 652 -117 -18 134 -269 70 - 293 363 -59 - - -59 Note 8 • Investment expenses and charges Group Parent Company 2012 2011 2012 2011 Operating expenses for land and buildings Asset management costs Interest expenses Other interest expenses -2 -79 -3 - 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 -211 Capital losses Foreign shares and participations Group and associated companies Derivative financial instruments Total -71 - -2 -368 -1 -64 -43 -37 - - - -24 -132 -2 -44 -3 - -212 -138 -20 -2 -421 -1 -53 -2 - - - - - -56 54 Annual Report 2012 Note 9 • Net profit or net loss per category of financial instrument financial assets / Group 2012 financial assets loan receivables valued at fair financial Available-for and other value in the assets held -sale financial accounts income statement for trading instruments receivables Total Shares and participations Derivative financial instruments Bonds and other interest-bearing securities Deposits with cedants Cash and bank balance Total 541 - 383 - - 924 - 291 - - - 291 - - 492 - - 492 - - - 13 13 26 541 291 875 13 13 1,733 financial assets / Parent Company 2012 financial assets loan receivables valued at fair financial Available-for and other value in the assets held -sale financial accounts income statement for trading instruments receivables Total Shares and participations Derivative financial instruments Bonds and other interest-bearing securities Deposits with cedants Cash and bank balance Total 13 - - - - - 291 - - - 13 291 - - 448 - - 448 - - - 13 3 16 13 291 448 13 3 768 financial assets / Group 2011 financial assets identified loan receivables valued at fair financial Available-for and other value in the assets held -sale financial accounts income statement for trading instruments receivables Total Shares and participations Derivative financial instruments Bonds and other interest-bearing securities Deposits with cedants Cash and bank balance Other debts Total 84 - -18 - - - - -157 - - - - - - 488 - - - 66 -157 488 - - - 17 6 -36 -13 84 -157 470 17 6 -36 384 financial assets / Parent Company 2011 financial assets identified loan receivables valued at fair financial Available-for and other value in the assets held -sale financial accounts income statement for trading instruments receivables Total Shares and participations Derivative financial instruments Bonds and other interest-bearing securities Deposits with cedants Cash and bank balance Total -32 - - - - -32 - 1 - - - 1 - - 456 - - 456 - - - 16 5 21 -32 1 456 16 5 446 The amounts in the table above constitute a specification of the amounts regarding financial instruments which are reported in the income statement as (i) return on capital, income, (ii) unrealized gains, (iii) return on capital, expenses, (iv) unrealized losses, with exception for (a) potential amortization and write-downs, (b) asset mana- gement costs and (c) exchange rate gains/losses. Currency exchange gains amount to 80 (126) for the Group, of which -97 (256) refer to exchange rate losses on financial assets. Exchange rate losses on liabilities and other assets amount to 177 (-130). 55 Annual Report 2012 Note 10 • Taxes Income tax recognized in income statement Current tax expense (-)[/tax revenue (+)] Current tax expenses Tax adjustment attributable to previous years Deferred tax expense (-)[/tax revenue (+)] Deferred taxes Total reported tax Reconciliation of effective tax Group Parent Company 2012 2011 2012 2011 -206 26 1,167 987 -147 41 -17 -123 -202 -2 -102 -306 -147 - 26 -121 Reconciliation of effective income tax rate for the Group and Parent Company to the Swedish income tax rate: Group Parent Company 2012 2011 2012 2011 Tax according to applicable tax rate for the Parent Company -26.3% Effects of foreign tax rates Effects from change in tax rates Tax effect from non-deductible expenses Tax effect from non-taxable income Current tax regarding previous years Recognition of tax loss carry-forwards related to previous years Reported effective tax -1.2% 23.0% -1.4% 7.1% -1.6% 54.0% 53.6% -26.3 % -0.2 % - -12.9 % 8.6 % 9.3 % -26.3% -26.3 % - 0.4% -1.1% 2.2% -0.2% - - -1.6 % 0.5 % 0 % -6.3 % -27.8 % 0.3% -24.7% 0 % -27.4 % On November 21, 2012 the Swedish Parliament decided to reduce the corporate tax rate from 26.3 percent to 22 percent applicable from January 1, 2013. The new tax rate has affected the calculation of deferred tax assets and liabilities on December 31, 2012. Reported deferred tax assets and deferred tax liabilities / Group Deferred tax assets Deferred tax liabilities Net 2012 2011 2012 2011 2012 2011 Personnel-related provisions Timing difference on recognition of underwriting result Other provisions Surplus value of securities Safety reserve and accelerated depreciation Tax loss carry-forwards Deferred tax balances, net 39 266 9 - 3 2,351 2,668 45 361 56 118 - 653 - - -57 -233 -2,132 - - -38 -52 -180 -2,550 - 39 266 -48 -233 -2,129 2,351 45 323 4 -62 -2,550 653 1,233 -2,422 -2,820 246 -1,587 Deferred tax assets are only recognized to the extent that realization of the related tax benefit through future taxable profits is probable. Significant tax loss carry-forwards are related to countries with long or indefinite periods of utilization, mainly the US and Luxembourg. The most part of the deferred tax assets and liabilities will not be recognized within 12 months. Reported deferred tax assets and deferred tax liabilities / Parent Company Personnel-related provisions Other provisions Surplus value of securities Tax loss carry-forwards Deferred tax balances, net Deferred tax assets Deferred tax liabilities Net 2012 2011 2012 2011 2012 2011 12 8 - - 20 14 12 - 15 41 - - -98 - -98 - - -6 - -6 12 8 -98 - -78 14 12 -6 15 35 Unreported deferred tax assets Unreported deferred tax assets for deductible temporary differences and tax loss carry-forwards amount to 1 (1) 56 Annual Report 2012 Changes in deferred tax Group Parent Company 2012 2011 2012 2011 Opening balance Acquisition of subsidiaries Recognized in income statement Recognized in other comprehensive income Tax loss carry-forwards Closing balance -1,587 656 1,167 -11 21 246 -2,519 982 -17 -29 -4 -1,587 35 - -102 -11 - -78 35 - 26 -26 - 35 Taxes recognized in other comprehensive income mainly refer to available-for-sale financial assets -11 (-26). Note 11 • Intangible assets Group Parent Company Intangible assets -IT Capitalized Acquired Other expenditure for intangible acquired development assets intangible Intangible assets -IT Capitalized expenditure for development Acquired intangible assets work Goodwill 1) assets Total work Goodwill 1) Total Accumulated acquisition value Opening balance January 1, 2011 Acquisitions for the year Closing balance December 31, 2011 Opening balance January 1, 2012 Acquisitions for the year Write-downs for the year Reclassification of goodwill Currency reevaluation effects 93 38 131 131 37 - - 0 Closing balance December 31, 2012 168 Accumulated amortization Opening balance January 1, 2011 Depreciation for the year Closing balance December 31, 2011 Opening balance January 1, 2012 Depreciation for the year Reclassification of goodwill -71 -15 -86 -86 -28 - Closing balance December 31, 2012 -114 Carrying amount Per January 1, 2011 Per December 31, 2011 Per January 1, 2012 Per December 31, 2012 22 45 45 54 Amortization for the year is included in the following rows of the income statement for 2011: Operating costs Other costs Total -15 - -15 Amortization for the year is included in the following rows of the income statement for 2012: Operating costs Other costs Total -28 - -28 615 5 620 620 - -5 -43 - 572 -324 - -324 -324 - 43 -281 291 296 296 291 - - - -5 - -5 - 2 2 2 67 - - - 69 - - - - - - - - 2 2 69 - - - - - - 708 46 754 754 104 -5 -43 0 810 -395 -15 -410 -410 -28 43 -395 313 343 343 415 -15 - -15 -33 - -33 93 38 131 131 37 - - - 460 - 460 460 - - - - 553 38 591 591 37 - - - 168 460 628 -71 -15 -86 -86 -28 - -114 22 45 45 54 -15 - -15 -28 - -28 -252 -4 -257 -257 -4 - -261 207 203 203 199 - -4 -4 - -4 -4 -323 -20 -343 -343 -32 - -375 229 248 248 253 -15 -4 -19 -28 -4 -32 57 1) The Group and Parent Company goodwill derive from the acquired operation in Belgium, which is an identifiable cash generating unit. The amounts refer both to acquisition- and asset deal goodwill and are annually tested for impairment. The projected future cash flows have been discounted to present value and are based on a conservative assessment without any growth of the unit’s earnings, based on historical and future earning patterns. The discount rate has been determined based on a market rate of return, i.e. WACC. The forecasted profit margin is currently equal to a combined ratio of approximately 95 %. IT-related intangible assets include acquired licenses and capitalized expenses for development of business-critical systems. Other intangible assets mainly include insurance licenses, for a number of American states, identified at the acquisition of subsidiaries. The licenses have been valued at fair vaule by an independent advisory firm. For the group, no depreciation is made on goodwill, the MSEK 324 is accumulated depreciations up to January 1, 2009 when IFRS was adopted. Write-down for the year of MSEK 5 is a write-down of goodwill for the holding in Passage2Health Ltd. For further information regarding depreciation, see Note 1, Accounting principles. Annual Report 2012 Note 12 • Land and Buildings Group and Parent Company Acquisition cost Opening balance January 1, 2011 Disposals Acquisitions Closing balance December 31, 2011 Opening balance January 1, 2012 Disposals Acquisitions Closing balance December 31, 2012 Depreciation Opening balance January 1, 2011 Disposals Depreciation for the year Closing balance December 31, 2011 Opening balance January 1, 2012 Disposals Depreciation for the year Closing balance December 31, 2012 Carrying amount Per January 1, 2011 Per December 31, 2011 Per January 1, 2012 Per December 31, 2012 18 -1 10 27 27 - 3 30 -16 1 -1 -16 -16 - -1 -17 2 11 11 13 The Parent Company holds three properties, located in Sweden and Belgium. Sirius International accounts for the properties, including building supplies, according to the acquisition value method and the capitalized expenses are depreciated over 50 and 10 years, respectively. No depreciation is performed on land. Note 13 • Shares and participations in group companies Name of subsidiary Registered offices, country Participating interest, % 2012 2011 Passage2Health Ltd. London, Great Britain Sirius Rückversicherungs Service GmbH Hamburg, Germany Sirius Belgium Réassurances S.A. Liège, Belgium Sirius International Holdings (NL) B.V. Amsterdam, The Netherlands White Mountains Re Bermuda Ltd. WM Phoenix (Luxembourg) S.à r.l. Hamilton, Bermuda Luxembourg White Mountains Re Sirius Capital Ltd. London, Great Britain White Sands Holdings (Luxembourg) S.à r.l. Luxembourg 75 100 100 100 - 100 100 100 75 100 100 100 100 100 100 - Accumulated acquisition cost Beginning of year Acquisitions Liquidations Capital contribution Repayment of paid-up capital Reclassification from associated companies End of year Accumulated write-downs Beginning of year Liquidations Write-downs for the year End of year Carrying amount December 31 58 Parent Company 2012 2011 8,098 - -185 959 -2 - 8,870 -781 185 -20 -616 8,254 1,862 1,185 - 3,028 -35 2,058 8,098 -781 - - -781 7,317 - Write down of shares in subsidiaries is related to the holding of Passage2Health Ltd. which has been written down with MSEK 20 to a book value of SEK 0. Annual Report 2012 Subsidiaries' shareholders´equity 2012 Name of subsidiary Shareholders’ equity Shares % Number of shares Book value Profit/loss Passage2Health Ltd. Sirius Rückversicherungs Service GmbH 6 23 75 100 Share capital total GBP 6,800 consisting of 6,800 shares with nom. GBP 1 per share Share capital total EUR 51,129 consisting of 1 share nom. value EUR 51,129 Sirius Belgium Réassurances S.A. 11 100 Share capital total EUR 1,245,681 consisting of 700,000 shares without nom. value 0 1 13 -10 4 0 Sirius International Holdings (NL) B.V. 1,306 100 Share capital total EUR 18,000 consisting of 180 shares with nom. EUR 100 per share 1,369 119 White Mountains Re Sirius Capital Ltd. 36 100 Share capital total GBP 1 consisting of 1 share with nom. GBP 1 per share 0 36 WM Phoenix (Luxembourg) S.à r.l. 6,281 100 Share capital total USD 42,266,200 consisting of 1,690,648 shares with nom. USD 25 per share 6,158 347 White Sands Holdings (Luxembourg) S.à r.l. 2 1 Share capital total SEK 145,055 consisting of 145,055 shares with nom. SEK 714 -1 Total 2011 7,665 8,254 495 Name of subsidiary Shareholders’ equity Shares % Number of shares Book value Profit/loss Passage2Health Ltd. 16 75 Sirius Rückversicherungs Service GmbH Sirius Belgium Réassurances S.A 15 11 Sirius International Holdings (NL) B.V. 1,005 White Mountains Re Bermuda Ltd. White Mountains Re Sirius Capital Ltd. 2 1 White Mountains Phoenix (Luxembourg) S.à r.l. 6,338 100 100 100 100 100 100 Share capital total GBP 6,800 consisting of 6,800 shares with nom. GBP 1 per share Share capital total EUR 51,129 consisting of 1 share nom. value EUR 51,129 Share capital total EUR 1,245,681 consisting of 700,000 shares without nom. value 20 1 13 -4 4 0 Share capital total EUR 18,000 consisting of 180 shares with nom. EUR 100 per share 1,124 -159 Share capital total 120,000 USD consists of 120,000 shares nom. USD 1 per share Share capital total GBP 1 consisting of 1 share with nom. GBP 1 per share Share capital total USD 42,266,200 consisting of 1,690,648 shares with nom. USD 25 per share 1 0 -1 -1 6,158 10 Total 7,388 7,317 -151 Note 14 • Investments in shares and participations Group 3,567 3,300 3,527 3,575 fair value Acquisition cost 2012 2011 2012 2011 fair value Acquisition cost 2012 2011 2012 2011 Parent Company 549 667 613 783 Further information on financial instruments can be found in Note 18. 59 Annual Report 2012 60 Annual Report 2012 Note 15 • Bonds and other interest-bearing securities fair value Acquisition cost Group 2012 2011 2012 2011 Swedish government Swedish mortgage institutions Other Swedish issuers Foreign governments Other foreign issuers Total 1,175 0 791 5,588 10,681 18,235 2,688 156 696 6,463 8,816 18,819 1,148 0 764 5,541 10,345 17,798 2,632 152 675 6,381 8,640 18,480 Of which listed 18,235 18,731 17,798 18,391 Difference compared to nominal value Total excess amount Total shortfall 1,154 24 1,111 95 812 3 753 75 fair value Acquisition cost Parent Company 2012 2011 2012 2011 Swedish government Swedish mortgage institutions Other Swedish issuers Foreign governments Other foreign issuers Total 1,175 0 791 2,829 5,246 10,041 2,687 156 696 2,128 3,805 9,472 1,148 0 764 2,803 5,078 9,793 2, 632 152 675 2,102 3,746 9,307 Of which listed 10,041 9,472 9,793 9,307 Difference compared to nominal value Total excess amount Total shortfall 640 6 503 33 398 1 323 17 Note 16 • Derivative financial instruments Group Parent Company 2012 2011 2012 2011 Derivatives with underlying security currency Total 326 326 30 30 326 326 30 30 Currency derivatives of nominal MUSD 600 against SEK mainly concern contracts with internal counterparties. The company has entered into three internal currency hedging agreements with Sirius International Financial Services LTD, in order to adjust the company’s currency exposure against USD in accordance with established limits. Trough foreign exchange options, the currency futures transactions are settled on the basis of an exchange rate cap and exchange rate floor (average rate 5.02 SEK/USD and 11.73 SEK/USD). The remaining average term is 17 months. The currency hedge agreements are valued monthly. Currency hedging with external counterparts occurs to a limited extent for the currencies USD, EUR and GBP. 61 Annual Report 2012 Note 17 • Other debtors Group Parent Company 2012 2011 2012 2011 Other debtors, group companies 1) Other debtors Total 127 185 312 2 187 189 125 77 202 244 49 293 1) Group companies are defined as companies within the White Mountains-Group. 2) The majority of the receivables have a duration less than three months. Note 18 • Categories of financial assets and liabilitities and their fair values financial loan assets valued finansial assets Group 2012 receivables and at fair value Available-for- Total accounts via the income sale financial carrying Acquisition receivables statement assets amount fair value value Shares and participations Derivative financial instruments 1) Bonds and other interest-bearing securities Accrued income Other debtors Total - - - 459 379 838 3,567 326 8,193 66 - - - 3,567 326 3,567 326 10,041 18,234 18,234 124 - 649 379 649 379 3,527 16 18,162 649 379 12,152 10,165 23,155 23,155 22,733 financial loan assets valued receivables and at fair value Available-for- Total Group 2011 accounts via the income sale financial carrying Acquisition receivables statement assets amount fair value value Shares and participations Derivative financial instruments 1) Bonds and other interest-bearing securities Accrued income Other debtors Total - - - 494 189 683 3,300 30 9,347 71 - - - 3,300 30 3,300 30 9,472 18,819 18,819 130 - 695 189 695 189 3,575 12 18,523 695 189 12,748 9,602 23,033 23,033 22,994 62 Annual Report 2012 financial loan assets valued receivables and at fair value Available-for- Total Parent Company 2012 accounts via the income sale financial carrying Acquisition receivables statement assets amount fair value value Shares and participations Derivative financial instruments 1) Bonds and other interest-bearing securities Accrued income Other debtors Total - - - 285 202 487 549 326 - - - - - 549 326 549 326 613 16 10,041 10,041 10,041 10,159 124 - 409 202 409 202 409 202 875 10,165 11,527 11,527 11,399 Parent Company 2011 accounts via the income sale financial financial loan assets valued receivables and at fair value Available-for- Total carrying Acquisition receivables statement assets amount fair value value Shares and participations Derivative financial instruments 1) Bonds and other interest-bearing securities Accrued income Other debtors Total - - - 362 293 655 667 30 - - - - - 667 30 667 30 9,472 9,472 9,472 130 - 492 293 492 293 783 12 9,333 492 293 697 9,602 10,954 10,954 10,913 1) Derivatives are classified as Financial instruments held for trading. financial liabilities Group 2012 Other liabilities Accrued expenses Total Group 2011 Other liabilities Accrued expenses Total Other financial Carrying liabilities amount fair value 1,400 321 1,721 1,400 321 1,721 1,400 321 1,721 Other financial Carrying liabilities amount fair value 814 350 814 350 814 350 1,164 1,164 1,164 Parent Company 2012 liabilities amount fair value Other financial Carrying Other liabilities Accrued expenses Total 1,325 185 1,510 1,325 185 1,510 1,325 185 1,510 Parent Company 2011 liabilities amount fair value Other financial Carrying Other liabilities Accrued expenses Total 690 199 889 690 199 889 690 199 889 63 Annual Report 2012 In the tables below, data is provided regarding the determination of fair value for financial instruments valued at fair value in the balance sheet. The determination of fair values is categorized according to the following three levels: level 1: Based on prices listed on a active market for identical assets or liabilities level 2: Based on directly (according to price listings) or indirectly (derived from price listings) observable market data for assets or liabilities that are not included in Level 1 level 3: Based on input data that is not observable on the market Group / 2012 level 1 level 2 level 3 Total Shares and participations Derivatives Bonds and other interest-bearing securities Total 2,324 - 4,220 6,544 363 - 14,015 14,378 879 326 - 1,205 3,566 326 18,235 22,127 Group / 2011 level 1 level 2 level 3 Total Shares and participations Derivatives Bonds and other interest-bearing securities Total 1,693 - 4,044 5,737 614 - 14,687 15,301 993 30 88 1,111 3,300 30 18,819 22,149 Parent Company / 2012 level 1 level 2 level 3 Total Shares and participations Derivatives Bonds and other interest-bearing securities Total - - 3,190 3,190 360 - 6,851 7,211 189 326 - 515 549 326 10,041 10,916 Parent Company / 2011 level 1 level 2 level 3 Total Shares and participations Derivatives Bonds and other interest-bearing securities Total - - 3,228 3,228 348 - 6,244 6,592 319 30 0 349 667 30 9,472 10,169 The fair value of financial instruments traded on an active market is based on the listed price on balance sheet date. A market is seen to be active in cases where listed prices from a stock exchange, broker, industry group, pricing service or supervisory authority are easily accessible, and where these prices repre- sent genuine, regularly-occurring market transactions conducted at arm’s length. The listed market price applied in determining the fair value of instruments that are to be found in Level 1 is the current buying-rate Fair values of financial instruments which are not traded on an active market are determined with the aid of valuation techniques. This procedure applies, as far as possible, such market information as is available, while information specific to a company is applied as little as possible. If all significant input data required in determining the fair value of an instrument is observable, the instrument is to be found in Level 2 or 3. Specific valuation techniques applied in valuing financial instruments include: • Listed market prices or broker listings for similar instruments. • Fair value of interest swaps is determined as the current value of estimated future cash flows, based on observable yield curves. • Fair value for currency forward exchange agreements is deter- mined through the use of exchange rates for forward exchanges on balance sheet date, at which point the resulting value is discounted to current value. • Other techniques, such as the calculation of discounted cash-flows, are applied in determining fair value for any financial instruments not covered by the above techniques. All fair values determined with the aid of these valuation techniques are to be found in Level 2. In the event that one or more significant input data figures are not based on observable market information, the associated instrument is to be classified in Level 3. 64 Annual Report 2012 The tables below shows a reconciliation of opening and closing balance data for financial instruments valued at fair value in the balance sheet, on the basis on non-observable input data (Level 3). Group / 2012 participations Derivatives Bonds Total Shares and Opening balance January 1, 2012 Total reported profit/loss: - reported in profit/loss for the year 1) Acquired balances Acquisition cost, purchase Proceeds of sale, sales Transfer from Level 3 Transfer into Level 3 FX difference Closing balance December 31, 2012 Profit/loss reported in profit/loss for the year for assets included in the closing 993 -46 53 -82 - - -39 879 30 294 - 2 - - - 326 balance December 31, 2012 1) -46 294 88 6 - -89 - - -5 0 6 1,111 254 53 -169 - - -44 1,205 254 Parent Company / 2012 participations Derivatives Bonds Total Shares and Opening balance January 1, 2012 Total reported profit/loss: - reported in profit/loss for the year 1) Acquisition cost, purchase Proceeds of sale, sales Transfer from Level 3 Transfer into Level 3 319 -118 - -12 - - 30 294 - 2 - - Closing balance December 31, 2012 189 326 Profit/loss reported in profit/loss for the year for assets included in the closing balance December 31, 2012 1) -118 294 - - - - - - - - 349 176 - -10 - - 515 176 65 Annual Report 2012 Group / 2011 participations Derivatives Bonds Total Shares and Opening balance January 1, 2011 Total reported profit/loss: - reported in profit/loss for the year 1) Acquired balances Acquisition cost, purchase Proceeds of sale, sales Transfer from Level 3 Transfer into Level 3 FX difference Closing balance December 31, 2011 Profit/loss reported in profit/loss for the year for assets included in the closing balance 529 -24 985 - -497 - 3 -3 993 273 -158 6 -87 - - -4 30 - - 246 - - -245 88 -1 88 802 -182 1,231 6 -584 -245 91 -8 1,111 December 31, 2011 1) -24 -158 - -182 Parent Company / 2011 participations Derivatives Bonds Total Shares and Opening balance January 1, 2011 Total reported profit/loss: - reported in profit/loss for the year 1) Acquisition cost, purchase Proceeds of sale, sales Transfer from Level 3 Transfer into Level 3 Closing balance December 31, 2011 Profit/loss reported in profit/loss for the year for assets included in the closing 529 -33 - -180 - 3 319 24 - 6 - - - 30 balance December 31, 2011 1) -33 - 1) Reported in net income of financial transactions in profit/loss for the year. Financial instruments classified in Level 3 are to some extent funds valued at NAV-rate. - - - - - - - - 553 -33 6 -180 - 3 349 -33 66 Annual Report 2012 Note 19 • Tangible assets Acquisition cost Opening balance January 1, 2011 Acquisition Acquired balances Disposals Currency reevaluation effect Closing balance December 31, 2011 Opening balance January 1, 2012 Acquisition Disposals Currency reevaluation effect Closing balance December 31, 2012 Depreciations Opening balance January 1, 2011 Acquired balances Depreciation for the year Disposals Currency reevaluation effect Closing balance December 31, 2011 Opening balance January 1, 2012 Depreciation for the year Disposals Currency reevaluation effect Closing balance December 31, 2012 Carrying amount Per January 1, 2011 Per December 31, 2011 Per January 1, 2012 Per December 31, 2012 Group Parent Company Equipment Equipment 86 23 59 -16 0 152 152 34 -9 -3 174 -54 -52 -13 14 0 -105 -105 -25 8 2 -120 32 47 47 54 85 23 - -8 - 100 100 32 -8 - 124 -54 - -13 7 - -60 -60 -21 7 - -74 31 40 40 50 Note 20 • Deferred acquisition costs Opening balance Acquired portfolio Capitalization for the year Depreciation/amortization for the year Exchange rate gains/losses Closing balance Note 21 • Untaxed reserves Parent Company Group Parent Company 2012 2011 2012 2011 471 0 351 -357 -26 439 386 118 323 -359 3 471 341 - 252 -310 -17 266 386 - 296 -344 3 341 Accumulated accelerated depreciation, goodwill and equipment Opening balance January 1 Change for the year Closing balance December 31 Appropriation to safety reserve Opening balance January 1 Change for the year Closing balance December 31 Total 2012 2011 35 -10 25 9,647 - 9,647 9,672 40 -5 35 9,647 - 9,647 9,682 67 Annual Report 2012 Note 22 • Provisions for unearned premiums and unexpired risks Provisions for unearned premiums / Group 2012 Gross Reinsurers’ 2011 Reinsurers’ share Net Gross share Net Opening balance Acquired portfolio Insurance policies signed during period Earned premiums for the period Currency effect Closing balance 2,182 3 1,718 -1,640 -143 2,120 Provisions for unexpired risks / Group -439 -3 -437 379 37 -463 2012 Gross Reinsurers’ 1,743 0 1,281 - 1,261 -106 1,657 1,936 395 1,479 -1,663 35 2,182 -403 11 -289 254 -12 -439 1,533 406 1,190 -1,409 23 1,743 2011 Reinsurers’ Opening balance Previous year’s provisions included in profit/loss Currency effect Closing balance 118 -31 -6 81 -87 22 4 -61 31 -9 -2 20 126 -10 2 118 -93 8 -2 -87 33 -2 - 31 share Net Gross share Net Provisions for unearned premiums / Parent Company 2012 Gross Reinsurers’ 2011 Reinsurers’ share Net Gross share Net Opening balance Insurance policies signed during period Earned premiums for the period Currency effect Closing balance 1,730 1,456 -1,577 -111 1,498 Provisions for unexpired risks / Parent Company -442 -441 389 38 -456 2012 Gross Reinsurers’ 1,288 1,015 -1,188 -73 1,042 1,936 1,487 -1,726 33 1,730 -403 -369 341 -11 -442 1,533 1,118 -1,385 22 1,288 2011 Reinsurers’ Opening balance Previous year’s provisions included in profit/loss Currency effect Closing balance 118 -31 -5 82 -87 22 4 -61 31 -9 -1 21 126 -10 2 118 -93 8 -2 -87 33 -2 - 31 share Net Gross share Net 68 Annual Report 2012 Note 23 • Claims reserve Group Gross share Net Gross share Net 2012 Reinsurers´ 2011 Reinsurers´ Opening balance, reported claims Opening balance, incurred but not reported claims (IBNR) Opening balance Acquired portfolio Cost for claims incurred - current year Cost for claims incurred - prior years Claims handling expense Paid claims Currency effect Closing balance Closing balance, reported claims Closing balance, incurred but not reported claims (IBNR) 7,882 12,418 20,300 190 3,003 -415 176 5,085 -1,452 16,365 7,264 9,101 -1,454 -6,131 -7,585 -91 -359 1,463 0 -763 867 -4,942 -1,359 -3,583 2012 Reinsurers´ 6,428 6,287 12,715 99 2,644 1,048 176 4,322 -585 11,423 5,905 5,518 4,831 6,251 11,082 8,475 2,625 1,895 170 4,020 413 20,300 7,882 12,418 -1,124 -4,432 -5,556 -1,049 -477 -918 - -736 -321 -7,585 -1,454 -6,131 2011 Reinsurers´ 3,707 1,819 5,526 7,426 2,148 977 170 3,284 92 12,715 6,428 6,287 Parent Company Gross share Net Gross share Net Opening balance, reported claims Opening balance, incurred but not reported claims (IBNR) Opening balance Cost for claims incurred - current year Cost for claims incurred - prior years Claims handling expense Paid claims Currency effect Closing balance Closing balance, reported claims Closing balance, incurred but not reported claims (IBNR) 4,272 7,673 11,945 1,990 -899 128 3,130 -1,025 8,753 3,985 4,768 -908 -5,637 -6,545 -358 1,393 0 -684 841 -3,985 -861 -3,124 3,364 2,036 5,400 1,632 494 128 2,446 -184 4,768 3,124 1,644 4,831 6,251 11,082 2,238 1,785 159 3,444 443 11,945 4,272 7,673 -1,124 -4,432 -5,556 -476 -839 - -650 -324 -6,545 -908 -5,637 3,707 1,819 5,526 1,762 946 159 2,794 119 5,400 3,364 2,036 Note 24 • Equalisation provision Opening balance Provision for the year Closing balance Parent Company 2012 2011 61 25 86 12 49 61 69 Annual Report 2012 Note 25 • Claims handling provision Opening balance Acquired portfolio Release of provision made in prior years Provision for the year Currency effect Closing balance Note 26 • Employee benefits Group Parent Company 2012 2011 2012 2011 254 16 -66 51 -8 247 129 115 -34 44 0 254 142 0 -39 31 -2 132 129 - -28 41 0 142 Group Parent Company Pension provisions 2012 2011 2012 2011 Pension provision – defined benefit plans Sweden Pension provision – other defined benefit plans Total -3 8 5 -4 6 2 9 - 9 7 - 7 Specification of provisions for employee benefits In a defined benefit plan, the employer guarantees that the employee will receive a defined level of benefit upon retirement, based on one or more factors, such as age, length of service and salary. The group calculates its provisions and expenses based on the conditions of the guaranteed pension obligations, as well as on its own assumptions regarding future development. The provision reported in the balance sheet for defined be- nefit plans is the present value of the defined benefit obligation at the end of the reporting period, less the fair value of plan assets, adjusted for unrecognized actuarial gains and losses, and unre- cognized service costs related to prior periods. Actuarial gains and losses arise if actual outcome deviates from calculated, defined assumptions, or if there is a change in assumptions. The defined pension obligation is calculated annually by independent actuaries, applying the projected unit credit method. The net present value of the obligation is defined by discounting of esti- mated future cash flows, using the interest rate of high quality mortgage bonds that are emitted in the same currency in which the obligations are to be paid, with durations comparable to the duration of the current pension obligation. The group applies the corridor method, implying that actuarial net losses are recorded when the opening balance of actuarial losses exceeds 10% of either the projected benefit obligation or of investment assets. As the actuarial net loss amount does not exceed the corridor amount, there is no surplus to amortize through the income statement during the employees’ remaining period of service. The group has defined benefit plans in Sweden (collective agreement) and Germany which are based on the employees’ pension entitlements and length of employment. In Germany all employees are included in the plan. In Sweden only employees born 1971 or earlier are covered by defined benefit plans and, thus, form part of the FTP2. Furthermore, there are two variations of retirement earlier than at the age of 65. Employees born 1955 and earlier have the possibility to retire between the ages of 62 and 65 according to local agreement. Staff employed before 1 January, 2004 have the right to retire from the age of 64. These plans are also defined benefit plans and are reflected in financial statements of both the Group and the Parent Company. Employees in Sweden born 1972 or later, are covered by a defined contribution plan, FTP1. Employees outside Sweden and Germany are mainly covered by defined contribution plans in which the employer has a responsi- bility for the employees’ pension. Amounts in the balance sheet for defined benefit plans / Group 2012 2011 Defined benefit obligations Fair value of plan assets Sub-total Net cumulative unrecognized actuarial losses Provisions for defined benefit plans 79 -69 10 -5 5 67 -61 6 -4 2 70 Annual Report 2012 Pension cost recognized in the income statement / Group 2012 2011 Current service cost Interest cost Expected return on plan assets Amortization of actuarial net loss Pension cost for defined benefit plans Paid premiums, defined contribution plans Total pension cost 1) 7 2 -2 - 7 51 58 1 2 -2 - 1 70 71 1) The pension cost for the year does not include special salary tax, which is disclosed in note 30 in the table ”Remuneration to employees”. Changes in defined benefit obligations / Group 2012 2011 Opening balance pension obligation Current service cost Interest cost, pension obligation Actuarial gains and losses, net Release of obligation by payment Transition Exchange differences on foreign plans Closing balance pension obligation 67 7 2 6 -3 - 0 79 59 1 3 3 -2 3 0 67 Changes in plan assets / Group 2012 2011 Opening balance plan assets at fair value Expected return on plan assets Actuarial gains and losses, net Contributions Release of obligation by payment Exchange differences on foreign plans Closing balance plan assets at fair value 61 1 5 4 -2 0 69 53 2 -1 8 -2 1 61 The investment assets’ fair value, as per December 31, 2012, is lower than the value of the Group’s defined benefit pension commitments. This is due to the Group having a non-funded com- mitment, for the portion of the Group’s benefit-based pension plans which facilitate retirement between 62 and 65 years of age. Actual retirements are settled when the decision regarding retirement is made. In conjunction with such a decision, the total pension premium is paid to the company’s pension administrator for the period up to 65 years of age. During the year, three indivi- duals have exercised the opportunity to take early retirement. Unrecognized actuarial net loss / Group 2012 2011 Opening balance actuarial net losses Defined benefit obligations The period’s experience effect on actuarial net gains (-)/net losses (+) on pension obligations Amortization of actuarial net gains/losses Plan assets The period’s experience effect on actuarial net gains (-)/net losses (+) on plan assets Amortization of actuarial net gains/losses Closing balance actuarial net losses 4 6 - -5 - 5 1 3 - 0 - 4 71 Annual Report 2012 Corridor method / Group 2013 2012 2011 Opening balance actuarial net losses Corridor amount Expected remaining service time (years) Gains/losses subject to amortization 5 7 14.0 - 4 6 14.7 - 1 5 14.9 - Actuarial assumptions, percentages / Group 2012 2011 Discount rate, January 1 Discount rate, December 31 Expected return on plan assets Expected salary increases, January 1 Expected salary increases, December 31 Indexation of benefits Indexation of income base amount, January 1 Indexation of income base amount, December 31 Staff turnover 3.7 % 3.3 % 3.0 % 2.9 % 3.0 % 1.5 % 2.4 % 2.5 % 3.0 % 5.0 % 3.7 % 3.0 % 2.9 % 2.9 % 1.4 % 2.4 % 2.4 % 3.0 % When calculating the expense for defined benefit obligations, as- sumptions are made regarding the future development of factors which may influence the size of expected payments. The discount rate is the interest rate applied to discount the value of expected payments. This rate is fixed applying a market rate with a remain- ing duration equivalent to the pension obligations. The group’s applied discount rate, for the Swedish defined obligations, is based on Swedish mortgage bonds. Assets to secure these pension obligations are invested in a variety of financial instruments by Sirius pension investment manager. The expected return on plan assets mirrors the expec- ted average yearly return on those financial instruments for the remaining duration. Expected future annual salary increases is mirrored by com- position of effects from collective agreements and salary drift. Final benefits according to FTP are governed by Swedish base income amount (inkomstbasbeloppet). Consequently, there is a requirement to assess future base income amounts. Annual pension increases also need to be considered, as these have historically always taken place. Assumptions about the beneficiaries’ life expectancy comply with FFFS 2007:31 (DUS06) and are updated annually. Three-year summary / Group 2012 2011 2010 Defined benefit obligations Fair value of plan assets Total Actuarial gains (-) losses (+) for the year Pension obligations Plan assets Note 27 • Other creditors -79 69 -10 6 -5 -67 61 -6 3 0 -59 53 -6 1 - Group Parent Company 2012 2011 2012 2011 Amounts due to group companies 1) Other debtors Total 2) 1,231 169 1,400 595 219 814 1,257 68 1,325 609 81 690 1) Group companies are defined as companies within the White Mountains-group. 2) The majority of the liabilities have a duration less than one year. 72 Annual Report 2012 Note 28 • Contingent liabilities and commitments Group Parent Company Pledged assets for own liabilities and provisions 2012 2011 2012 2011 Bonds and other interest-bearing securities Cash and bank 8,675 195 Assets for which policy holders have preferential rights 8,870 9,528 223 9,751 7,559 142 7,701 8,453 170 8,623 On the basis of the stipulations in Chapter 7, Section 11 of the Insurance Business Act, registered assets amount to MSEK 6,460. 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 insurance commitments are covered by technical provisions in accordance with the Insurance Business Act. Contingent liabilities and other commitments 2012 2011 2012 2011 Group Parent Company Nominal amount Guarantees on behalf of subsidiary 1,970 1,458 1,970 1,458 Future commitments for investments in private equity companies Total 161 2,131 174 1,632 53 2,023 56 1,514 Note 29 • Associated parties Summary of transactions with associated companies within the White Mountains Group Group / 2012 Premium income, net Indemni- fication Purchased sold services Receivables liabilities White Mountains Life Re Ltd. – ceded reinsurance -213 -1,582 Sirius International Holding - administrative services Sirius International Financial Services LLC – financial services Sirius Insurance Holding Sweden AB – group contributions and short-term receivables Fund American Holdings AB – group contributions and dividends White Mountains Advisors LLC – financial services White Mountains Capital Inc – administrative services White Mountains Insurance Group – administrative services Scandinavian Reinsurance Company Ltd. – administrative services Sirius International Insurance Group Ltd.–administrative services Sirius International Group Ltd. – administrative services White Mountains International S.à r.l. – administrative services OneBeacon Insurance Group Ltd. – liability insurance and dividends Symetra Financial Corporation – dividends - - - - - - - - - - - - - - - - - - - - - - - - - - Total -213 -1,582 - -3 - - - -41 3 2 2 14 - - 40 20 37 2,845 1) - 1,292 49 - - - 2 - - - - - - 14 - 16 533 680 4 - - - - 25 1 - - 4,188 1,273 73 Annual Report 2012 Purchased sold services Receivables liabilities - - -5 - -3 - - - -21 2 - - -24 - -1 -52 210 - - 2,845 1) - 326 49 - - - 69 7 - - - - 89 -4 14 1 16 533 680 4 - - - 26 1 - 3,506 1,360 Purchased sold services Receivables liabilities - - 2 - - 5 5 -1 - - -25 - -5 - - 71 12 64 - - - - 5,253 1) - - 1,021 - - - - 2 - - - - - - - - 16 - 1 13 374 190 11 1 - 3 1 - - 6,276 610 Parent Company / 2012 Sirius America Insurance Company – assumed reinsurance Sirius America Insurance Company – ceded reinsurance Sirius America Insurance Company – administrative services White Mountains Life Re Ltd. – ceded reinsurance Sirius International Holdings Ltd. - administrative services Sirius International Financial Services LLC – financial services Sirius Insurance Holding Sweden AB – group contributions and short-term receivables Fund American Holdings AB – group contributions and dividends White Mountains Advisors LLC – financial services Scandinavian Reinsurance Company Ltd. – administrative services Syndicate 1945 – intra group receivables White Mountains Re Sirius Capital Ltd. – intra-group receivables Sirius Rückversicherungs Service GmbH – intra-group payables Sirius Belgium Réassurances S.A – intra-group payables OneBeacon Insurance Group Ltd. - liability insurance Premium income, net 185 -4 0 -213 Indemni- fication -318 21 0 -1,582 - - - - - - - - - - - - - - - - - - - - - - Total Group / 2011 Sirius America Insurance – assumed reinsurance 2) Sirius America Insurance – ceded reinsurance 2) Sirius America Insurance – administrative services 2) Esurance – assumed reinsurance White Mountains Life Re Ltd. – ceded reinsurance Sirius Global Services – administrative services 2) Sirius International Holdings Ltd. - administrative services Sirius International Financial Services LLC – financial services Sirius Insurance Holding Sweden AB – group contributions Fund American Holdings AB – group contributions White Mountains Advisors LLC – financial services White Mountains Capital Inc – administrative services Sirius International Insurance Group Ltd –administrative services Sirius International Group Ltd. – administrative services White Mountains International S.à r.l. – administrative services OneBeacon Insurance Group Ltd. – dividends Symetra Financial Corporation – dividends -32 -1,879 Premium income, net 122 -22 - - 42 -209 Indemni- fication 21 19 - 44 857 - - - - - - - - - - - - - - - - - - - - - - - - Total -151 941 74 Annual Report 2012 Parent Company / 2011 Sirius America Insurance – assumed reinsurance Sirius America Insurance – ceded reinsurance Sirius America Insurance – administrative services Esurance – assumed reinsurance White Mountains Life Re Ltd. – ceded reinsurance Sirius Global Services – administrative services Sirius International Holdings Ltd. - administrative services Sirius International Financial Services LLC – financial services Sirius Insurance Holding Sweden AB – group contributions Fund American Holdings AB – group contributions White Mountains Advisors LLC – financial services Sirius International Holding NL (BV) – anticipated dividend Syndicate 1945 – intra-group receivables White Mountains Re Sirius Capital Ltd. – intra-group receivables Sirius Rückversicherungs Service GmbH – intra-group payables Sirius Belgium Réassurances S.A – intra-group payables Premium income, net 147 -25 - -42 -209 - - - - - - - - - - - Indemni- fication Purchased sold services Receivables liabilities 26 22 - 44 857 - - - - - - - - - - - - - 3 - - 7 5 -1 - - 19 - - - - - 499 1 - - 5,253 1) - - - - - - 205 32 7 - - - - - - 16 2 1 13 374 190 5 - - - 22 1 624 Total -129 949 -5 5,997 1) Refers to reinsurer’s share of outstanding claims. 2) Refers to reinsurance and services purchased during 9 months 2011. As of October 1, 2011, all companies within the White Mountains Phoenix (Luxembourg) S.à r.l. Group are consolidated and the reinsurance and services are eliminated. Note 30 • Average number of employees, salaries and other remuneration Average number of employees / Group Men Women Total Men Women Total 2012 2011 Parent Company Germany UK USA Canada Total 136 4 2 59 4 205 143 9 2 55 2 211 2012 279 13 4 114 6 416 132 4 1 20 1 158 272 12 2 38 2 326 140 8 1 18 1 168 2011 Average number of employees / Parent Company Men Women Total Men Women Total Sweden UK Belgium Switzerland Singapore Denmark Bermuda Total 71 23 23 4 4 5 6 71 20 24 5 10 2 11 142 43 47 9 14 7 17 68 22 22 4 5 4 7 70 19 23 5 10 2 11 138 41 45 9 15 6 18 136 143 279 132 140 272 2012 2011 Senior management / Group and Parent Company Men Women Total Men Women Total Board and CEO Other senior members of management Total 4 2 6 - - - 4 2 6 3 3 6 1 - 1 4 3 7 75 Annual Report 2012 Remuneration to employees Group Parent Company 2012 2011 2012 2011 Salaries including bonuses Of which expenses bonus and other similar remunerations Pension expenses - Defined contribution plans - Defined benefit plans (Note 26) Social security contributions, special employer’s contributions on pensions Total 520 147 58 51 7 78 656 299 52 71 70 1 78 448 302 87 49 47 2 72 423 248 44 68 69 -1 76 392 Of which paid remuneration for the year to: Group Parent Company CEO 2012 2011 2012 2011 Salaries including bonuses Of which paid out bonuses Pension expenses - Defined contribution plans - Defined benefit plans Total Board and other senior members of management Salaries including bonuses Of which expenses bonus and other similar remunerations Pension expenses - Defined contribution plans - Defined benefit plans Total 18 14 3 3 - 21 14 9 2 2 - 16 12 8 3 3 - 15 11 6 2 2 - 13 18 14 3 3 - 21 14 9 2 2 - 16 12 8 3 3 - 15 11 6 2 2 - 13 Salaries and remuneration The Board receives remunerations in accordance with the resolutions of the Annual General Meeting. Board fees are not paid to individuals employed in the company. No board fees were paid in 2012 and 2011. Remuneration policy Sirius International’s remuneration policy is available on the Company’s homepage, which follows FFFS 2011:2. Note 31 • Fees and reimbursements to auditors PwC Audit assignment Tax counseling Other services Total Group Parent Company 2012 2011 2012 2011 11 1 1 13 7 1 - 8 4 1 1 6 4 1 - 5 Audit assignment refers to the examination of the annual report and accounting records, as well as the administration of the Board of Directors and Managing Director, 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. Other services than those included in the audit agreement are classified as audit services in addition to audit agreement, tax counseling and other services. 76 Annual Report 2012 Note 32 • Operational leasing Non-cancellable leases Group Parent Company 2012 2011 2012 2011 Due for payment within one year Due for payment later than one year but within five years Due for payment after five years Total 45 129 51 225 56 146 25 227 31 74 3 108 31 101 5 137 Note 33 • Class analysis Profit/loss per insurance class Group / 2012 Personal Marine, fire and other Premium income, gross Premium earned, gross Incurred claims, gross Operating expenses, gross Result, ceded reinsurance Technical result Parent Company / 2012 Premium income, gross Premium earned, gross Incurred claims, gross Operating expenses, gross Result, ceded reinsurance Equalization provision Technical result Group / 2012 Premium income, gross Premium earned, gross Incurred claims, gross Operating expenses, gross Result, ceded reinsurance Technical result Parent Company / 2011 accident and aviation and property Total direct Assumed health transport damage Miscellaneous insurance reinsurance 970 885 -499 -377 -44 -35 88 81 -44 -37 4 4 110 94 -64 -42 - -12 89 87 -47 -43 - -3 1,257 1,147 -654 -499 -40 -46 6,824 6,887 -1,934 -2,027 -2,369 557 Personal Marine, fire and other accident and aviation and property Total direct Assumed health transport damage Miscellaneous insurance reinsurance 723 736 -412 -303 -42 - -21 88 81 -44 -37 4 - 4 110 95 -64 -42 - - -11 39 51 -5 -27 - - 19 960 963 -525 -409 -38 - -9 4,819 4,968 -566 -1,198 -2,346 -25 833 Total 8,081 8,034 -2,588 -2,526 -2,409 511 Total 5,779 5,931 -1,091 -1,607 -2,384 -25 824 Personal Marine, fire and other accident and aviation and property Credit Total direct Assumed health transport damage insurance Miscellaneous insurance reinsurance Total 651 599 -337 -272 -5 -15 75 58 -38 -29 4 -5 83 87 -98 -40 - -51 - - -2 - - -2 91 86 -40 -33 - 13 900 830 -515 -374 -1 -60 5,055 5,319 -4,005 -1,385 129 58 Personal Marine, fire and other accident and aviation and property Credit Total direct Assumed health transport damage insurance Miscellaneous insurance reinsurance Premium income, gross Premium earned, gross Incurred claims, gross Operating expenses, gross Result, ceded reinsurance Equalization provision Technical result 635 596 -335 -264 -4 - -7 75 58 -38 -30 4 - -6 83 87 -97 -40 - - -50 - - -3 - - - -3 82 83 -39 -29 - - 15 876 824 -512 -363 - - -51 4,471 4,772 -3,511 -1,173 53 -49 92 5,955 6,149 -4,520 -1,759 128 -2 Total 5,347 5,596 -4,023 -1,536 53 -49 41 77 Annual Report 2012 Stockholm, March 5, 2013 Allan Waters Chairman of the Board of Directors Brian Kensil Lars Ek Göran Thorstensson President & CEO Our Auditors’ Report was submitted on March 7, 2013 Anna Hesselman Authorized Public Accountant Morgan Sandström Authorized Public Accountant 78 Annual Report 2012 Audit Report To the annual meeting of the shareholders of Sirius International Insurance Corpo- ration (publ) corporate identity number 516401-8136 and disclosures in the annual accounts and consolidated accounts. The procedures se- lected depend on the auditor’s judgment, in- cluding the assessment of the risks of material misstatement of the annual accounts and con- solidated accounts, whether due to fraud or error. In making those risk assessments, the Report on the annual accounts auditor considers internal control relevant to and consolidated accounts the company’s preparation and fair presenta- We have audited the annual accounts and con- tion of the annual accounts and consolidated solidated accounts of Sirius International Insur- accounts in order to design audit procedures ance Corporation (publ) for the year 2012. that are appropriate in the circumstances, but Responsibilities of the Board of Directors and not for the purpose of expressing an opinion the Managing Director for the annual accounts on the effectiveness of the company’s internal and consolidated accounts control. An audit also includes evaluating the The Board of Directors and the Managing appropriateness of accounting policies used Director are responsible for the preparation and the reasonableness of accounting esti- and fair presentation of these annual accounts mates made by the Board of Directors and the and consolidated accounts in accordance with Managing Director, as well as evaluating the International Financial Reporting Standards, as overall presentation of the annual accounts adopted by the EU, and the Annual Accounts and consolidated accounts. Act for Insurance Companies, and for such We believe that the audit evidence we internal control as the Board of Directors and have obtained is sufficient and appropriate to the Managing Director determine is necessary provide a basis for our audit opinion. to enable the preparation of annual accounts and consolidated accounts that are free from Opinions material misstatement, whether due to fraud or In our opinion, the annual accounts have error. been prepared in accordance with the An- nual Accounts Act for Insurance Companies Auditor’s r esponsibility and present fairly, in all material respects, Our responsibility is to express an opinion the financial position of the parent company on these annual accounts and consolidated as of December 31, 2012 and of its financial accounts based on our audit. We conducted performance and its cash flows for the year our audit in accordance with International then ended in accordance with the Annual Standards on Auditing and generally accepted Accounts Act for Insurance Companies. The auditing standards in Sweden. Those standards consolidated accounts have been prepared in require that we comply with ethical require- accordance with the Annual Accounts Act for ments and plan and perform the audit to obtain Insurance Companies and present fairly, in all reasonable assurance about whether the annual material respects, the financial position of the accounts and consolidated accounts are free group as of December 31, 2012 and of their from material misstatement. financial performance and cash flows for the An audit involves performing procedures year ended in accordance with International to obtain audit evidence about the amounts Financial Reporting Standards, as adopted 79 Annual Report 2012 by the EU, and the Annual Accounts Act for As a basis for our opinion on the Board of Di- Insurance Companies. The statutory admin- rectors’ proposed appropriations of the compa- istration report is consistent with the other ny’s profit or loss, we examined the Board of parts of the annual accounts and consolidated Directors’ reasoned statement and a selection accounts. of supporting evidence in order to be able to We therefore recommend that the annual assess whether the proposal is in accordance meeting of shareholders adopt the income with the Companies Act and the Insurance statement and balance sheet for the parent Business Act. company and the group. As a basis for our opinion concerning dis- charge from liability, in addition to our audit Report on other legal and r egulatory of the annual accounts and consolidated ac- r equir ements counts, we examined significant decisions, ac- In addition to our audit of the annual ac- tions taken and circumstances of the company counts and consolidated accounts, we have in order to determine whether any member of also audited the proposed appropriations of the Board of Directors or the Managing Direc- the company’s profit or loss and the adminis- tor is liable to the company. We also examined tration of the Board of Directors and the Man- whether any member of the Board of Directors aging Director of Sirius International Insur- or the Managing Director has, in any other ance Corporation (publ) for the year 2012. way, acted in contravention of the Companies Act, the Insurance Business Act, the Annual Responsibilities of the Board of Accounts Act for Insurance Companies or the Dir ectors and the Managing Dir ector Articles of Association. The Board of Directors is responsible for the We believe that the audit evidence we proposal for appropriations of the company’s have obtained is sufficient and appropriate to profit or loss, and the Board of Directors and provide a basis for our opinion. the Managing Director are responsible for administration under the Companies Act and Opinions the Insurance Business Act. We recommend to the annual meeting of shareholders that the profit be appropriated in Auditor’s r esponsibility accordance with the proposal in the statutory Our responsibility is to express an opinion administration report and that the members with reasonable assurance on the proposed of the Board of Directors and the Managing appropriations of the company’s profit or Director be discharged from liability for the loss and on the administration based on our financial year. audit. We conducted the audit in accordance with generally accepted auditing standards in Sweden. Stockholm, 7 March, 2013 Anna Hesselman Authorized Public Accountant Morgan Sandström Authorized Public Accountant 80 Annual Report 2012 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 Annual Report 2012. The audited Swedish version is the binding version. 81 Annual Report 2012 82 Annual Report 2012 hISTORY Sirius was founded in 1945 as a captive by the Swedish industrial group Axel Johnson. Initially the company insured only Johnson fleet vessels and reinsured at Lloyd’s. Over time, Sirius moved into third party business and during the 1970s a global assumed reinsurance account was developed. By 1978 Sirius had become one of the largest reinsurance companies in Sweden with premiums of about $40 million. In 1985, the Johnson group ran into financial difficulties and reluctantly sold Sirius to the Swedish indus- trial group ASEA, later to become ABB. Premium volume was now around $180 million, nearly all written on a proportional basis. In 1990 Göran Thorstensson became CEO of Sirius. The company added non-proportional business and improved profitability. Sirius gradually emerged as a leading excess of loss reinsurer. By 2000, Sirius was the only major Nordic reinsurer. Merely 15 years earlier, some 35-40 Nordic compa- nies were writing assumed reinsurance accounts; alas, without sustainable results. In 2004, history then repeated itself as Sirius’ second owner also ran into financial difficulties, enabling White Mountains to acquire Sirius for $428 million and record a gain of $111 million. In 2011 on July 1 the wholly owned Syndicate 1945 started to underwrite. In the autumn Sirius America (former White Mountains Re America) became part of the Sirius Group. A combination of strong underwriting controls and uniquely experienced management – most of the team has been with the company for more than 20 years – has allowed Sirius to outperform the reinsur- ance industry over an extended period. Nearly all of Sirius’ customers have been business partners for a long time, many for more than 40 years. The company’s philosophy has always been to write for profit only – every company says so but few walk the walk. Management has no volume targets, avoids legacy problems by maintaining a strong balance sheet, and always sticks to what it knows. Since the acquisition by White Mountains, Sirius has an average combined ratio of 86% and cumulative underwriting profits in excess of $600 million. This long-term track record is perhaps unparalleled. 83 Annual Report 2012 Art and pr oduction: Studio Ringvall 84 Annual Report 2012
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