HEAD OFFICE Sirius International Insurance Corporation (publ) SE-113 96 Stockholm, Sweden Visiting address: Birger Jarlsgatan 57B Telephone: +46 8 458 55 00 Sirius International Insurance Corporation (publ) Belgian Branch Mont Saint Martin 62 B/2 BE 4000 Liège, Belgium Telephone: +32 4 220 86 11 Sirius International Insurance Corporation (publ) Bermuda Branch Hamilton HM11, Bermuda Visiting address: 14 Wesley Street; 5th floor Telephone: +1 441 278 31 40 Sirius Rückversicherungs Service GmbH Neuer Wall 52/Entrance: Bleichenbrücke 1–7 DE-20354 Hamburg, Germany Telephone: +49 403 095 190 Sirius International Insurance Corporation (publ) UK Branch 4th Floor, 20 Fenchurch Street London EC3M 3BY, Great Britain Telephone: +44 203 772 3111 Sirius International Insurance Corporation (publ) Asia Branch 24 Raffles Place #10-01/02 Clifford Centre 048 621 Singapore, Singapore Telephone: +65 643 500 52 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 Sirius International Insurance Corporation (publ) Zurich Branch P.O. Box 2807 CH-8002 Zurich, Switzerland Visiting address: Dreikönigstrasse 12 Telephone: +41 43 443 0180 I S I R 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 6 Annual report 2016 CONTENTS Board of Directors’ Report Five-year summary 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 Income Statement – Parent Company continued Statement of Comprehensive Income – 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 Shares and participations in associated companies Note 15 Investments in shares and participations Note 16 Bonds and other interest-bearing securities Note 17 Derivative financial instruments Note 18 Other debtors Note 19 Categories of financial assets and liabilities and their fair value Note 20 Tangible assets Note 21 Deferred acquisition costs Note 22 Untaxed reserves Note 23 Provisions for unearned premiums and unexpired risks Note 24 Claims reserve Note 25 Equalization provision Note 26 Claims handling provision Note 27 Employee benefits Note 28 Other creditors Note 29 Contingent liabilities and commitments Note 30 Associated parties Note 31 Average number of employees, salaries and other remunerations Note 32 Fees and reimbursements to auditors Note 33 Operational leasing Note 34 Class analysis Note 35 Appropriation of profits Audir Report Definitions History xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx HEAD OFFICE Sirius International Insurance Corporation (publ) SE-113 96 Stockholm, Sweden Visiting address: Birger Jarlsgatan 57B Telephone: +46 8 458 55 00 Sirius International Insurance Corporation (publ) Belgian Branch Mont Saint Martin 62 B/2 BE 4000 Liège, Belgium Telephone: +32 4 220 86 11 Sirius International Insurance Corporation (publ) Bermuda Branch Hamilton HM11, Bermuda Visiting address: 14 Wesley Street; 5th floor Telephone: +1 441 278 31 40 Sirius Rückversicherungs Service GmbH Neuer Wall 52/Entrance: Bleichenbrücke 1–7 DE-20354 Hamburg, Germany Telephone: +49 403 095 190 Sirius International Insurance Corporation (publ) UK Branch 4th Floor, 20 Fenchurch Street London EC3M 3BY, Great Britain Telephone: +44 203 772 3111 Sirius International Insurance Corporation (publ) Asia Branch 24 Raffles Place #10-01/02 Clifford Centre 048 621 Singapore, Singapore Telephone: +65 643 500 52 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 Sirius International Insurance Corporation (publ) Zurich Branch P.O. Box 2807 CH-8002 Zurich, Switzerland Visiting address: Dreikönigstrasse 12 Telephone: +41 43 443 0180 I S I R 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 6 Annual report 2016 CONTENTS Board of Directors’ Report Five-year summary 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 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 Shares and participations in associated companies Note 15 Investments in shares and participations Note 16 Bonds and other interest-bearing securities Note 17 Derivative financial instruments Note 18 Other debtors Note 19 Categories of financial assets and liabilities and their fair value Note 20 Tangible assets Note 21 Deferred acquisition costs Note 22 Untaxed reserves Note 23 Provisions for unearned premiums and unexpired risks Note 24 Claims reserve Note 25 Equalization provision Note 26 Claims handling provision Note 27 Employee benefits Note 28 Other creditors Note 29 Contingent liabilities and commitments Note 30 Associated parties Note 31 Average number of employees, salaries and other remunerations Note 32 Fees and reimbursements to auditors Note 33 Operational leasing Note 34 Class analysis Note 35 Appropriation of profits Audit Report Definitions History 5 8 11 12 13 15 17 18 19 20 23 25 26 28 35 50 50 52 53 53 53 54 55 56 57 58 60 60 60 61 61 62 68 68 69 69 70 70 70 71 73 73 74 76 77 77 78 79 80 82 83 CMIH, our owners CM International Holding Pte. Ltd. (“CMIG International”) – CMIG International completed the acquisition of Sirius International Insurance Group, Ltd (“Sirius Group”) through its Bermuda holding company, CM Bermuda Limited, on April 18, 2016. CMIG International is a subsidiary of CMIG with a core focus on overseas investments. Registered in December 2014 in Singapore, CMIG International’s registered capital is in excess of USD 2.2 billion. With strong insurance capital support and support from M&A insurance funds, CMIG International focuses on becoming a major global insurance investment group via the form of mergers and organic growth of insurance companies. Through Sirius Group, CMIG International plans to grow its business portfolio consisting of reinsurance, specialty insurance, property insurance, life insurance and internet insurance. CMIG International is committed to support Sirius’ expansion into the Asian market and strengthening its financial assets. *China Minsheng Investment Group (CMIG) – a leading international private investment group founded in Shanghai on 21 August 2014 by 59 renowned private enterprises. Sirius International Insurance Group, Ltd. (”Sirius Group”) – A Bermuda-domiciled holding company whose operating companies offer capacity for property, casualty, accident & health, credit and bond, surety, aerospace, marine and other exposures. Our principal operating companies are: SIRIUS BERMUDA INSURANCE COMPANY, LTD. (”Sirius Bermuda”) – A Bermuda based reinsurer currently focused primarily on US treaty business. At January 2018, the territorial scope will expand to also include Canada and Latin America. Sirius Bermuda is a leading reinsurer for property, casualty and accident & health business. As from January 2017, Sirius Bermuda writes the US treaty business formerly written by Sirius America through an advisory agreement with Sirius America Re Managers. SIRIUS INTERNATIONAL INSURANCE CORPORATION A Swedish-based international reinsurer that focuses mainly on property and other short-tailed lines. Sirius International is the largest reinsurance company in Scandinavia and a leading reinsurer in Europe. Sirius International’s home office is in Stockholm, and it has offices in Australia, Bermuda, Hamburg, Liège, London, Singapore and Zürich. SIRIUS AMERICA INSURANCE COMPANY (“Sirius America”) – A U.S.-based international (re)insurance company focused on accident & health, property and surety lines in North and Latin America. Sirius America’s head office is located in New York with branch offices in Miami and Toronto. Sirius America is a 100% owned subsidiary of Sirius International. SIRIUS INTERNATIONAL MANAGING AGENCY LIMITED – A Lloyd’s Managing Agency which obtained regulatory approval July 1, 2014 and is a 100% owned subsidiary of Sirius International. The managing agency is responsible for Sirius International’s Syndicate 1945 which has been trading at Lloyd’s since 2011. SIRIUS GLOBAL SOLUTIONS, INC Established to serve clients seeking to reduce exposure to historical liabilities and/or exit a line of business. 1 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Sirius Annual Report for 2016 I am pleased to report another year of achievement for Sirius International – one of continuing service and stability for our clients coupled with exciting prospects for future expansion under our new owners. The most important milestone in 2016 was reached on April 18th, when we received final regulatory approval for the Sirius Group acquisition by CMIG. We are delighted that we have now become part of the CMIG family, and discussions with our new owners and colleagues about further developing and strengthening the Sirius brand both in Asia and globally have already begun in a constructive and positive manner. For the Sirius International Group, our combined ratio for the calendar year was 95%. This is up from 2015, but also includes the cost of reinsurance protections purchased on behalf of our previous owners White Mountains in conjunction with the sale of the Sirius Group. Both Sirius America and our Lloyd’s Syndicate 1945 had a few larger losses in their respective portfolios, coming from catastrophe events and larger risk claims. The most significant catastrophe losses were earthquakes in Japan, Taiwan and Ecuador, the wildfires in Canada as well as Hurricane Matthew which hit the US and Caribbean. The year ended with Typhoon Meranti in Asia. 2 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 For several years, our annual reports have discussed the progress of Solvency II. I am pleased to confirm that the new regime is now fully embedded in our processes and the way we make decisions about underwriting and capital allocation. It is also worth reflecting that Sirius International operates in a varied and often demanding regulatory environment. Depend- ing on where we underwrite, our supervisory authorities can include the Swedish FSA, the FCA, PRA and Lloyd’s in the UK, the Bermuda Monetary Authority and the US regulators, among others. Whilst this level of oversight can be onerous and time-consuming, we nonetheless welcome the secure framework it provides and the protection it gives our clients. The renewals at January 1, 2017 continued to be demanding with further pressure on rating levels and prices, primarily due to higher ceding company retentions and continuing competi- tion caused by global overcapacity. Overall, there has been a slowing down in the speed of these trends, and we see signs of stabilization in several markets. We continue to explore new business opportunities and lines of business, while strengthen- ing our underwriting teams and maintaining our underwriting discipline. This will continue to be of fundamental importance in the challenging market environment going forward. In the first few days of 2017, and just before the Chinese New Year, we completed and filed our application with the CIRC to establish our Rep Office in Shanghai. We are also investigating the possibility of joining the Lloyd’s China Platform in Shanghai and Beijing, as well as business opportunities and distribution channels for our A & H products in Asia. Finally, no annual report would be complete without mention- ing both our staff and our clients. I would like to thank the entire staff for their hard work, dedication and enthusiasm, without which we would not achieve the results we see here. Also, our clients and brokers, who are the reason we come to work, I thank them for their continued support and loyalty. We look forward to being of continued service. Monica Cramér Manhem President & CEO Despite these losses, I am pleased to report that the parent company Sirius International Insurance Corporation produced a very healthy combined ratio of 85% with positive results emanating from almost all our branch offices around the globe. My previous annual report reflected on a highly competitive 2015/16 renewal season. The main priority in these conditions was to achieve sustainable, profitable underwriting rather than to expand market share, and to further strengthen the existing relationships developed over decades. Today more than 60% of our portfolio is made up of relationships that have been in existence for over 10 years. With our long history and experience, we believe strong market knowledge and a deep understanding of our clients’ needs is an important factor in maintaining our position in a challenging market environment. Overall, our gross premium income was up almost 12% in Swedish Krona. Although the mix of business remained broadly the same, our Accident and Health book has continued the growth pattern we have seen in recent years, while competitive pricing has led to reductions in property catastrophe business. We continue to benefit from the policy of diversifying our risk exposure by both class and geography, supported by a conservative underwriting approach and highly experienced underwriting teams. This policy is one of the main reasons why Sirius has remained consistently profitable over the past 15 years, underpinning our promise of financial stability. During 2016, Sirius International’s Bermuda Branch was transformed into Sirius Bermuda Insurance Company (SBDA). Almost the entire Sirius America and Bermuda Branch business was successfully renewed by SBDA in the referral arrangement we have set up between the US-based advisory company, Sirius America Re Managers and SBDA. A very big thankyou to the teams across our organisation in the US, Bermuda and Sweden for the hard work they have put into bringing this project to fruition and making the transition a successful one. 2016 also saw some very important personnel changes. The transition in our London operations, with Michael Dashfield stepping down at the start of 2017 from his role as CEO of Sirius International Managing Agency Ltd (SIMA) and manager of our London branch, has gone smoothly. Michael Dashfield has taken on the role of Chairman of our Lloyd’s Syndicate, while Robert Harman, previously the Active Underwriter, has taken over as branch manager and CEO of SIMA. The transition in Singapore has gone equally smoothly with our branch manager Song Kng Yap retiring after many years of service to the Sirius Group and Paul Ng, previously Deputy Manager has now taken over. Both Michael and SK have been with the Group since the 1990’s, and I would like to place on record my thanks for the immense contributions they have both made to our develop- ment. It is significant that all the replacements have come from internal promotions, reflecting the in depth strength that exists throughout all our offices. 3 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 AT A GLANCE 2016 2015 Net premium income Claims net of reinsurance Underwriting profit Combined ratio Result before taxes COMBINED RATIO 90 % $835 million $496 million $41 million 95 % $845 million $428 million $118 million 86 % $41 million $233 million 83 % 78 % 86 % 95 % 2012 2013 2014 2015 2016 SOLVENCY CAPITAL, MSEK 16,011 16,191 17,954 18,632 16,983 2012 2013 2014 2015 2016 4 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Board of Directors’ Report The Board of Directors and the President and Chief Executive Officer of Sirius International Försäkringsaktiebolag (publ), (Sirius International), Corporate Identity Number 516401-8136, hereby present the Annual Report for 2016. General information regarding the company Sirius International operates within international insurance and reinsurance. Sirius International was established in 1989. However, the operations were initially started within Sirius Insurance in 1945. In 1989, the reinsurance operations were transferred to Sirius International. Sirius International has been the Parent Company in the Group since 1992. Development of the Company’s operations, income and financial position Globally, the amount of major claims arising from natural disasters increased in 2016 to the highest level in four years. Insurance costs for natural catastrophes during the year are estimated to be 7 % higher than average for the past 16 years, and thus thereby marks an end to the downward trend since the record year in 2011. The major events for the industry include Hurricane Matthew in the United States and the Caribbean, earthquakes in Japan and Ecuador, extensive wildfires in Alberta, Canada, along with major claims from both droughts and floods in the US, Europe and Asia. Sirius International’s insurance portfolio has also been affected by the above events, but the extent varies depending on geographical exposure and market shares. In addition, a number of major non-catastrophe claims occurred during the year. The major claims events for Sirius International, for the parent company as well as for the group, are summarized below. overcapacity with falling prices in certain markets and insurance classes. For the overall portfolio however, the pricing and renewal volume for 2017 is deemed to be satisfactory and in line with expectations. During 2016, the business operations for the Syndicate 1945 at Lloyd’s have continued to develop and are in terms of volume in line with plan. The Syndicate has in terms of results not reached the profitability targets, mainly due to larger claims outcome compared to plan. The US operations, that’s primarily conducted in Sirius America Insurance Company reported satisfactory growth in volume. However, due to the less favorable claims outcome mentioned above, the results were below expectations. Gross premium income amounted to MSEK 10,806 (9,689) for the Group and MSEK 6,795 (5,901) for the Parent Company. The Group’s premium income for own account amounted to MSEK 7,146 (7,090), and MSEK 3,927 (3,651) for the Parent Company. For the Group the premium volume was 12 % higher compared to the previous year, and 15 % higher for the Parent Company. The increases in gross premium volume are noted mainly in the lines property reinsurance and direct accident- and health insurance, while other insurance lines show a small decrease. The weakened SEK, primarily against USD has provided a favorable effect on premium volume for the group as well as the parent company expressed in SEK. The largest insurance losses for Sirius International during 2016 were Hurricane Matthew, Hurricane Meranti in Southeast Asia, earthquakes in Ecuador and New Zeeland and the wildfires in Canada. These events are estimated to have resulted in claims of approximately MSEK 280 for own account. For the Sirius International- group, additional claims have arisen from Lloyd’s syndicate 1945 (the syndicate) and Sirius America Insurance Company (Sirius America). The major additional claims derive primarily from Hurricane Matthew, the Canadian wildfires and the earthquake in Ecuador. In addition to these natural disasters, a major direct insurance claim from the Syndicate occurred coupled with losses from two specific contracts written by Sirius America. For the group these events altogether are estimated to have resulted in claims of approximately MSEK 780. The Group’s operating profit from insurance operations amounted to MSEK 185 (1,090) and to MSEK 459 (720) for the Parent Company. The combined ratio was 95 % (86 %) for the Group and 85% (82 %) for the Parent Company. The weakened insurance operating result is due to the increased amount of claims and of non-recurring costs associated with the change of ownership, as further described below. 2016 has been a politically turbulent year. The referendum in the United Kingdom on the withdrawal from the European Union (Brexit), the presidential election in the United States, the continuing conflict in Syria and terror attacks in Europe have all contributed to the political turmoil. This political turbulence, however, has not been fully reflected in the financial markets. Overall, the claims reserves from previous years have had a very favorable development during the year and resulted in a positive run-off result for the 2016 financial year. The price levels of the insurance portfolio for the current year have been satisfactory for the majority of markets and insurance classes. The portion of the insurance portfolio, which was renewed at the beginning of 2017, was exposed to a certain amount of price pressure, and some The world economy has developed surprisingly strong in view of the political turmoil. On a global basis, GDP grew 3.1 % during 2016. Generally, the world’s leading stock markets had a positive development where FTSE 100 index increased by 14. 4 %, Dow Jones increased by 13. 4 % and DAX increased by 6. 9 %. OMX 30 in Sweden increased by 4. 9 %. 5 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 In Sweden, the Riksbank has continued its expansive monetary policy, with negative repo rates and purchases of government bonds. During 2016, the inflation rose to 1.6 %, the GDP growth rate was 2.8%, while the unemployment rate remained around 6.5 %. The Swedish economy has continued to develop strongly and the demand remains strong in many of its most important export markets. The Swedish krona has had a volatile year with large fluctuations to the most important currencies. On an annual basis, SEK has continued to weaken in relation to USD and EUR. During 2016, USD and EUR have strengthened by 7.5% and 4.2% respectively against SEK. GBP has, mainly as a result of Brexit, weakened against SEK by 10.05% during the year. The markets in the US, Sweden, Germany and the UK are the most important ones for the Group’s bond portfolio. In Sweden, the interest rate levels on three year tenor have decreased 21 basis points whereas the interest rate in the five year tenor decreased 42 basis points. In the US, the interest rates have continued to increase. The three year tenor increased 14 basis points whereas the interest rate in the five year tenor increased about 17 basis points. The UK interest rates declined steeply by approximately 80 basis points for three and five-year tenor, while the corresponding interest rates for EURO bonds remained virtually unchanged. Overall, yield on the bond portfolio was 1.8 % adjusted for exchange rate effects. As regards the equity portfolio, including investments in Hedge Funds and Private Equity investments, the yield amounted to 8.7 %, adjusted for exchange rate effects. The realized and unrealized exchange rate result, including currency hedging and translation differences from foreign subsidiaries amounted to a profit of MSEK 458. Exchange rate hedging against the USD has been undertaken to the same extent as previous year and the total nominal hedged amount remains at MUSD 600. Per year end the portion of the solvency capital that is exposed to foreign currency, after currency hedging, is in line with previous year. The Investment result for the Group including unrealized gains and losses from the bond portfolio recognized in Other Comprehensive Income, but before allocation of interest to the insurance operations, shows a profit of MSEK 317 (875). The Group’s direct yield was 1.7 % (2.0 %) and the total yield was –0.8 % (3.2 %). The direct and total yields are calculated according to the recommendations of The Swedish Financial Supervisory Authority. The investment portfolio’s concentration and composition are largely unchanged compared to the previous year. At year-end, the consolidated investment portfolio, excluding currency related derivatives, had the following composition: Bonds and other interest bearing securities 81 %, Shares and participations 8 %, Bank funds 11 %. As part of an ongoing group restructuring, the Sirius Internation- al Bermuda Branch has ceased to write new reinsurance. The branch employees have been offered employment in Sirius Bermuda Insurance Company Ltd. During the second quarter SI Holdings made a capital repayment of MSEK 338 to Sirius International after the disposal of the shares in the associated company, Symetra. The shares in Sirius International Holdings (NL) BV were written down by MSEK 92 due to an accumulated deficit in its subsidiary Star Re. The capital was subsequently restored by a capital contribution amounting to MSEK 112 made in December. In the fourth quarter S.I Phoenix executed a capital repayment of MSEK 551, the transaction also resulted in an exchange gain of MSEK 195. Furthermore, Sirius International made a capital contribution of MSEK 1,598 to SI Holdings in December. The new solvency regime, Solvency 2, was adopted January 1, 2016. The objective is to strengthen the relationship between solvency capital requirements and risks for insurance undertak- ings. The company has adapted its processes for the calculation of own funds and capital requirement, risk management, corporate governance and reporting. The parent company, Sirius International Försäkringsaktiebolag (publ), is subject to Solvency 2 reporting to the Swedish Financial Supervisory Authority. The Sirius International group is not subject to Solvency 2 group reporting. Instead, this is currently done for the SI Caleta Group, (Gibraltar). Furthermore, Bermuda Monetary Authority (BMA) has from the 1th July 2016 assumed the role as group supervisor for Sirius International Insurance Group, Ltd, Bermuda. Discussions are ongoing between the two supervisory authorities to ensure that appropriate group supervision at appropriate level of the group are in line with the new EU regulation and also takes into account the Solvency 2 equivalency rules at Bermuda. Other events regarding the changes in the Group’s structure are described primarily under the section “Ownership structure” below. Ownership structure Sirius International Försäkringsaktiebolag (publ) is a wholly- owned subsidiary of Fund American Holdings AB (Corporate Identity Number 556651-1084), Stockholm, Sweden. Fund American Holdings AB is a wholly-owned subsidiary of Sirius Insurance Holding Sweden AB (Corporate Identity Number 556635-9724), Stockholm, Sweden, which is the ultimate entity in the Swedish Group structure and which is, in turn, owned by CM International Holdings PTE Ltd., Singapore and in turn owned by China Minsheng Investment Corp.,Ltd.,China. At the end of the year 2016, the Group comprised of the Parent Company, Sirius International Försäkringsaktiebolag (publ), with the subsidiaries Sirius Belgium Réassurances S.A. (in liquida- tion), Liège, Belgium; Sirius Rückversicherungs Service GmbH, Hamburg, Germany; Sirius International Holdings (NL) B.V., Amsterdam, Holland; Sirius International Corporate member Ltd., London, United Kingdom; Sirius International Managing Agency Ltd., London, United Kingdom, SI Phoenix (Luxembourg) S.à r.l., Luxemburg; White Sands Holdings (Luxembourg) S.à r.l., Luxemburg and S.I. Holdings (Luxembourg) S.à r.l., Luxemburg. In addition, Sirius International has eight branch offices outside Sweden. These are Sirius International Insurance Corporation (publ) UK branch, London, United Kingdom; Sirius International Insurance Corporation (publ) Stockholm Zürich branch, Zürich, 6 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Switzerland; Sirius International Insurance Corporation (publ) Asia branch, Singapore; Sirius International Insurance Corpora- tion (publ) Labuan branch, Labuan, Malaysia; Sirius International Insurance Corporation (publ) Belgian branch, Liège, Belgium; Sirius International Danish Branch, filial af Sirius International Försäkringsaktiebolag (publ), Copenhagen, Denmark; Sirius International Insurance Corporation (publ) Bermuda Branch, Hamilton, Bermuda and Sirius International Insurance Corpora- tion (publ) Australian Branch, Australia. In Hamburg, Germany, the operations are conducted through the agency, Sirius Rückversicherungs Service GmbH, which provides insurance on behalf of Sirius International. During 2001, Sirius Belgium Réassurances S.A. (in liquidation), Liège, Belgium commenced voluntary liquidation proceedings, as the company had ceased to conduct operations. The liquidation remains incomplete, as the result of a tax dispute. The outcome of the dispute will not impact the company’s financial position. Significant events during and after the financial year On April 18, 2016 CM International Holding PTE Ltd., Singapore and, in turn, owned by China Minsheng Investment Corp., Ltd., China completed the acquisition of Sirius International Insurance Group, Ltd. The Group’s holdings in the affiliated companies Symetra Financial Corporation and OneBeacon Insurance Group were sold before the transaction closed. There are no other significant events to disclose in addition to what has been covered in the preceding sections above. Information regarding risks and factors of uncertainty See Note 1, Accounting Principles, and Note 2, Information on Risks. Financial instruments and risk management See Note 1, Accounting Principles, and Note 2, Information on Risks. Remuneration and benefits to senior executives See Note 31, Average number of employees, salaries and other remuneration. Insurance contracts with insufficient insurance risk The Company retains only a few contracts in which insufficient insurance risk is assessed to exist, and which, thereby, do not qualify as insurance contracts. These contracts are classified as investment contracts. For further details, refer to Note 1, Accounting Principles. Expected future developments The underlying profitability in the insurance operations is good, despite increased competition on the market, and the diversified investment portfolio is expected to provide a stable yield. However, the fierce competition requires stringent pricing and underwriting, continued efficiency improvements and sound balancing of risks between the insurance and investment operations, in order to ensure long-term profitability. Sirius International’s targets for 2017 are to achieve a combined ratio under 95 % and an Underwriting Return on Capital (UROC) of 8 %. Stockholm 7 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Five-year summary GROUP (MSEK) Net premium income Net premiums earned Allocated investment return Net claims incurred Operating costs Other operating costs Insurance operating result Investment operating result Net income for the year Net technical provisions Market value on investment assets4) 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 Total solvency capital Solvency ratio Capital base 1) Required solvency capital Group based values 2) Capital base Solvency requirement Total Eligible Own Funds 5) Of which basic own funds Consolidated Solvency Capital requirement 2016 2015 2014 2013 20123) 7,146 7,165 192 -4,244 -2,566 -362 185 169 421 13,786 26,411 59% 36% 95% 2% 1% 14,633 2,359 -10 16,983 238% - - - - 11,059 10,871 8,117 7,090 7,106 143 -3,589 -2,525 -45 1,090 863 1,541 13,193 27,769 51% 36% 86% 2 % 3 % 16,277 2,358 -3 18,632 263% 17,516 1,911 18,586 1,911 12,317 12,317 8,609 5,930 5,952 313 -2,445 -2,218 -53 1,549 637 1,688 13,081 26,824 41% 37% 78% 2 % 5 % 15,651 2,301 2 17,954 303% 16,863 1,787 17,842 1,787 - - - 5,729 5,675 101 -2,748 -1,977 -43 1,008 1,352 1,956 12,198 23,906 48% 35% 83% 2 % 4 % 13,879 2,302 10 16,191 283% 15,006 1,687 15,689 1,687 - - - 6,304 6,293 547 -3,692 -2,002 -89 1,057 784 2,830 13,347 25,601 59% 32% 90% 2 % 5 % 13,828 2,128 55 16,011 254% 15,185 1,621 17,698 1,621 - - - 1) Include Sirius International with subsidiaries. According to Solvency 1 requirements. 2) Include WM Caleta (Gibraltar) Ltd..According to Solvency 1 requirements. 3) Comparison year 2012 has been converted per January 1, 2012 in order to apply IAS 19 R. Solvency capital and required solvency capital have not been converted. 4) Includes Investment assets and Cash and bank balances. 5) According to Solvency 2 requirements. 8 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 PARENT COMPANY (MSEK) Net premium income Net premiums earned Allocated investment return Net claims incurred Operating costs Other operating costs Insurance operating result Investment operating result Other expenses Net income for the year Net technical provisions Market value on investment assets 1) 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 2) Required solvency capital 2) Total Eligible Own Funds 3) Of which basic own funds Minimum capital requirement (MCR) Solvency capital requirement (SCR) 1) Include Investment assets and Cash and bank balances. 2) According to Solvency 1 requirements. 3) According to Solvency 2 requirements. 2016 2015 2014 2013 2012 3,927 3,603 94 –1,786 –1,305 –192 459 3,457 10 3,855 5,923 20,271 48 % 36 % 85 % 19% 18% 4,856 10,724 - 15,580 397 % - - 17,005 17,005 1,808 7,234 3,651 3,711 51 –1,734 –1,305 –3 720 354 -22 717 5,522 18,313 47 % 35 % 82 % 3 % 2 % 3,618 10,719 - 14,337 393 % 13,372 947 18,146 18,146 1,793 7,170 3,281 3,358 179 –1,298 –1,208 - 1,028 575 -28 1,386 5,627 19,526 39 % 36 % 75 % 5 % 4 % 4,456 10,459 - 14,914 455 % 14,035 835 - - - - 3,423 3,485 55 –1,623 –1,086 –2 829 1,329 -28 1,266 5,557 19,241 47% 31% 78% 9% 6% 4,576 10,462 12 15,050 440 % 14,237 851 - - - - 4,014 4,196 280 –2,126 –1,220 –1 1,104 129 -4 932 6,048 20,692 51% 29% 80% 1% 2% 5,117 9,672 54 14,843 370 % 14,265 710 - - - - 9 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Hamburg Proposed appropriation of profits For 2016, the Parent Company recorded income before appropri- ations and taxes of MSEK 3,912 (MSEK 1,069). Net income for the year amounted to MSEK 3,855 (MSEK 717). As of December 31, 2016 unrestricted retained earnings in the Group amounted to MSEK 5,400. The following profits are at the disposal of the general meeting of shareholders in the Parent Company Sirius International: (SEK in thousands) Retained earnings Non-Restricted reserves Change in restricted reserves Group contribution provided Dividends paid, as resolved by the general meeting of shareholders and extraordinary general meeting of shareholders Net income for the year Total 2,817,736 -14,452 -67,834 -5,162 -2,596,700 3,854,698 3,988,286 The Board of Directors and the president propose that the amount be appropriated as follows: Dividend to the owner To be carried forward 905,000 3,083,286 3,988,286 The Company’s financial position does not give rise to any assessment other than that the Company can be expected to fulfill its obligations in both the short-term and in the long-term. It is the opinion of the Board of Directors that the solvency capital of the Company, as it has been reported in the annual report, is adequate in relation to the scope and risks of the operations. Regarding the Company’s and the Group’s results and financial position, please refer to the attached income statements and balance sheets, cash flow statements and statements of changes in shareholders’ equity, with accompanying notes. 10 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 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 Other Operating costs OPERATING PROFIT/LOSS OF TECHNICAL ACCOUNT NON-TECHNICAL ACCOUNT Balance of technical account Investment income/expenses — Investment income — Unrealized gains and losses — Investment expenses and charges — Share of result in associated companies Investment income allocated to the technical account Total investment income/expenses RESULT BEFORE TAXES Taxes NET INCOME FOR THE YEAR Note 2016 2015 3 3 4 4 5 5 9 6 7 8 14 10 10,806 –3,660 –278 297 7,165 192 –5,946 1,363 –4,583 129 210 –4,244 –2,566 –362 185 9,689 –2,599 –82 98 7,106 143 –5,582 1,279 –4,303 1,016 –302 –3,589 –2,525 –45 1,090 185 1,090 1,795 –562 –880 8 –192 169 354 67 421 1,647 –418 –215 –8 –143 863 1,952 –411 1,541 11 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Statement of Comprehensive Income – Group JANUARY 1 – DECEMBER 31 (MSEK) Net income for the year Other comprehensive income Items not to be reclassified to income statement: — Actuarial gains and losses on defined benefit pension plans — Tax on items not to be reclassified to income statement Items to be reclassified to income statement: — Change of fair value on bonds — Currency translation differences — Tax on items to be reclassified to income statement Items reclassified to income statement: — Change of 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 27 10 10 2016 421 –6 2 53 575 –11 –97 22 538 959 2015 1,541 3 0 –73 649 17 –58 13 551 2,092 12 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Balance Sheet – Group DECEMBER 31 (MSEK) ASSETS Intangible assets Goodwill Other intangible assets Total intangible assets Investment assets Land and buildings Interest bearing investments emitted by, and loans to, group companies Shares and participations in associated companies 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 balance Total other assets Prepayments and accrued income Accrued interest Deferred acquisition costs Other prepayments and accrued income Total prepayments and accrued income Note 2016 2015 11 12 14 15, 19 16, 19 17, 19 23 24 10 18, 19 20 19 21 26 113 139 10 118 145 1,918 20,581 53 22,552 811 23,638 1,322 2,777 4,099 236 3,533 273 2,181 93 6,316 94 2,764 2,858 136 645 19 800 26 162 188 11 310 127 5,387 18,428 - 23,815 664 24,927 736 2,381 3,117 168 2,658 314 1,964 260 5,364 98 2,842 2,940 134 628 29 791 TOTAL ASSETS 37,850 37,327 13 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Balance Sheet – Group, cont. DECEMBER 31 (MSEK) Note 2016 2015 SHAREHOLDERS’ EQUITY, PROVISIONS AND LIABILITIES Shareholders’ equity — 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 Total shareholders’ equity Minority interest Total shareholders’ equity Technical provisions Provisions for unearned premiums Claims outstanding Total Technical provisions Provisions for other risks and expenses Employee benefits Current tax liabilities Deferred tax liabilities Other provisions Total provisions for other risks and expenses Liabilities Deposits received from reinsurers Creditors arising out of direct insurance operations Creditors arising out of reinsurance operations Derivative financial instruments Other liabilities Accrued expenses and deferred income Total liabilities 800 5,480 1,943 8,433 -2,023 14,633 7 14,640 3,601 14,284 17,885 30 0 2,335 366 2,731 727 135 1,076 336 254 66 2,594 800 5,479 1,402 8,361 235 16,277 - 16,277 2,879 13,431 16,310 27 1 2,350 383 2,761 441 88 490 734 154 72 1,979 23 24, 26 27 10 17, 19 19, 28 19 TOTAL SHAREHOLDERS’ EQUITY, PROVISIONS AND LIABILITIES 37,850 37,327 14 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Change in Shareholders’ Equity – Group (MSEK) Share Capital1) Additional paid in capital Reserves Retained earnings – restricted1) Retained earnings – non- restricted Total Minority interest Amount January 1, 2016 800 5,479 1,402 8,361 235 16,277 Comprehensive Income Net profit/loss for the year Change in untaxed reserves Reclassification within shareholders’ equity Other comprehensive income, after tax Change of fair value on bonds Change defined benefit pension paid Currency translation differences Total other comprehensive income Total comprehensive income Transactions with owners Shareholder’s contribution Dividend paid2) Total transactions with owners - - - - - - 0 0 - - 0 - - 1 - - - 0 1 - - 0 - - - –34 575 541 541 - - 0 - 4 68 - - - 0 421 –4 –69 - –5 - –5 72 343 421 0 0 –34 –5 575 537 958 - - 0 –5 –2,597 –2,602 –5 –2,597 –2,602 AMOUNT DECEMBER 31, 2016 800 5,480 1,943 8,433 –2,023 14,633 Amount January 1, 2015 800 5,317 854 8,158 522 15,651 Comprehensive income Net profit/ loss for the year Change in untaxed reserves Reclassification within shareholders’ equity Other comprehensive income, after tax Change of fair value on bonds Change defined benefit pension paid Currency translation differences Total other comprehensive income Total comprehensive income Transactions with owners Shareholder’s contribution Dividend paid2) Total transactions with owners - - - - - - - - - - - - - - - - - - - 162 - 162 - - - -101 - 649 548 548 - - - - 203 1,541 -203 - - - - - - - 3 - 3 1,541 0 0 -101 3 649 551 203 1,341 2,092 - - - - 162 -1,627 - 1,627 - 1 627 -1,465 AMOUNT DECEMBER 31, 2015 800 5,479 1,402 8,361 235 16,277 1) Share capital and Retained earnings – restricted represents the restricted shareholders’ equity. 2) Dividend paid to the parent company Fund American Holdings AB. The dividend is equal to 325 SEK (203 SEK) per share. 0 7 - - - - - 0 7 - - 0 7 0 - - - - - - - - - - - - Total Share- holders equity 16,277 428 0 0 –34 –5 575 537 964 0 –5 –2,597 –2,602 14,640 15,651 1,541 0 0 -101 3 649 551 2,092 162 - 1,627 -1,465 16,277 15 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Change in Shareholders’ Equity – Group, cont. (MSEK) SHARE CAPITAL Specified in number of shares Issued per January 1 Issued per December 31 Per December 31, 2016 the share capital comprised 8,000,000 (8,000,000) ordinary shares. The shares have a nominal value of 100 (100) SEK. 2016 2015 8,000,000 8,000,000 8,000,000 8,000,000 2016 2016 2015 ADDITIONAL PAID IN CAPITAL Opening additional paid in capital Reclassification within shareholders’ equity 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 reserves Opening tax on fair value reserves 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 Change for the year CLOSING TRANSLATION DIFFERENCE RETAINED EARNINGS – RESTRICTED Opening retained earnings - restricted Change for the year OPENING RETAINED EARNINGS – RESTRICTED RETAINED EARNINGS – NON–RESTRICTED Opening retained earnings – non-restricted Net profit/loss for the year Change in safety reserve and other restricted reserves Change defined benefit pension plans Reclassification within shareholders’ equity Dividend paid CLOSING RETAINED EARNINGS – NON-RESTRICTED 16 5,479 1 5,480 23 –44 –21 –4 10 6 19 –34 –15 1,383 575 1,958 8,361 72 8,433 235 421 –4 –5 –69 –2,602 –2,023 5,317 162 5,479 154 –131 23 –34 30 –4 120 –101 19 734 649 1,383 8,158 203 8,361 522 1,541 –203 3 - –1,627 235 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Cash flow Statement – Group (MSEK) 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 financial investments Change in other operating receivables Change in other operating liabilities Cash flow from operating activities Investing activities Net investment of intangible assets Net investments of tangible assets Cash flow from investing activities Financing activities Capital contributions received Dividends paid Cash flow from financing activities CASH FLOW FOR THE YEAR Cash and cash equivalents at beginning of year Cash flow for the year Translation difference on Cash and cash equivalents CASH AND CASH EQUIVALENTS 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 Unrealized losses Interest income Interest expenses Dividends received Shares of result in associated companies 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 Note 2016 2015 354 418 –1 36 50 24 881 764 –1,265 –574 –194 14 –25 –11 0 –365 –365 –570 2,842 –570 501 2,773 58 –405 793 –935 - –456 1,018 –418 1 –36 –8 450 –4 50 1,055 1,718 2,773 1,952 383 –4 177 –1,126 –330 1,052 –248 –110 –393 301 20 –60 –40 0 –709 –709 –448 3,198 –448 92 2,842 47 –719 - –477 108 –116 534 –365 4 –177 8 24 3 –1,126 1,055 1,787 2,842 11, 12, 20 6 8 6 8 7 7 6 8 6 14 24 17 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Performance Analysis – Group Direct Swedish risks — property Direct Swedish risks — aviation Direct Swedish risks — MFL Direct foreign risks Assumed reinsurance 1 JANUARY – 31 DECEMBER 2016 (MSEK) ANALYSIS OF INSURANCE RESULT 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 1) Of which results from prior years, gross amounts 2) Technical provisions Unearned premiums and remaining risks Outstanding claims Claims adjustment provision TECHNICAL PROVISIONS Reinsurers’ share of technical provisions Unearned premiums and remaining 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 Total 7,165 192 –4,244 –2,566 547 –804 1,443 19 –963 –597 –98 –418 5,717 173 –3,269 –1,967 654 –373 –1,294 –1,188 –29 –2,305 –3,601 –12,790 –13,983 –272 –301 –2,511 –15,367 –17,885 686 486 1,172 3,343 –1,868 –144 112 1,443 636 2,290 2,926 7,459 –1,792 –135 185 5,717 1,322 2,777 4,099 10,806 –3,660 –278 297 7,165 –1,824 –3,906 –5,740 855 –43 –123 172 –963 508 –163 254 38 1,363 –206 129 210 –3,269 –4,244 3 - –11 –2 –10 –12 –2 –4 - –6 - - - 3 - - - 3 –8 - - –3 - –11 1 - –1 - 0 –1 - –1 - –1 - 1 1 - - 1 - 1 –2 - - 1 - –1 1 - - - 1 - - - - - - - 1 - - - 1 - - - - - 1) Exludes other operating costs that are not related to the insurance operations. 2) Defined as result from underwriting year 2015 and earlier. 18 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Income Statement – Parent Company JANUARY 1 — DECEMBER 31 (MSEK) Note 2016 2015 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 Other Operating costs Change in equalization provision OPERATING PROFIT/LOSS OF TECHNICAL ACCOUNT NON-TECHNICAL ACCOUNT Balance of technical account Investment income/expenses — Investment income — Unrealized gains and losses — Investment expenses and charges Investment income allocated to the technical account Total investment income/expenses Goodwill depreciation Result before appropriations and taxes Appropriations Change in accelerated depreciations Provision to safety reserve Result before taxes Taxes NET INCOME FOR THE YEAR 3 3 4 4 5 5 25 9 6 7 8 11 22 10 6,795 –2,868 –665 341 3,603 94 –2,768 846 –1,922 83 53 –1,786 –1,305 –192 45 459 5,901 –2,250 –16 76 3,711 51 –2,966 985 –1,981 495 –248 –1,734 –1,305 –3 - 720 459 720 4,238 251 –938 –94 3,457 –4 3,912 - –5 3,906 –51 3,855 1,149 –573 –171 –51 354 –5 1,069 –243 –18 808 –91 717 19 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 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 of fair value on bonds — Tax on items to be reclassified to income statement Items reclassified to income statement: — Change of 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 2016 3,855 69 –15 –88 19 –15 3,840 2015 717 –60 13 –55 12 –90 627 20 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Balance Sheet – Parent Company DECEMBER 31 (MSEK) ASSETS Intangible assets Goodwill Other intangible assets Total intangible assets Investment assets Land and buildings Shares and participations in group companies Shares and participations in 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 balance Total other assets Prepayments and accrued income Accrued interest Deferred acquisition costs Other prepayments and accrued income Total prepayments and accrued income TOTAL ASSETS Note 2016 2015 11 12 13 15, 19 16, 19 17, 19 23 24 10 18,19 20 19 21 13 68 81 10 10,760 122 152 6,468 53 6,673 1,286 18,851 1,125 1,520 2,645 63 2,175 274 47 488 3,047 75 1,420 1,495 68 431 18 517 17 76 93 11 10,031 122 126 6,302 - 6,428 617 17,209 702 1,391 2,093 23 1,772 174 40 916 2,926 77 1,104 1,181 68 322 28 419 26,636 23,921 21 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Balance Sheet – Parent Company, cont. DECEMBER 31 (MSEK) Note 2016 2015 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 Accumulated accelerated depreciations 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 Current tax liabilities Deferred tax liabilities Other provisions Total provisions for other risks and expenses Deposits received from reinsurers Creditors Creditors arising out of direct insurance operations Creditors arising out of reinsurance operations Derivative financial instruments Other creditors Total creditors Accrued expenses and deferred income Other accrued expenses and deferred income Total accrued expenses and deferred income 800 9 192 3,855 4,856 34 10,690 10,724 2,602 5,922 44 8,568 16 170 - 233 419 473 0 1,020 336 179 1,535 61 61 800 24 2,077 717 3,618 29 10,690 10,719 1,802 5,724 89 7,615 16 - - 220 236 301 7 508 734 117 1,366 66 66 22 23 24, 26 25 27 10 17, 19 19, 28 19 TOTAL SHAREHOLDERS’ EQUITY, PROVISIONS AND LIABILITIES 26,636 23,921 22 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Change in Shareholders’ Equity – Parent Company Restricted reserves Other Reserves1) Retained earnings1) Net profit/loss for the year1) (MSEK) Amount January 1, 2016 Share Capital 800 Transfer of net result from previous year Reclassification within shareholders’ equity 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 Group contributions provided3) Dividend paid2) Total transactions with owners AMOUNT DECEMBER 31, 2016 Amount January 1, 2015 Transfer of net result from previous year Reclassification within shareholders’ equity 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 Shareholder’s contribution Dividend paid2) Total transactions with owners - - - - - - - - 800 800 - - - - - - - - - AMOUNT DECEMBER 31, 2015 800 - - 68 - - - - - - - 68 - - - - - - - - - 23 - - - –14 –14 –14 - - - 9 113 - - - –90 –90 –90 - - - 23 2,078 717 –68 - - - - –5 –2,597 –2,602 124 2,157 1,386 - - - - - 162 –1,627 –1,465 2,078 Total 3,618 0 - 717 –717 - 3,855 3,855 - - 3,855 - - - 3,855 1,386 –1,386 - 717 - - 717 - - - 717 –14 –14 3,841 –5 –2,597 –2,602 4,856 4,456 0 - 717 –90 –90 627 162 –1,627 –1,465 3,618 1) The columns Other reserves, Retained earnings and Net profit/loss for the year together represents the non-restricted shareholders’ equity for the parent company. 2) Dividend paid to the parent company Fund American Holdings AB. Dividend is equal to SEK 325 (SEK 203) per share. 3) Group contributions provided to parent company Fund American Holdings AB 23 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Change in Shareholders’ Equity – Parent Company, cont. (MSEK) SHARE CAPITAL Specified in number of shares Issued per January 1 Issued per December 31 Per December 31, 2016 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 reserves Opening tax on fair value reserves 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 Shareholder’s contribution Transfer to restricted reserve Group contributions paid Dividend paid CLOSING RETAINED EARNINGS RESTRICTED RESERVE Opening restricted reserve Transfer to restricted reserve CLOSING RESTRICTED RESERVE NET PROFIT/LOSS FOR THE YEAR NET PROFIT/LOSS FOR THE YEAR 2016 2015 8,000,000 8,000,000 8,000,000 8,000,000 29 -17 12 -6 5 -3 23 -14 9 2,078 717 - -68 -5 -2,597 124 - 68 68 145 -116 29 -32 26 -6 113 -90 23 2,157 1,386 162 - - -1,627 2,078 - - - 3,855 717 24 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Cash flow Statement – Parent Company (MSEK) 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 financial investments Change in other operating receivables Change in other operating liabilities Cash flow from operating activities Financing activities Acquisition of subsidiaries liquidity Net investment of intangible assets Net investments of tangible assets Cash flow from investing activities Investing activities Capital repayment Shareholder’s contribution Dividend paid Group contributions paid Cash flow from financing activities CASH FLOW FOR THE YEAR Cash and cash equivalents at beginning of year Cash flow for the year Translation difference on Cash and cash equivalents CASH AND CASH EQUIVALENTS AT END OF YEAR2) 1) Specification of non-cash items: Depreciations Capital gains on foreign exchange Capital losses on foreign exchange Capital gains Capital losses Unrealized gains Unrealized losses 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 Note 2016 2015 3,912 119 -6 998 -3,656 16 1,383 -1,617 -897 1,808 677 - -18 -23 -41 - - -365 - -365 271 1,104 271 45 1,420 58 -247 - - -286 891 -461 210 -119 6 -3,631 -77 - 3,656 585 835 1,420 1,069 170 -4 79 -345 -248 721 -17 314 -688 330 - -21 -56 -77 - - -709 - -709 -456 1,525 -456 35 1,104 48 -513 - - -62 117 - 573 -148 4 -461 96 -345 389 715 1,104 11,12,20 6 8 8 6 8 7 7 6 8 6 24 25 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Performance Analysis – Parent Company Direct Swedish risks — property Direct Swedish risks — aviation Direct Swedish risks - MFL Direct foreign risks Assumed reinsurance 1 JANUARY - 31 DECEMBER 2016 (MSEK) ANALYSIS OF INSURANCE RESULT 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 in equalization provision TECHNICAL RESULT OF INSURANCE OPERATION 1) Of which results from prior years, gross amounts 2) Technical provisions Unearned premiums and remaining risks Outstanding claims Claims adjustment provision Equalization provision TECHNICAL PROVISIONS Reinsurers’ share of technical provisions Unearned premiums and remaining 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 Total 3,603 94 -1,786 -1,305 45 651 -736 -2,602 -5,781 -141 -44 531 9 -223 -273 - 44 -205 -696 -258 -9 - 3,068 85 -1,551 -1,031 45 616 -519 -1,904 -5,518 -132 -44 -963 -7,598 -8,568 390 43 433 1,268 -770 -111 144 531 -525 260 -9 53 -2 735 1,476 2,211 5,523 -2,098 -554 197 3,068 1,125 1,520 2,645 6,795 -2,868 -665 341 3,603 -2,113 -2,648 586 -111 32 55 846 -120 83 53 -223 -1,551 -1,786 3 - -11 -1 - -9 -12 -2 -4 - - -6 - - - 3 - - - 3 -8 - - -3 - -11 0 - -1 - - -1 -1 - -1 - - -1 - 1 1 - - - - 0 -2 - - 1 -1 1 - - - - 1 - - - - - - - - 1 - - - 1 - - - - - - 1) Exludes other operating costs that are not related to the insurance operations. 2) Defined as result from underwriting year 2015 and earlier. 26 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Stockholm 27 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Note 1 – Accounting principles income, for liabilities designated at fair value through P&L. The standard is effec- tive for accounting periods beginning on or after January 1, 2018. Early adoption is permitted. Insurance companies are permitted to defer the implementation of the standard until IFRS 17, Insurance Contracts, is effective. However, no later GENERAL INFORMATION This annual report was issued per December 31, 2016 and refers to Sirius Inter- than 2021. The group has not yet evaluated in what timeframe the standard will be applied. Evaluation of the effects is an ongoing process and the initial assessment national Försäkringsaktiebolag (publ), both the Group and the Parent Company, is that the introduction of the new standard will not have any significant effect on which is an insurance company with its registered offices in Stockholm. The valuation nor the income statement. address of the head office is Birger Jarlsgatan 57B, Stockholm and the Corporate IFRS 15 Revenue from contracts with customers regulates the reporting of Identity Number is 516401-8136. The Group’s ultimate owner is CM International revenues from contracts other than insurance contracts. The principles that IFRS Holdings PTE Ltd.,Singapore and in turn owned by China Minsheng Investment 15 is built upon shall provide users of financial reports more useful information re- Corp.,Ltd.,China. The Group writes property and casualty insurance and reinsur- garding the company’s revenues. The increased disclosure requirements implies ance, see Note 34 Class analysis for further information. that information regarding revenue segments, timing of settlement, uncertainty COMPLIANCE WITH STANDARDS AND LAW The Company’s annual report has been prepared in accordance with the Swedish in connection to revenue recognition and cash flow from customers shall be dis- closedAccording to IFRS 15 revenue is based on the principle that it is recognised when the customer obtains control over the sold goods or services and have the Act on Annual Accounts in Insurance Companies (ÅRFL), as well as the Swedish ability to use and gain the benefits from goods or services. IFRS 15 replaces IAS 18 Financial Supervisory Authority’s regulations and general guidelines on Annual Revenue, and IAS 11 Construction contracts and the related SIC and IFRIC. IFRS 15 Reports in Insurance Companies (FFFS 2015:12) with amendments as well as the come into effect on January 1, 2018 and is adopted by EU. Early adoption is permit- Swedish Financial Reporting Board RFR 2. ted. At present, the group can not estimate the quantitative impact on the financial The Sirius International Group’s annual report has been prepared in accord- statements. The group will make a detailed evaluation in the upcoming year. ance with the Swedish Act on Annual Accounts in Insurance Companies (ÅRFL), IFRS 16 Leases was published in January 2016 and will replace IAS 17 leases as well as the Swedish Financial Supervisory Authority’s regulations and general and related interpretations. The largest effect from the new rules is that a lessee guidelines on Annual Reports in Insurance Companies (FFFS 2015:12) with amend- shall report a lease asset (the right to use an asset) and financial liability in the ments, the Swedish Financial Reporting Board RFR 1 Supplementary Accounting balance sheet. In the income statement, the linear operating leasing cost is Rules for Groups, as well as International Financial Reporting Standards (IFRS) replaced by depreciation cost of the leased asset and an intrest expense for the and IFRIC interpretations as adopted by the EU. financial liability. ASSUMPTIONS IN THE PREPARATION OF THE COMPANY’S FINANCIAL REPORTS The Company’s functional currency is the Swedish krona (SEK) and the financial At present, alessee does not recognize an operational lease asset in the balance sheet . The group’s assessment is that this standard will not have any significant impact of the group’s financial statements. The standard will come into effect on January 1, 2019 and is not adopted by EU. reports are presented in Swedish kronor. Unless otherwise stated, all amounts No other of the IFRS or IFRIC interpretations which have not yet entered into are rounded to the nearest million. Assets and liabilities are recorded at acqui- force are expected to have any significant impact on the Group. sition 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 classified as financial assets valued at fair ASSESSMENTS AND ESTIMATES IN THE FINANCIAL STATEMENTS The preparation of financial statements in conformity with International Financial value via the income statement or as available-for-sale financial assets. Reporting Standards requires the Company’s management to make assessments and estimates, as well as assumptions impacting the application of the accounting CHANGES TO STANDARDS, STATEMENTS AND INTERPRETATIONS The Annual Report per December 31, 2016 has been prepared in accordance with principles and the recorded values of assets, provisions, liabilities, income and expenses. These estimates and assumptions are based on historical experience standards, statements and interpretations that have come into force during the and a number of other factors considered reasonable in the current situation. The year. Furthermore, a number of standards, statements and interpretations have results of these estimates and assumptions are, subsequently, used to assess the been published but have not yet come into force. Below follows a summary and a recorded values of assets, provisions and liabilities which are not otherwise clear- preliminary assessment of the effect these standards, statements and interpreta- ly apparent from other sources. Actual outcome can deviate from these estimates tions have and may have on the Company’s financial reports. Changes other than and assessments. those given below are not deemed relevant, alternatively are not expected to affect Estimates and assumptions are reviewed on a regular basis. Changes in the Group’s financial reports. 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 New and amended standards applied by the Group None of the IFRS standards that are mandatory for the first time for the financial periods, if such change affects both current and future periods. Significant assessments in the application of the Accounting principles have year that started January 1st 2016 has had any significant impact on the group’s income statement or balance sheet. been made in conjunction with the decision to report financial instruments at fair value, as well as in conjunction with the decision to classify insurance contracts as insurance or investment contracts. New standards, amendments and interpretations of existing stan- dards which have not yet entered into force and which have not been early adopted by the Group A number of new standards and interpretations come into effect for financial years 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 beginning after 1 January 2017 and have not been applied in the preparation of risk in excess of five percent should be deemed significant and the contract is thus these financial statements. These new standards and interpretations are expected classified as insurance. to impact the group’s financial reports in the following way: All agreements that are insurance contracts have been subject to assessment IFRS 9 “Financial Instruments” addresses the classification, measurement and regarding whether they signify a transfer of significant insurance risk, so that recognition of financial assets and liabilities. The complete version of IFRS 9 was they can also be presented as insurance contracts in the accounts. In the case of issued in July 2014 and is adopted by EU. It replaces certain parts of IAS 39 that certain agreements which are a combination of risk and savings, the Company has handles classification and valuation of financial instruments. IFRS 9 retains but been obligated to undertake an assessment of the contracts which can be consid- simplifies the mixed measurement model and establishes three primary measure- ered to signify a transfer of significant insurance risk. The amount of the insurance ment categories for financial assets; amortized cost, fair value through OCI and risk has been assessed through a consideration of whether there exists one or fair value through P&L. The basis of classification depends on the entity’s business more scenarios with commercial implications in which the insurance company model and the contractual cash flow characteristics of the financial asset. Invest- would be liable to pay significant further benefits in excess of the amount which ments in equity instruments are required to be measured at fair value through would have been paid had the insured event never occurred. P&L with the irrevocable option at the inception to present changes in fair value Certain contracts include an option for the contract holder to insure them- in OCI and no recycling is made at disposal of the instrument. There is now a new selves in the future. The Company does not consider such options, in themselves, expected credit losses model that replaces the incurred loss impairment model. to constitute a material insurance risk. For financial liabilities there were no changes to classification and measurement except for the recognition of changes in own credit risk in other comprehensive 28 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Note 1 – Cont. Important sources of uncertainty in estimates The Company makes assessments and estimates forming the basis for the valua- participations in associated companies are recorded in the consolidated accounts according to the equity method. The equity method implies that the value of the tion of certain assets, provisions and liabilities. These assessments and valuations shares in the associated company, reported in the Group, corresponds to the are made on an ongoing basis and are based on previous experience and future Group’s share of the associated companies’ equity and Group goodwill and any expected outcomes. Technical provisions The Company’s accounting principles for insurance contracts are described below. 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 Company’s most critical accounting estimate concerns insurance technical the item ”Share of associated companies’ income”. Dividends received from asso- provisions. This estimate is based on historical experience and other relevant ciated companies decrease the book value of the investment. factors considered as reasonable. Even if the applied methods and employed When the Group’s share of reported losses in an associated company exceeds parameters are assessed as correct, future outcomes may deviate from the the book value of the Group’s participations in the company, the value of the par- expected value. ticipations is reduced to zero. The equity method is applied up to the point in time The process applied for the determination of central assumptions, forming the when the significant influence ceases. 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 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 financial assets and liabilities for which there is no observable market price. entirety when the consolidated financial statements are prepared. Unrealized There may be some uncertainty as regards the observed market price for financial gains arising from transactions with associated companies and joint ventures are instruments with limited liquidity. Such instruments may, therefore, require eliminated to the extent corresponding to the Group’s participating interest in the further assessments, depending on the uncertainty of the market situation. For a company. Unrealized losses are eliminated in the same manner as unrealized sensitivity analysis of interest- and equity risk, see note 2 Information on risks. gains, but only to the extent there is no write-down requirement. Company management has discussed the development, selection and disclo- sure 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 FOREIGN CURRENCY Transactions in foreign currency Transactions in foreign currency are translated to the functional currency at the all periods presented in the financial statements, unless stated otherwise below. exchange rate prevailing on transaction date. The Parent Company’s, including APPROVAL The annual accounts were approved for publication by the Board of Directors on 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 April 25, 2017. The income statement and balance sheet will be adopted at the are recorded net in the income statement on the lines, Investment, income or General Meeting held in May 2017. Investment, expenses. the branch offices, and the Group’s, functional currency is the Swedish krona CONSOLIDATION PRINCIPLES Subsidiaries Subsidiaries are companies in which the Parent Company has a controlling influ- 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 for- ence. The group has controlling influence over a company when it is exposed to eign operation to the Group’s reporting currency, Swedish kronor, at the exchange or entitled to variable returns from its holdings in the company and the possibility rate prevailing on the balance sheet date. Income and expenses in foreign opera- to affect the return through its controlling influence. Acquisitions of subsidiaries tions are translated into Swedish kronor at an average rate that approximates the are reported according to the purchase method, as described in IFRS 3, with the exchange rates prevailing at the date of the respective transactions. Translation exception of intra-group acquisitions of subsidiaries under common control. The differences arising in the translation of foreign net investments and the associated application of the purchase method implies requirements for the identification effects of the hedging of net investments are recorded in other comprehensive of the purchaser and the establishment of the acquisition date. The purchase income. Upon disposal of a foreign operation, accumulated translation differences method further implies that the acquisition of subsidiaries is considered to be a attributable to the operation, less any currency hedging, are realized in the transaction through which the Group indirectly acquires the subsidiary’s assets Group’s income statement. and assumes its provisions, liabilities and contingent liabilities. The Group acquisi- tion value is determined through an acquisition analysis of the identifiable acquired Rates for the most important currencies assets and the assumed provisions and liabilities, as well as any contingent liabil- ities 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 statements 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 combination under USD EUR GBP Closing rates Average rates 9.05 9.55 11.21 8.56 9.45 11.64 common control, such acquisitions are reported according to the “predecessor accounting method” or at fair value. The “Predecessor accounting method” im- INSURANCE CONTRACTS Insurance contracts are recorded and valued in the income statement and balance plies that the acquirer assumes the acquired company’s reported book values as sheet in accordance with their financial substance as opposed to their legal form, presented in the divested entity’s accounts. Adjustment of the acquired values is to in the event that these differ. Contracts transferring material insurance risks from be carried out in the case that these accounts are not prepared in accordance with the policyholder to the Company and whereby the Company agrees to compensate IFRS. Furthermore, the method implies that goodwill is not reported; any possible the policyholder or other beneficiary in the event that a pre-determined insured difference between the consideration paid and the acquired values is reported event occurs are recorded as insurance contracts. Financial instruments are directly against shareholders equity. Intra-group business combinations are val- contracts which do not transfer any material insurance risk from the policyholder ued and accounted for according to IFRS 3. Subsidiaries’ financial statements are to the Company. The Company has issued a policy entailing a mandatory test of included in the consolidated accounts from the date of acquisition until the date whether sufficient insurance risk exists in written contracts for classification as 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 administra- tion, 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, insurance contracts. This test builds upon definitions in accordance with IFRS 4. For contracts or groups of contracts classified as insurance contracts, recording and valuation are carried out in accordance with previously applied principles. For contracts or groups of contracts which are not classified as insurance contracts, recording and valuation are conducted according to IAS 39, Financial Instruments or according to IAS 18, Revenue. 29 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Note 1 – Cont. Accounting of insurance contracts Revenue recognition/Premium income Gross premiums written relate to insurance contracts incepted during the external deferred acquisition costs. Other costs for insurance contracts are recorded as costs when they arise. financial year, together with any differences between booked premiums for prior financial years and those premiums previously accrued, and include estimates of Provision adequacy testing The Company’s applied accounting and valuation principles for the balance sheet premiums due but not yet receivable or notified, less an allowance for cancella- items Deferred acquisition costs, Provisions for unearned premiums and Unex- tions. The gross premium income also includes the net of entered and withdrawn pired risks automatically entail testing of whether the provisions are sufficient with premium portfolios. Gross premiums written are stated before deduction of regard to expected future cash flows. 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 Operating costs All operating costs are allocated in the income statement according to their period, or where the exposure vary during the contract period. In these circum- functional nature, acquisition, claims adjustment, administration, commission stances, premiums are recognized as earned over the period of risk in proportion and profit shares in ceded reinsurance, investment expenses and in certain cases, to the amount of insurance protection provided. Reinstatement premiums receiv- other technical costs. Changes in technical provisions for insurance contracts are able are recognized and fully earned latest when fallen due. Premium revenue recorded in the income statement under each heading. Payments to policyhold- corresponds to the portion of premium income that has been earned. ers, due to insurance contracts or incurred claims, during the financial year, are Acquisition costs By acquisition costs are meant such external operating expenses, such as com- missions, that directly vary with the acquisition or renewal of insurance contracts. Ceded reinsurance As premiums for ceded reinsurance are recorded amounts paid during the finan- The deferred acquisition costs are amortized in the same way as corresponding cial year and amounts recorded as liabilities to the company that have assumed recorded as claims paid, regardless of when the claim was incurred. premiums are earned. Technical provisions Technical provisions consist of the Provisions for unearned premiums and 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 unexpired risks, Provisions for outstanding claims, claims handling provision and period of the insurance cover. All items relating to ceded reinsurance are shown equalization provision (in the Parent Company). on separate lines in the income statement. The reinsurers’ share of technical provisions are recorded as an asset in the Provision for unearned premiums and unexpired risks balance sheet and corresponds to the reinsurers’ liability for technical provisions In the balance sheet, this provision consists of amounts corresponding to the in accordance with entered agreements. The Company assesses any required Company’s liability for claims, administrative expenses and other costs during impairment for assets referring to reinsurance agreements bi-annually. If the the remainder of the contract period for policies in force. “Policies in force” refers recoverable amount is lower than the carrying amount of the asset, 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 REPORTING OF INVESTMENT RETURN Investment income allocated to the technical account Investment return is transferred from the non-technical account to the technical for this period. The estimation of costs is based on the Company’s own experience account on the basis of average technical provisions for the Company’s own and considers both the observed and the forecasted development of relevant account, less deductions for net receivables in insurance operations. This capital costs. base is allocated per currency. The transferred investment return is calculated These future costs are tested quarterly against the unexposed portion of the on the basis of an interest rate per currency equivalent to the actual total yield premium for the contracts in force and if the latter exceeds the costs, the unex- from the investment assets belonging to the insurance operations. The weighted posed portion of the written premium will form an unearned premium reserve. average interest rate for 2016 amounted to 1.63%. 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 Applied interest rates 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 % EUR GBP SEK USD 2016 5.09 % 6.08 % 0.39 % 1.15 % 2015 1.12 % 1.95 % 0.78 % 1.27 % 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 Investment income The item Investment income refers to yield from investment assets and comprises are due for payment. rental income from land and buildings, dividends from shares and participations, The provision for incurred but not reported claims (IBNR) includes costs for in- including dividends from shares in Group companies, interest income, net foreign curred but, to date, unknown claims and not yet fully reported claims. This amount exchange gains, reversed impairments and net capital gains. is an estimate based on historic experience and outcome of claims. The income statement recognizes the change in provision for in outstanding claims for the period. Claims adjustment provision 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 The amount of this provision is based on outstanding claims. The provision is equal and impairments and net capital losses. to a percentage of reported unpaid claims and a percentage of incurred unreport- ed and not yet fully reported claims. The claims handling reserve for catastrophe insurance is calculated in the same way, but with the difference that they are Changes in realized and unrealized gains and losses For investment assets valued at acquisition value, capital gain comprises the calculated on an average of four to five years for those provisions. The period’s positive difference between sale price and book value. For investment assets change in the claims adjustment provision is recorded in the income statement valued at fair value, a capital gain is the positive difference between sale price within the items Claims handling expenses and Operating costs. and acquisition value. For interest-bearing securities, acquisition value is the Deferred acquisition costs for insurance contracts Deferred acquisition costs are only recorded for insurance contracts deemed amortized cost value and, for other investment assets, it is the historical acqui- sition value. At the sale of investment assets, previously unrealized changes in value are recognized as adjustment entries under the item Unrealized profits from to generate a margin at least covering the acquisition costs. Sirius only records investment items or Unrealized losses from investment items, as appropriate. As 30 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Note 1 – Cont. regards interest-bearing securities classified as available-for-sale financial as- — it is technically possible to prepare the software for use, sets, previously unrealized changes in value are recognized as adjustment entries — the Company’s intention is to complete the software and to put it into use, in Other comprehensive income. Capital gains from assets other than investment — the conditions for the use of the software are in place, assets are recorded as Other income. — the manner in which the software can generate probable future economic Unrealized gains and losses are recorded net per asset class. Changes due to benefits can be demonstrated, exchange rate fluctuations are recorded as exchange rate gains or exchange rate — adequate technical, financial and other resources for the completion of losses under the item Investment income/expenses. development and for the use of the software are accessible, and Share of associated company’s profit or loss Share of associated company’s profit or loss represents Sirius’ share of the — expenditure attributable to the software during its development period can be calculated in a reliable manner. associated company’s result, accounted for according to the equity accounting Other development costs, which do not fulfill these criteria, are charged at the method. Currency translation effects are recorded in Other comprehensive income. time at which they arise. Development costs which have previously been charged INCOME TAX Income taxes are accounted according to IAS 12 and consist of current 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. are not reported as an asset in the following period. Development costs for soft- ware reported as an asset are amortized during their assessed useful life, which does not exceed five years. Licenses Licenses, acquired or otherwise received, are accounted as an intagible asset in accordance with IAS 38. Current tax Current tax is tax to be paid or received regarding the current year, with applica- tion of the tax rates which have been enacted or practically enacted at balance LAND AND BUILDINGS All properties owned by the Company are operational properties and are valued sheet date, which also includes the adjustment of current tax referring to previous using the acquisition cost method, in accordance with IAS 16. The Company owns periods. Deferred 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 three properties located in Sweden and Belgium. Sirius reports its properties in accordance with the acquisition cost method and the capitalized costs are depreci- ated over 50 years. No depreciation is carried out on land. FINANCIAL INSTRUMENTS Financial instruments recorded in the balance sheet include, on the asset side, arising at the initial recording of goodwill and the initial recording of assets and shares and participations, loan receivables, bond and other interest-bearing secu- liabilities that are not business acquisitions and which did not affect either net rities as well as derivatives. Where appropriate, derivatives with negative market profit/loss or taxable profit/loss at the transaction date. Furthermore, temporary value are included among liabilities, other liabilities and shareholders’ equity. differences referring to participations in subsidiaries or associated compa- Acquisitions and disposals of financial assets are recorded on trade date, the nies that are not expected to be reversed within the foreseeable future are not date upon which the Company commits to acquire or dispose an asset and thus considered either. The valuation of deferred tax is based on the extent to which gains or looses control of the asset. 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. Classification and valuation Financial instruments are initially recorded at acquisition value corresponding The Group recognizes deferred tax assets on each closing day to the extent that to the fair value of the instrument plus transaction costs, except in the case of it is probable that they can be used against future taxable income. This is based on instruments belonging to the category Financial assets recorded at fair value via assumptions on future profitability and earnings. If these assumptions change it the income statement, which are recorded at fair value exclusive of transaction could imply future reductions in deferred tax assets. Estimating future earnings, costs. A financial instrument is classified when it is initially reported, based upon historical experience and assumptions of the future development of the underlying the purpose for which the instrument was acquired. This classification determines asset is considered. the manner in which the financial instrument will be valued after initial recording, as described below. INTANGIBLE ASSETS Goodwill Goodwill comprises the amount by which the acquisition cost exceeds the fair Financial assets valued at fair value via the income statement This category consists of two sub-groups: financial assets held for trading value of the Group’s participation in the acquired subsidiary’s or associate’s and other financial assets that the Company had initially designated on initial identifiable net assets at the point in time of the acquisition. Goodwill on the recognition as an asset to be measured at fair value trough the income statement acquisition of subsidiaries is recognized as an intangible asset. Goodwill is tested annually for impairment and is recognized at acquisition cost less accumulated (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. impairment losses. Impairment losses of goodwill are not reversed. Profit or loss accounting mismatch). Financial instruments in this category are continually on the sale of a unit includes the remaining carrying value of goodwill referring to valued at fair value, with changes in value recorded in the income statement. The the unit sold. Goodwill is distributed to cash-generating units upon testing of any first sub-group includes derivatives with a positive fair value. The first sub-group 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 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 associ- ated 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 intangible asset is based on it useful life. An intangible asset with a finite useful the basis of the asset’s listed bid rate at balance sheet date, with no added trans- life is amortized while an intangible asset with an indefinite is not amortized but is action costs (e.g. commission) at the time of acquisition. A financial instrument impaired annually. Establishing the useful life is based on an analysis of each ac- is considered to be listed in an active market if listed prices are easily accessible quired intangible asset. The amortized amount of an intangible asset is periodized on a stock exchange, with a trader, broker, trade association, company supplying over the useful life. current price information or supervisory authority and these prices represent actual and regularly occurring market transactions under business-like condi- Self-developed software Costs for maintenance of software are charged at the time at which they arise. tions. Possible future transaction costs from a disposal are not considered. These instruments are included in the balance sheet items Shares and participations and Development costs directly attributable to the development and testing of Bonds and other interest-bearing securities. The predominant proportion of the identifiable and unique software products controlled by the Company are Company’s financial instruments has been assigned a fair value with prices quoted reported as intangible assets when the following criteria are fulfilled: on an active market. 31 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Note 1 – Cont. Financial instruments not listed on an active market If the market for a financial instrument is not active, the Company establishes Other financial liabilities Borrowings and other financial liabilities, for example, accounts payable, are the fair value by means of various valuation techniques. As far as is possible, the included in this category. These liabilities are valued at fair value including trans- valuation methods employed are based on market data, while company-specific action costs and are subsequently accounted at amortized cost. information is used to the least degree possible. The Company regularly calibrates valuation methods and tests their validity by comparing the outcome of the valua- tion methods with prices from observable current market transactions in the same instrument. Financial guarantees Financial guarantee agreements are recorded as insurance contracts in ac- cordance with the accounting principles described in the section Accounting of The total effect in the Income Statement for the year, and the values in the insurance contracts, above. December 31, 2016 balance sheet, for financial instruments valued at fair value 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, is disclosed in Note 19. 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 Loans receivables and accounts receivables Loans receivables and accounts receivables are non-derivative financial assets 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 which are not listed on an active market and with fixed or determinable payments. future cash flows from the asset or group of assets. If there is objective evidence These assets are measured at amortized cost. Amortized cost is determined indicating that an impairment requirement may exist, the assets in question by using the effective interest method at time of acquisition. Loans receivables are considered to be doubtful. Objective evidence is constituted of observable and accounts receivables are reported in the amounts which are expected to be conditions which have arisen and which have a negative impact on the possibility received, that is, after deductions for bad debt provisions. The major posts are of recovering the acquisition cost. For investments in equity intruments objective Interest bearing investments emitted by, and loans to, group companies and Other evidence is also constituded by significant or extended reductions of the fair value debtors. of a financial investment classified as an available-for-sale financial asset. Available-for-sale financial assets The category available-for-sale financial assets include financial assets not Reversal of impairment An impairment is reversed if an indication exists both that the impairment re- classified in any other category or financial assets that the Company has initially quirement no longer exists and that a change has taken place in the assumptions chosen to classify in this category. The holding of bonds and other interest-bearing forming the basis of the estimation of the impaired amount. The impairment of securities is recorded here. Assets in this category are continuously valued at loans receivable and account receivables, recorded at amortized cost, is reversed fair value with changes in value recorded in other comprehensive income, except if a later increase of the recoverable amount can be objectively related to an event for changes in value due to impairment or to foreign exchange rate differences occurring after the impairment has been performed. on monetary items recorded in the income statement. Furthermore, interest on The impairment of interest-bearing instruments, classified as availa- interest-bearing instruments is recorded in accordance with the effective interest ble-for-sale financial assets, is reversed via Other comprehensive income if fair method in the income statement. As regards these instruments, any transaction value increases and this increase can objectively be related to an event occurring costs will be included in the acquisition value when initially reported, and will, after the write-down was carried out. thereafter, 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 LEASED ASSETS All lease agreements are classified and recorded in the Group and Parent Compa- in the income statement. ny as operational leases. In operational leasing, the leasing fee is expensed over A long-term approach forms the basis for investments in this category, where the duration of the lease, on the basis of the benefit received, which can differ from the yield granted by these instruments at the time of investment is of significance the amount paid as a leasing fee during the year. for which investments shall be made. Stockholm 32 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Note 1 – Cont. TANGIBLE ASSETS Tangible assets are recorded at acquisition value after deduction for accumulat- ed depreciation and any impairment, with a supplement for any appreciation. In assessments of the effect of the time value of money and, if applicable, the risks associated with the liability. 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 Pensions and similar commitments The Group companies’ pension plans differ. The pension plans are usually financed useful lives for equipment such as cars, furniture and computer equipment through payments to insurance companies or managed funds. These payments are 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 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 contri- butions if this legal entity does not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior periods. A defined indication of an impairment requirement exists, the asset’s recoverable amount is benefit plan is a pension plan that is not a defined contribution plan. A character- estimated in accordance with IAS 36. istic of defined benefit plans is that they indicate a level for the pension benefit an An impairment loss is recognized when the reported value of an asset or employee receives after retirement, usually based on one or several factors, such cash-generating unit exceeds its recoverable amount. An impairment loss is rec- as age, duration of employment and salary. ognized in the income statement. The impairment of assets related to a cash-gen- The liability reported in the balance sheet regarding defined benefit pension erating unit is primarily allocated to goodwill. The proportional impairment of plans is the current value of the defined benefit obligation at the end of the period, other assets included in the unit is subsequently performed. reduced with the fair value of the managed assets, with adjustments for actuarial The recoverable amount is the highest of fair value less selling expenses and gains and losses. The defined benefit pension plan obligation is calculated annually value in use. In the calculation of value in use, future cash flow is discounted by a by independent actuaries applying the so-called projected unit credit method. The discount factor that considers the risk-free interest rate and the risk associated current value of the defined benefit obligation is determined through discounting with the specific asset. Reversal of impairment An impairment is reversed if an indication exists both that the impairment re- of expected future cash flows, using interest rates determined by current market interest rates. The market rates take into account the caracteristics of the defined pension obligaton, both in terms of duration and the currency in which the remu- neration will be paid quirement no longer exists and that a change has taken place in the assumptions The service cost for current year is recognized in the Income Statement. Costs re- forming the basis of the estimation of the recoverable amount. However, the ferring to service during earlier periods are reported directly in the income statement, impairment of goodwill is never reversed. Reversals are only performed to the unless the changes in the pension plan are conditional on the employee remaining degree that the asset’s reported value after reversal does not exceed the reported employed during a given period (earning period). In this case, the cost referring to value that should have been reported, with deduction for depreciation or amortiza- service during earlier periods is distributed on a straight-line basis over the earning tion when appropriate, if no impairment had been carried out. period. Actuarial gains and losses on the defined benefit obligation and the fair value 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 on the plan assets are recognized in Other comprehensive income (OCI). 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 legal or constructive obligation as a result of past events, when it is likely that an 65. Employees born 1955 and earlier have the possibility to retire between the ages outflow of resources will be required to settle the obligation and when the amount of 62 and 65 according to local agreement. Staff employed before January 1, 2004 can be estimated reliably. In cases in which the date of payment has a material have the right to retire from the age of 64. These plans are also defined benefit effect, the amount of the provision is calculated via the discounting of the expected plans and are reflected in financial statements of both the Group and the Parent future cash flow to an interest rate before taxes which reflects the relevant market Company. 33 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Note 1 – Cont. For defined contribution pension plans, the Group pays fees to publicly or privately administered pension insurance plans on an obligatory, contractual or Taxes Untaxed reserves are recorded in the Parent Company including deferred income voluntary basis. The Group has no further payment obligations when all fees are tax liabilities. However, untaxed reserves in the consolidated accounts are allocat- paid. The fees are reported as personnel costs at the point in time at which they ed between deferred income tax liabilities and shareholders’ equity. 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. Remuneration upon termination of employment Remuneration upon employment of contract is payable when an employee’s em- Pensions The Parent Company applies a different form of reporting of defined benefit pension plans than stipulated in IAS 19. The Parent Company’s reporting of defined benefit pension plans follows the Pension Obligations Vesting Act and ployment is terminated by the Group before the normal retirement age or when an the regulations of the Swedish Financial Supervisory Authority, as it is stated in employee voluntarily accepts the termination of employment in exchange for such RFR 2 that it is not necessary to apply the regulations in IAS 19 regarding defined remuneration. The Group reports severance payments when it is demonstrably benefit pension plans in legal entities. Pension costs are reported as Operational obliged to terminate employees’ employment in accordance with a detailed formal expenses in the Parent Company’s income statement and a provision referring to plan, without possibility of revocation. In the case that the Company has submitted individuals with the option of retiring at the ages of 62 and 64 is found on the line an offer to encourage voluntary termination of employment, the calculation of Pension provisions in the Parent Company’s balance sheet. severance payment is based on the number of employees which it is estimated will accept this offer. Appropriations and untaxed reserves Appropriations and untaxed reserves are only recorded in the Parent Company. CONTINGENT LIABILITIES A contingent liability is recognized when there is a possible obligation which Taxation legislation in Sweden gives companies the option of decreasing taxable income for the year by making provisions to untaxed reserves. When applicable, arises from past events and whose existence is solely confirmed by one or more untaxed reserves are set off against fiscal loss deductions or become subject to uncertain future events, or when there is a commitment which is not recorded as taxation upon resolution. In accordance with Swedish practice, changes in untaxed a liability or provision due to the fact that it is unlikely that an outflow of resources reserves are recorded in the income statement. Provisions made to untaxed will be required. 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 PARENT COMPANY’S ACCOUNTING PRINCIPLES The Parent Company’s annual report, as well as its financial statements in heading Untaxed Reserves. A total of 22% of the untaxed reserves can be considered as a deferred tax general, has been prepared using the same accounting principles and calculation liability and 78% as shareholders’ equity. The deferred tax liabilities can be methods used in the most recent annual report. described as an interest-free liability with a non-defined duration. In the group Differences between accounting principles in the Group and the Parent Company The differences between the accounting principles in the Group and the Parent 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 Company are presented below. The accounting principles stated below for the payable. The largest item attributable to untaxed reserves refers to the safety Parent Company have been consistently applied for all periods presented in the reserve. The safety reserve forms a collective security-conditioned reinforcement Parent Company’s financial statements, unless stated otherwise. of the technical provisions. Accessibility is limited to loss coverage and otherwise requires official authorization. Goodwill Goodwill represents the difference between acquisition cost for business acqui- sitions and the fair value of acquired assets, assumed liabilities and contingent Equalization provision The Parent Company’s balance sheet includes an Equalization provision within liabilities. In the Parent Company, goodwill is amortized in accordance with the Technical provisions, and any changes for the period in this provision are reported Swedish Annual Account Act and is reported in the balance sheet on a straight-line in the income statement. The amount of the provision is calculated as the equiva- basis over the estimated useful life of the asset. The estimated useful life is re- lent of 150% of the highest net premium income for Class 14, credit insurance, with viewed annually. The estimated useful life for goodwill, and goodwill arising from equivalent reinsurance, for the five most recent financial years. The provisions the purchase of the net assets of a business, amounts to 20 years. Amortization for each financial year are equivalent to 75% of the technical surplus in the credit which deviates from plan is handled as an appropriation and is reported under the insurance operations. However, in the consolidated balance sheet, the Equalization heading Difference between reported depreciation/amortization and depreciation/ provision is allocated into deferred tax liabilities and shareholders’ equity. amortization according to plan. Subsidiaries and associated companies The Parent Company records participations in subsidiaries and associates accord- ing to the cost method. Only dividends which have been received are recognized as income, provided that such dividends derive from profits earned subsequent Since the new Insurance Business act came into force, the equalization provision have to be dissolved no later than on December 31, 2019 according to law 2015:700 12 pt. Group contributions and shareholders’ contributions for legal entities The Company reports group contributions and shareholders’ contributions in to the acquisition. Dividend amounts exceeding this earned profit are considered accordance with the Swedish Financial Reporting Board (RFR2). as repayment of the investment and reduce the carrying value of the participations. Shareholders’ contributions are recorded directly against shareholders’ equity In the Parent company’s financial statements transaction costs are capitalized in the receiving entity and in shares and participations in the entity providing the in the balance sheet and are added to the total acquisition amount booked as contribution, to the extent that no impairment is required. shares in subsidiaries. In the consolidated accounts transaction costs are ex- Group contributions are recorded according to their financial significance. This pensed according to IFRS 3. Self-developed software An amount corresponding to what has been capitalized is transfered to restricted implies that group contributions provided and received for the purpose of minimiz- ing the Group’s total taxes are recorded directly against retained earnings, with a deduction for the current tax effects of the contributionGroup contributions which can be seen as the equivalent of a dividend are reported as a dividend. This implies reserves. The reserve is subsequently reversed in line with the amortizations, that group contributions received and their current tax effects are recorded in the according to ÅRL ch 3.§ 10 a. Anticipated dividends Anticipated dividends from subsidiaries are recorded in those cases in which the income statement. Group contributions provided and their current tax effects are recorded directly against retained earnings. In the receiving entity, group contri- butions which can be seen as the equivalent of a shareholders’ contribution are directly recorded in retained earnings, with consideration for current tax effects. Parent Company has the sole right to make decisions regarding the amount of the The contributor records the group contribution and its current tax effects as in- dividend and the Parent Company has reached a decision on the dividend’s amount vestments in participations in the Group companies, to the extent that impairments before the Parent Company has published its financial statements. are not required. 34 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Note 2 – Information on risks 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 RISK MANAGEMENT The company’s Enterprise Risk Management, ERM, is at the heart of Sirius’ of Directors. thinking. Sirius defines ERM as the discipline by which the company identifies, assesses, controls, monitors, and discloses risks from all sources for the purpose of increasing Sirius’ short- and long-term value to its stakeholders. INSURANCE RISK MANAGEMENT Goals, principles and methods A clear focus on managing insurance risks is vital for Sirius’ continued success. ERM is an ongoing process with the objective of creating a risk management These risks are managed mainly by evaluating the degree of gross and net risk culture that emanates from top management and which permeates throughout the (after retrocessional protections) that Sirius is willing to assume. entire organization. Sirius strives to maintain a risk culture where employees are Sirius divides insurance risk management into two principal areas; underwrit- aware of and measure, assess and communicate risk as part of their responsibil- ing risk and reserve risk. ities. Management’s role includes communicating, implementing, monitoring and fostering this culture. Underwriting risk Underwriting risk refers to premium and accumulation assessment, which is The objectives of Sirius’ work with ERM are: defined as premium risk and catastrophe risk, respectively. The underwriting risk — Define Sirius’ risk tolerance and develop appropriate operating guidelines assessment is performed by underwriters on each individual risk and the Chief consistent with that framework Underwriting Officer is ultimately responsible for managing these risks. — Optimize profitability within the established risk tolerance framework The goal for all underwriting is to maximize profitability for each selected risk — Provide clear information for strategic management decisions level. The anticipated profitability of each underwriting decision shall comprise the — Demonstrate strong risk management through a well-defined process basics of all underwriting. Other underwriting guiding principles include diversifi- including identification, quantification, monitoring, and appropriate cation, strong accumulation controls and an active use of reinsurance in order to management response adjust risks to acceptable risk tolerance levels. — Provide all stakeholders with transparent risk management information At Sirius America the ultimate responsibility for managing these risks is — Comply with current Solvency II standards and with all regulatory assigned by underwriting unit. For property it is the Property Chief Underwriting requirements RISK STRATEGY AND THE COMPANY’S RISK TOLERANCE Risk strategy and risk tolerance comprise the foundation of the risk management 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 Interna- tional, as appropriate. processes. Sirius’ risk strategy and risk tolerance have been established by Sirius’ The insurance premiums for assumed business are to cover expected losses Board of Directors. The aim is to secure a balance between risk, return and capital and expenses as well as provide a reasonable return on deployed capital. The pre- requirements. As part of the planning process, strategic limits are explicitly mium risk is therefore associated with any possible level of losses deviating from discussed and specified. The strategic risk tolerance is expressed either in quanti- expected levels. The premium risk is generally managed through the application tative terms or in qualitative terms. From these overall risk tolerance statements, of pricing models and underwriting procedures, but also through a restructuring risk limits are applied at a detailed level throughout the organization in the form of under-performing business, active use of retrocession or through by to accept of maximum risk exposure, retrocession limits, foreign exchange exposure limits, such business. maximum equity exposure in the investment portfolio, etc. 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 As part of the ERM culture, Sirius embraces the following qualitative principles: profit, or, even consume a portion of the solvency capital. This catastrophic risk — Controlled/moderate risk taking and adequate capitalization is managed with the assistance of underwriting methods and tools which monitor — Reduce risk by proper risk selection and active portfolio diversification and control the company’s total aggregate risks, both gross and net. Catastrophe — All insurance transactions are expected to yield positive technical results risk is also managed by the effective use of retrocessional protections. — Active use of retrocession as part of business and capital planning In order to ensure consistency in the underwriting process, all underwriting — Positive investment returns through a diversified portfolio of high quality within Sirius complies with specific rules and procedures. Detailed underwriting debt and equity investments — Strong accumulation control guidelines comprise the framework for all risk acceptances, and these guidelines contain sections regarding, for example, limits, underwriting authorities and — Strong and independent control functions restricted business. A Four-Eyes underwriting system, that is, a system in which at — Motivate employees to further develop their risk management capabilities least two individuals participate in each decision, is applied for the majority of the business. The underwriting guidelines are reviewed at least annually and updated RISK GOVERNANCE The risk management processes within Sirius are supported by a risk manage- when appropriate. There are several levels of control functions as well as technical systems, ment infrastructure consisting of the Board of Directors, an experienced manage- which are in place to monitor and control that underwriting policies and proce- ment team, various risk committees, control functions, policies and procedures, dures are followed. At Sirius International, there is an underwriting control unit risk models and reporting routines. This is described in further detail in the risk reporting to the Chief Underwriting Officer. This unit focuses in detail on how the sections below. business is underwritten and that the underwriters follow issued policies and Sirius’ Board of Directors is ultimately responsible for the company’s risk man- procedures. Another unit controls the underwriting system and ensures it is used agement strategy, risk tolerances and policies and Sirius’ management has the correctly and that input data is accurate. Finally, Risk Control, Compliance and In- day-to-day responsibility for all ERM activities. To deploy these responsibilities, ternal Audit also monitor these control groups, carrying out random inspections/ different risk committees carry out certain pre-defined duties. tests, in detail ensuring they use sufficient control. The Risk Management Committee is a sub-committee to the Board of Directors and has the objective of formalizing the oversight of critical risks, including the Retrocession Sirius International uses retrocessional reinsurance as a tool to manage net risk following risk management processes: — Establishment of risk tolerances and has a centralized unit responsible for the purchasing and administration of its outwards reinsurance. The implementation of reinsurance purchases is based — dentification and management of emerging risks on the strategic direction of the inwards portfolio, overall risk tolerances and the — Quantification and subsequent monitoring of exposures search for an optimal portfolio mix. Catastrophe models and capital modeling — Implementation of risk reduction/reward expansion strategies tools are used in the analytical and decision making process. — Risk reporting Sirius’ functions for risk management and compliance are responsible for the in- Sensitivity to risks attributable to insurance agreements Within the insurance operations, natural catastrophe exposure (wind, flooding, dependent monitoring of Sirius’ risks. The functions submit quarterly risk reports and earthquakes) constitutes the company’s greatest risk. In order to manage and compliance reports to the CEO, the Management Group and to the Board of this catastrophe risk, and the resulting accumulated risks, the company utilizes a Directors. Additionally, ad hoc reporting is done when deemed necessary. number of different models. In 2012, Sirius started using a new proprietary prop- 35 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Note 2 – Cont. erty underwriting and pricing tool (“GPI”), which consolidates and reports on all its to measure its financial exposure to such scenarios. Sirius focuses on monitoring worldwide property exposures. GPI is used to calculate individual and aggregate NFI TVaR, including the 100, 250, 500 and 1,000 year return periods in order to PMLs by statistical blending of multiple third-party and proprietary models. There manage the potential impact of remote events on the Sirius financial position. The is a process in place to evaluate and select a model of choice per territory and calculation of the NFI begins with the modeled TVaR PML and takes account of peril. Based on the new tool, reports and analyses can be produced on an as re- estimated reinstatement premiums, reinsurance recoverables net of estimated quired basis demonstrating the various degrees of likelihood of estimated claims. uncollectible balances, and tax benefits. This amount is deducted from Sirius’ Everything from average claims per year to claims that are only expected to occur planned legal entity comprehensive net income for the year (before any planned once every 10,000 years can be stochastically estimated using these models. Aside losses for catastrophe events) to arrive at the NFI. The NFI does not include the from the possibility of modeling single events, multiple occurrences within one potential impact of the loss events on Sirius’ investment portfolio. calendar year are also modeled. Within Aviation reinsurance, the company applies another licensed third-party Sensitivity analyses are undertaken based on a comparison of claims estimated model, ALPS, in which the exposure per airline company can be modeled and mon- by various models, but also through changes to the assumptions applied by the itored. Within the insurance classes Accident & Health, Property and Trade Credit, different models, such as, return periods. the company has models which it has developed internally. In addition, Sirius utilizes a system linked to the underwriting system. In this system the company’s exposure is measured via a number of predefined catastro- phe scenarios. Reserve risk The reserve risk, i.e. the risk that insurance technical provisions will be insuf- Sirius also registers and monitors total exposed limits to wind and earthquake ficient to settle incurred and future claims, is foremost handled by actuarial losses per country and/or zone. methods and a careful continuous review of reported claims. Concentrations and sensitivity analysis Through the use of the simulation models, discussed in the previous section, costs with the period in which they emerged. The amount of the provision shall cor- respond to the amount that is required to fulfill all expected obligations and reflect the company can obtain an estimate of catastrophe risk, both prior to and after the best knowledge available to Sirius. Acknowledged and appropriate methods retrocession. are used in these estimations. The table below shows a summary of the manner in which Sirius analyzes ca- Sirius supports its decisions on provisions by a combination of several actuarial tastrophe risks, divided by geographical area and return periods. Sirius analyzes methods, such as the Chain Ladder method, the Bornhuetter-Ferguson method catastrophe risks each quarter during the financial year. The figures show the and the Benktander method. A combination of benchmarks and underwriting situation at the end of Q4 2015 and Q4 2016. judgment is used for the most recent years. Provisions are made to obtain a correct balance sheet and match revenues and SENSITIVITY ANALYSIS — LOSSES DIVIDED BY GEOGRAPHICAL AREA AND RETURN PERIODS FOR THE GROUP refer also to Note 4 Claims incurred and Note 24 Claims Outstanding, where a specification of claims costs and expenses relating to the current year and prior Regarding run-off results and claims development from previous years please 2016 2015 years is made. Once per 100 years Once per 250 years Once per 100 years Once per 250 years The Group has asbestos and environmental claims amounting to MSEK 1,633 (1,598) net in the Group balance sheet. These claims are actively managed and are Global — Gross Global — Net Europe — Gross Europe — Net US — Gross US — Net 3,975 2,435 3,431 891 3,105 2,353 4,917 2,968 4,604 1,081 3,940 2,911 4,688 2,918 3,209 1,436 4,255 2,808 5,423 3,572 4,187 1,852 5,156 3,488 subject to in depth analyses, the latest during the second half of 2013. A new in depth analysis is scheduled for 2017. The increase during 2016 is caused entirely by changes in foreign exchange rates. In original currency (USD) we have a 5 % reserve decrease. 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 2016. The table below is thus not directly comparable to the income statement. The changes 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. Generally development of runoff portfolios are included In addition, to manage its aggregate exposure to very large catastrophe events, only after they are acquired. This implies that the table only shows the loss devel- among other measures Sirius has been monitoring the largest net financial impact opment from the date of acquisition, which is the point of time when controlling (“NFI”) that third-party models predict it would suffer based on the extreme tail influence was obtained. of the modeled losses. Sirius monitors multiple indicators of catastrophe tail risk 36 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Note 2 – Cont. 10-YEAR TABLE GROUP – CLAIMS, GROSS UNDERWRITING YEAR 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 8 years later 9 years later Current estimate of total claims Total paid CLAIMS OUTSTANDING1) 2006 AND PRIOR YEARS TOTAL 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 TOTAL 4,353 5,300 5,279 5,174 9,509 9,466 9,463 9,439 9,423 9,422 9,422 9,179 242 — — 4,473 5,588 5,575 9,629 9,588 9,571 9,534 9,492 9,480 9,480 9,230 250 — — 4,334 6,293 9,686 9,533 9,449 9,377 9,391 9,369 9,369 9,155 214 — — 3,588 9,130 8,987 8,931 8,748 8,702 8,688 8,688 8,357 331 — — 5,270 6,834 7,055 6,887 6,845 6,825 6,825 6,626 199 — — 3,658 4,850 4,667 4,577 4,543 3,405 4,982 4,839 4,736 2,984 5,043 5,229 2,993 5,086 3,916 4,543 4,101 442 — — 4,736 4,275 460 — — 5,229 4,391 838 — — 5,086 2,904 2,182 — — 3,916 854 3,062 — — 8,220 5,763 13 982 GROUP – CLAIMS, NET OF REINSURANCE UNDERWRITING YEAR 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 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 8 years later 9 years later Current estimate of total claims Total paid CLAIMS OUTSTANDING1) 2006 AND PRIOR YEARS TOTAL PARENT COMPANY – CLAIMS , GROSS UNDERWRITING YEAR 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 8 years later 9 years later Current estimate of total claims Total paid CLAIMS OUTSTANDING1) 2006 AND PRIOR YEARS TOTAL 3,878 4,751 4,700 4,595 9,151 8,715 8,280 8,255 8,241 8,235 8,235 8,017 218 — — 4,118 4,939 4,881 9,259 8,427 8,299 8,259 8,236 8,234 8,234 8,004 230 — — 3,776 4,908 8,449 7,986 7,908 7,839 7,874 7,854 7,854 7,662 192 — — 2,970 8,397 8,111 8,062 7,860 7,817 7,813 7,813 7,538 275 — — 4,755 6,482 6,428 6,043 6,010 5,986 5,986 5,814 172 — — 3,363 4,196 3,901 3,801 3,770 3,770 3,445 325 — — 2,470 3,621 3,540 3,453 2,175 3,842 4,068 2,235 3,837 2,822 3,453 3,135 317 — — 4,068 3,414 654 — — 3,837 2,088 1,749 — — 2,822 549 2,273 — — 6,406 4,800 1 205 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 TOTAL 4,353 5,300 5,279 5,174 5,151 5,136 5,134 5,137 5,130 5,119 5,119 5,058 61 — — 4,473 5,588 5,575 5,486 5,494 5,472 5,423 5,371 5,347 5,347 5,242 105 — — 4,334 6,293 5,991 5,903 5,862 5,800 5,823 5,819 5,819 5,676 143 — — 3,588 5,462 5,283 5,250 5,139 5,111 5,084 5,084 4,865 219 — — 2,504 3,693 3,526 3,326 3,288 3,291 3,291 3,014 277 — — 2,340 3,078 2,912 2,850 2,876 2,876 2,499 377 — — 2,491 3,481 3,271 3,222 1,976 2,907 2,777 1,853 2,636 2,122 3,222 2,864 358 — — 2,777 2,255 522 — — 2,636 1,400 1,237 — — 2,122 405 1,717 — — 5,016 765 5,781 PARENT COMPANY – CLAIMS , NET OF REINSURANCE UNDERWRITING YEAR 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 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 8 years later 9 years later Current estimate of total claims Total paid CLAIMS OUTSTANDING1) 2006 AND PRIOR YEARS TOTAL 3,878 4,751 4,700 4,595 4,568 4,554 4,554 4,561 4,555 4,539 4,539 4,502 37 — — 4,118 4,939 4,881 4,786 4,803 4,789 4,741 4,708 4,692 4,692 4,623 69 — — 3,776 4,908 4,646 4,643 4,613 4,554 4,570 4,554 4,554 4,462 92 — — 2,970 4,574 4,384 4,354 4,224 4,199 4,177 4,177 4,024 154 — — 1,956 2,821 2,677 2,479 2,451 2,451 2,451 2,202 249 — — 1,892 2,367 2,191 2,118 2,147 2,147 1,887 261 — — 1) For reconciliation against Balance Sheet, see Note 24. 1,558 2,212 2,081 2,047 1,294 1,913 1,800 1,284 1,827 1,408 2,047 1,830 217 — — 1,800 1,438 362 — — 1,827 911 916 — — 1,408 204 1,204 — — 3,560 701 4,261 37 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Note 2 – Cont. FINANCIAL RISK MANAGEMENT Goals, principles and methods In the company’s operation various types of financial risks arise, such as market The Investment Committee is responsible for the continuous management of market risks. The development of the market risks is reported within the Invest- ment Committee on a quarterly basis. The Investment Committee is reporting to risks, credit risks and liquidity risks. In order to limit and control the risk taking the Sirius Board of Directors. in the operations, Sirius’ Board of Directors, being ultimately responsible for The company’s investment operations during 2016 yielded a total return of 2.1 the internal control in the company, has determined guidelines for the financial percent (3.2 percent in 2015), expressed in SEK. The duration in the port¬folio operations. with interest-bearing investments at the end of 2016 was 3.1 years which was The overall investment objective is to achieve consistent positive returns and higher compared to 2015 (2.38 years). During the year the group has reduced the to maximize long-term after-tax return on invested assets within prudent levels portion of shares and participations compared to 2015. The table below shows the of risk, through a diversified portfolio of high-quality fixed income and equity investment assets divided by class of asset, excluding deposits in companies that investments. are reinsured by Sirius. INVESTMENT ASSETS, DIVISION BY CLASS OF ASSET, PERCENTAGE SPLIT 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), Finansinspektionen. As regards Policyholder Funds Investments, at least 90 percent shall be invest- ed in fixed income securities at all times. Furthermore, at least 90 percent of the fixed income portfolio must be creditworthy and liquid; i.e. consisting of securities with high credit ratings (investment grade). Bonds and other interest- bearing securities To limit concentration risk, the guidelines also include restrictions on expo- Shares in associated companies sures 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. Shares and participations — whereof venture capital companies GROUP PARENT COMPANY 2016 2015 2016 2015 81.99 71.08 34.70 37.18 0.55 7.60 0.52 58.38 59.90 20.41 0.82 0.74 1.41 1.34 0.72 0.64 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. Derivatives –1.12 –2.78 –1.52 –4.33 Cash and bank balances 10.98 10.78 7.62 6.51 TOTAL 100.00 100.00 100.00 100.00 38 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Note 2 – Cont. Below, the company’s exposure and sensitivity to the respective market risks are market value increases as the interest rates decrease. The level of interest rate described. risk increases with the asset’s duration. The tables below illustrate, in absolute figures, the exposure to interest rate risk as per December 31, 2016 and December Interest Rate Risk The company is exposed to the risk that the market value on its fixed-interest 31, 2015. assets decreases as market interest rates increase, or alternatively, that the INVESTMENT ASSETS, INTEREST RATE RISK EXPOSURE (MSEK) SCENARIO, STRESS TEST GROUP Assets in SEK Assets in EUR Assets in USD and other currencies TOTAL PARENT COMPANY Assets in SEK Assets in EUR Assets in USD and other currencies TOTAL 2016 1,859 1,574 17,149 20,582 EXPOSURE (MSEK) 2016 1,531 1,574 3,363 6,468 2015 1,679 1,479 14,524 17,681 2015 1,304 1,478 4,519 7,301 2016 100 bp 100 bp 100 bp - SCENARIO, STRESS TEST 2016 100 bp 100 bp 100 bp - 2015 100 bp 100 bp 100 bp - 2015 100 bp 100 bp 100 bp - CAPITAL REQUIREMENTS (MSEK) 2016 2015 77 82 472 631 33 75 290 399 CAPITAL REQUIREMENTS (MSEK) 2016 2015 64 82 106 252 24 75 101 200 Equity Risk The equity risk is the risk that the market value of equity securities will decrease specifically to the company in question. Equity risks are mainly mitigated by a diversification of the equity securities portfolio. The tables below show the equity as a result of factors related to the external economic climate and factors related risk as per December 31, 2016 and December 31, 2015. INVESTMENT ASSETS, EQUITY RISK GROUP Foreign shares and participations Foreign subsidiaries and associated companies TOTAL PARENT COMPANY Foreign shares and participations Foreign subsidiaries and associated companies TOTAL EXPOSURE (MSEK) SCENARIO, STRESS TEST CAPITAL REQUIREMENTS (MSEK) 2016 1,918 145 2,063 EXPOSURE (MSEK) 2016 152 10,882 11,034 2015 5,387 127 5,514 2015 2,858 8,223 11,081 2016 35% 35% - SCENARIO, STRESS TEST 2016 35% 35% - 2015 35% 35% - 2015 35% 35% - 2016 671 51 722 CAPITAL REQUIREMENTS (MSEK) 2016 53 3,809 3,862 2015 1,885 45 1,930 2015 1,000 2,878 3,878 39 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Note 2 – Cont. CURRENCY RISK Currency risk arises if assets and liabilities in the same foreign currency vary in amounts. exposure related to Owners’ Funds. Sirius’ net Policyholder Funds exposure for currency risk is marginal as the objective for managing currency risk is to match net insurance liabilities in foreign currency with corresponding assets on timely The Currency and Market Risk group meets at least monthly in order to monitor basis. The Group’s total net exposure for currency risk, i.e. including both Policy- currency exposure and limit currency risk. In addition, it is the responsibility of the holder and Owners’ Funds, before and after any hedging by derivatives is shown in group to review and update the Currency Risk Policy and ensure it is approved by the table below (the table is only presented for the Group since the exchange rate the Investment Committee and the Board of Directors on an annual basis. exposure, at large, is the same for the Parent Company and the Group since the Sirius’ total net currency exposure is divided into two categories, exposure re- subsidiaries are treated on a look through basis where the subsidiaries’ valuation lated to Policyholder Funds, which is matched with the corresponding assets, and and exposure is taken into consideration). EXCHANGE RATE EXPOSURE — INVESTMENT ASSETS GROUP USD EUR GBP Other USD EUR GBP Other 2016 2015 Shares and participations 2,450 17 4 Bonds and other interest-bearing securities 13,950 1,615 1,520 Other financial investment assets Other assets and liabilities, net Total assets 3,602 2,951 125 178 32 -39 22,953 1,935 1,517 - - 394 214 608 5,496 5 - 13,635 1,488 1,701 2,244 2,910 145 94 63 4 24,285 1,732 1,768 Technical provisions, net Total liabilities and provisions –11,166 –1,291 –11,166 –1,291 –244 –244 –563 –563 -10,503 -1,309 -10,503 -1,309 -330 -330 Net exposure before financial hedging with derivatives 11,787 644 1,273 45 13,782 423 1,438 Nominal value currency forwards -5,433 - - NET EXPOSURE AFTER FINANCIAL HEDGING WITH DERIVATIVES 6,354 644 1,273 - 45 -5,055 - - 8,727 423 1,438 - - 309 163 472 -518 -518 -46 - -46 In the table below, the effect on the company’s shareholders’ equity and income The analysis below assumes that the changes in exchange rates do not affect other statement of two stress tests are shown: An unfavorable foreign exchange rate risk parameters, such as interest rate. The sensitivity analysis takes into consider- move of 25 basis points, in the respective foreign currencies towards SEK and ation existing financial hedges with currency related derivatives. an unfavorable change to foreign exchange rates by 10 percent in the respective foreign currencies towards SEK. SENSITIVITY ANALYSIS PER CURRENCY GROUP 6 Change 25 basis points 1 0 2 Change 10 % 5 Change 25 basis points 1 0 2 Change 10 % USD 175 635 259 873 EUR 17 64 12 42 GBP 28 127 29 144 Other TOTAL - 4 - 5 220 830 300 1,064 40 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Note 2 – Cont. CREDIT RISK Credit risk, or counterparty risk, refers to the risk that the company will not re- structure. Sirius invests in fixed income assets with high credit quality. The average credit rating of the fixed income portfolio at the end of 2016 was AA-. ceive agreed payment and/or will make a loss due to the counterparty’s inability to Assets sensitive to changes in credit spreads may also give rise to others risks, fulfill its obligations. A substantial portion of the credit risk to which the company e.g. counterparty risk. is exposed, arises as a result of established reinsurance agreements. Counterparty risk in investment assets Credit risk in investment assets The credit risk in investment assets can be split into credit spread risk and 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 counter party risk. relatively limited. The table below shows the exposure of Sirius’ investment assets divided per Credit spread risk in investment assets Credit spread risk results from the sensitivity of the value of fixed income assets to changes in the level or in the volatility of credits spreads over the risk-free term class of asset (MSEK). Bonds and other interest-bearing assets — Governments — Swedish mortgage institutions — Other Swedish issuers — Other issuers Shares in associated Companies Shares and participations Derivatives TOTAL GROUP PARENT COMPANY 2016 20,699 3,657 775 560 15,707 145 1,918 -283 22,479 2015 18,738 1,687 480 - 16,571 127 5,387 -734 23,518 2016 6,468 1,744 618 480 3,626 10,882 152 -283 17,219 2015 6,302 421 377 - 5,504 10,153 126 -734 15,847 41 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Note 2 – Cont. The table 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 2016 Name of security Type of security Market value (MSEK) % of financial assets Doubleline Total Return Bond CL MF JPMorgan Chase & Co Swedbank Hypotek AB Fund Bond Bond New Energy Capital Infrastructure Credit Fund L.P Share Länsförsäkringar Hypotek AB New Energy Capital Infra Offshore Bond Share BE Reinsurance Ltd Shares in Associated Company Sveriges Säkerställda Obligationer AB Avis Budget Rental Car Funding LLC Volvo Financial Equipment LLC TOTAL Bond Bond Bond 1,053 354 243 219 185 147 145 126 99 97 4.63 1.55 1.07 0.96 0.81 0.64 0.60 0.55 0.43 0.43 2,668 11.67 PARENT COMPANY 2016 Name of security Type of security Market value (MSEK) % of financial assets SI Phoenix (Luxembourg) S.à r.l Shares in Subsidiary S.I. Holdings (Luxembourg) S.à r. Shares in Subsidiary JPMorgan Chase & Co Swedbank Hypotek AB Länsförsäkringar Hypotek AB Bond Bond Bond Be Reinsurance Ltd Shares in Associated Company Sveriges Säkerställda Obligationer AB Swedish Cover bond Corp MLSSS Ltd Länsförsäkringar Hypotek AB TOTAL Bond Bond Shares Bond 5,606 4,833 354 243 185 145 126 95 94 81 11,762 32.03 27.61 2.02 1.39 1.06 0.83 0.72 0.54 0.54 0.46 67.20 London 42 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Note 2 – Cont. GROUP 2015 Name of security Symetra Financial Corporation OneBeacon Insurance Group SPDR S&P 500 ETF Trust Swedbank Hypotek AB ISHARES Core S&P 500 ETF JPMorgan Chase & Co Nordax Finans AB Total Capital Canada Ltd Verizon Communications Telenor ASA TOTAL PARENT COMPANY 2015 Name of security Type of security Market value (MSEK) % of financial assets Share Share Share Bond Share Bond Bond Bond Bond Bond 3,012 766 378 377 370 327 219 216 160 132 5,957 12.08 3.07 1.52 1.51 1.48 1.31 0.88 0.87 0.64 0.53 23.89 Type of security Market value (MSEK) % of financial assets SI Phoenix (Luxembourg) S.à r.l Shares in Subsidiary S.I. Holdings (Luxembourg) S.à r. Shares in Subsidiary Swedbank Hypotek AB Bond Sirius International Holdings (NL) B.V. Shares in Subsidiary Total Capital Canada Ltd Nordax Finans AB Telenor ASA BE Reinsurance Ltd Scania CV AB MLSSS Ltf TOTAL Bond Bond Bond Shares in Associated Company Bond Share 6,158 3,572 377 269 233 219 132 128 96 77 11,261 35.78 20.76 2.19 1.56 1.35 1.28 0.77 0.74 0.56 0.45 65.44 43 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Note 2 – Cont. The tables below show fixed income investments and equity investments per presented per sector (the table is only presented for the Group since the distribu- geographical area and credit rating classes. Fixed income investments are also tion, at large, is the same for the Parent Company). CREDIT QUALITY ON CLASSES OF INVESTMENT ASSETS, % GROUP AAA AA A BBB CCC Not rated TOTAL AAA AA A BBB CCC Not rated TOTAL 2016 2015 Bonds and other interest-bearing securities — Swedish government — Swedish mortgage institutions — Other Swedish institutions — Foreign governments — Other foreign issuers 23 100 89 94 7 20 29 25 22 0 3 0 65 20 0 8 0 25 25 0 0 0 0 32 0 0 0 0 0 0 1 0 0 6 3 3 100 100 100 100 100 100 22 0 100 0 27 19 24 20 34 - - - 64 20 - - - 8 - - - 1 22 39 - - - - - - - - - - - - EQUITY INVESTMENTS, DIVIDED BY GEOGRAPHICAL AREA, % GROUP PARENT COMPANY Western Europe North America Other Total 2016 1.69 97.68 0.63 100 INTEREST-BEARING INVESTMENTS, DIVIDED BY GEOGRAPHICAL AREA, % GROUP Western Europe North America Scandinavia Other Total INTEREST-BEARING INVESTMENTS, DIVIDED BY SECTOR, % Governments Swedish mortgage institutions Other Swedish issuers Other foreign issuers Total 2016 14.01 76.73 9.03 0.23 100 GROUP 2016 17.77 3.76 2.72 75.75 100 2015 0.62 96.85 2.53 100 2015 23.30 73.85 2.61 0.25 100 2015 9.15 2.61 0 88.24 100 2016 3.77 96.03 0.2 100 PARENT COMPANY 2016 44.57 31.03 23.67 0.73 100 PARENT COMPANY 2016 26.96 9.56 7.42 56.05 100 100 0 100 0 100 100 2015 3.62 96.15 0.23 100 2015 57.86 35.43 5.99 0.72 100 2015 6.68 5.99 0 87.33 100 Credit risk on receivables with reinsurers The credit risk resulting from reinsurance ceded by Sirius can be divided into two Ageing balances Receivables related to direct insurance as well as assumed and ceded reinsurance separate components; reinsurers’ share of technical provisions as recorded on an are followed up on a semi-annual basis. Outstanding receivables are analyzed on ongoing basis under assets in the balance sheet, and the potential exposure that the basis of the length of time that has passed since the due date with the following would emerge in the event of large claims to the insurance portfolio, which would distribution: Less than 1 month, 1-3 months, 3-6 months, 6-9 months, 9-12 months occur for example, in the case of a severe European windstorm. An event such as and over 1 year. These analyses comprise the basis for various collection activities, this would trigger recoveries from major portions of Sirius’ outwards reinsurance as does the supporting documentation regarding the assessment of the counter- program. party’s credit risk status and any requirements for bad debts provisions. Sirius’ Security Committee is responsible for managing the risk of reinsurer in- solvency. To mitigate this risk, the financial condition of our reinsurers is reviewed bi-annually and periodically monitored. The credit risk reserve for bad debts amounted, as per December 31, 2016, to MSEK 100 for the Group, whereof MSEK 36 at Sirius International (2015 MSEK 74 for the Group, MSEK 22 at Sirius International). 44 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Note 2 – Cont. GROUP 2016 2015 Due for <1 Month 1–3 Months 4–6 Months 7–9 Months 10–12 Months >1 Year Net receivables Net receivables 948 731 141 100 49 50 -6 8 1 5 51 119 Total 1,184 1,013 PARENT COMPANY Due for <1 Month 1–3 Months 4–6 Months 7–9 Months 10-12 Months >1 Year Total 2016 2015 Net receivables Net receivables -25 109 43 24 22 22 0 6 2 1 35 83 77 245 In accordance with Sirius International’s policy for write-downs of receivables outstanding for more than 1 year, there is a specific reserve for counterparties Retrocession credit risk Reinsurers’ share of technical provisions consists of outstanding claims including which are not classified as IDC companies (Insolvent and Doubtful Companies) IBNR reserves, as well as a provision for unearned premiums and remaining risks. which totals MSEK 1 (6) at December 31, 2016. The credit rating distribution for this exposure is shown in the table below. RATING – STANDARD & POOR’S OR EQUIVALENT GROUP Gross Collateral Net Percentage split Gross Collateral Net Percentage split 2016 2015 AAA AA+ AA AA- A+ A A- BBB+ BBB or lower Special approval TOTAL 0 474 218 307 643 227 1,100 35 398 697 4,099 0 0 7 8 17 1 131 0 66 121 351 0 474 211 299 626 226 969 35 332 576 0 12 5 8 15 6 27 1 10 16 0 460 269 300 487 193 543 36 208 621 3,748 100 3,117 0 0 7 2 28 0 73 0 39 124 273 0 460 262 298 460 193 469 36 169 497 2,844 0 15 9 10 15 6 17 1 7 20 100 PARENT COMPANY Gross Collateral Net Percentage split Gross Collateral Net Percentage split 2016 2015 AAA AA+ AA AA- A+ A A- BBB+ BBB or lower Special approval TOTAL 0 0 214 155 315 170 1,005 33 84 669 2,645 0 0 6 0 0 0 0 0 10 121 137 0 0 208 155 315 170 1,005 33 74 548 2,508 0 0 8 6 12 6 38 1 3 25 100 0 0 244 181 304 136 504 34 79 611 2,093 0 0 7 0 0 0 0 0 0 124 131 0 0 237 181 304 136 504 34 79 487 1,962 0 0 12 9 14 7 24 1 4 29 100 45 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Note 2 – Cont. Significant credit losses can potentially arise from unusually large and infrequent 2016 Retrocession Program. (The table represents the Parent Company since events. external reinsurance, at large, does not exist in other parts of the Group). The table below describes the assumed liabilities from Retrocessionaires (ex- cluding costs for reinstatements) and the distribution of credit ratings for Sirius’ STANDARD & POOR’S OR EQUIVALENT 2016 2015 PARENT COMPANY Gross Collateral AA+ AA AA- A+ A A- BBB+ BBB or lower Special approval TOTAL 0 105 630 2,222 256 733 81 77 493 4,597 0 0 0 0 0 0 54 98 495 647 Net 0 105 630 2,222 256 733 27 (21) (2) Percentage split Gross Collateral 0 3 16 56 6 19 1 (1) 0 0 215 1,338 2,066 157 915 63 63 1,705 6,522 0 0 0 0 0 0 46 77 1,298 1,421 3,950 100 Net 0 215 1,338 2,066 157 915 17 -14 407 Percentage split 0 4 26 41 3 18 0 0 8 5,101 100 LIQUIDITY RISK Liquidity risk is the risk that the company will have difficulties fulfilling payment assets was 3.1 years (2.4 years at the end of 2015) and the duration of insurance obligations, mainly those related to insurance liabilities. Liquidity risk can also be liabilities was 4.9 years (5.0 years at the end of 2015). The liquidity is monitored expressed as the risk of loss or impaired earning potential as a result of the com- continuously and stress tests are performed for different scenarios. The compa- pany not being able to fulfill payment obligations in due time. Liquidity risks arise ny’s claims payment capabilities are further strengthened with its high portion of as assets and debts including derivatives instruments have different durations. cash and bank deposits of the total investment assets. The company’s strategy for dealing with liquidity risk aims to match expected The cash flow analysis also provides an illustration of the company’s liquidity payments and receipts of payment (so called asset-liability management, ALM). situation. This is accomplished through advanced liquidity analysis of financial assets and The tables below show a more detailed maturity profile for the Group and insurance liabilities. At the end of 2016 the duration of interest-bearing investment Parent Company in respect of both financial assets and debts. 46 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Note 2 – Cont. LIQUIDITY PROFILE — FINANCIAL ASSETS (CONTRACTUAL INFLOWS) GROUP 2016 On demand <3 months 3 months— 1 year 1—5 years >5 years No duration Total Bonds and other interest-bearing securities Shares & participations in Associated Companies Shares & participations Cash & bank balances Receivables, direct insurance Receivables, reinsurance Other debtors Prepayments and accrued income TOTAL GROUP 2015 Bonds and other interest-bearing securities Shares & participations in Associated Companies Shares & participations Cash & bank balances Receivables, direct insurance Receivables, reinsurance Other debtors Prepayments and accrued income - - - 2,764 - - - - 521 2,109 10,371 7,698 - - - 113 912 - 9 - - - - 2,533 27 145 - - - 0 51 45 1 - - - - - - - - 145 1,918 - 123 28 21 - 20,699 145 1,918 2,764 236 3,524 93 155 2,764 1,555 4,814 10,468 7,698 2,235 29,742 On demand <3 months 3 months— 1 year 1—5 years >5 years No duration - - - 2,842 - - - - 689 1,300 8,702 7,737 - - - - - - - - 680 1,880 - 9 168 153 - - - - 67 65 1 - - - - - 28 - - 127 5,387 - 168 30 - - Total 18,428 127 5,387 2,842 168 2,657 261 163 TOTAL 2,842 1,378 3,501 8,835 7,765 5,713 30,034 PARENT COMPANY 2016 On demand <3 months 3 months— 1 year 1—5 years >5 years No duration Total Bonds and other interest-bearing securities Shares & participations in Group companies Shares & participations Cash & bank balances Receivables, direct insurance Receivables, reinsurance Other debtors Prepayments and accrued income TOTAL PARENT COMPANY 2015 Bonds and other interest-bearing securities Shares & participations in Group companies Shares & participations Cash & bank balances Receivables, direct insurance Receivables, reinsurance Other debtors Prepayments and accrued income - - - 1,420 - - - - 1,420 18 530 3,716 2,204 - - - - 2,094 3 76 - - - - 35 41 1 - - - - - - - - 10,882 152 - 63 28 444 - 6,468 10,882 152 1,420 63 2,175 488 86 2,703 3,793 2,204 11,569 21,734 - - - - 18 - 9 45 On demand <3 months 3 months— 1 year 1—5 years >5 years No duration - - - 1,104 - - - - 155 722 2,752 2,673 - - - - - - - - 107 1,598 - 9 9 87 - - - - 67 39 1 - - - - - - - - 10,153 126 - 23 - 869 - Total 6,302 10,153 126 1,104 23 1,772 917 97 TOTAL 1,104 271 2,416 2,859 2,673 11,171 20,494 47 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Note 2 – Cont. LIQUIDITY PROFILE — FINANCIAL DEBTS (CONTRACTUAL OUTFLOWS) GROUP 2016 Payables, direct insurance Payables, reinsurance Other creditors Accrued expenses and deferred income TOTAL GROUP 2015 Payables, direct insurance Payables, reinsurance Other creditors Accrued expenses and deferred income TOTAL PARENT COMPANY 2016 Payables, direct insurance Payables, reinsurance Other creditors Accrued expenses and deferred income TOTAL PARENT COMPANY 2015 Payables, direct insurance Payables, reinsurance Other creditors Accrued expenses and deferred income TOTAL On demand <3 months 3 months— 1 year 1—5 years >5 years No duration TOTAL - - - - - - - - - - 98 817 253 352 1,521 - - - 53 53 - - - - - 37 258 - 27 322 135 1,076 253 432 1,896 On demand <3 months 3 months— 1 year 1—5 years >5 years No duration TOTAL - - - - - - - - - - 75 437 145 293 950 - - - 136 136 - - 27 22 49 13 53 - 3 69 88 490 172 454 1,204 On demand <3 months 3 months— 1 year 1—5 years >5 years No duration TOTAL - - - - - - - - - - - 556 143 243 942 - - - 24 24 - - 0 - 0 0 258 36 27 322 0 814 179 294 1,287 On demand <3 months 3 months— 1 year 1—5 years >5 years No duration TOTAL - - - - - - - - - - - 455 66 204 725 - - - 78 78 - - 16 - 16 7 53 51 3 114 7 508 133 285 933 LIQUIDITY PROFILE — TECHNICAL PROVISIONS Estimated claim payments, net, excluding ULAE. GROUP PARENT COMPANY <3 months 3 months — 1 year 1—5 years >5 years TOTAL <3 months 2016 2015 905 809 2,790 2,482 4,607 4,191 4,171 4,327 12,473 11,809 381 366 3 months — 1 year 1,198 1,138 1—5 years >5 years TOTAL 1,973 1,763 1,524 1,525 5,076 4,792 48 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Note 2 – Cont. OPERATIONAL RISK MANAGEMENT Sirius has defined operational risks as “The risk of loss arising from inadequate requirements are based on the European Solvency II legislation. The SFSA and the Bermuda Monetary Authority perform group supervision over Sirius at EU and or failed internal processes, personnel or systems or from external events. Oper- global level respectively. ational risk excludes risks arising from strategic decisions as well as reputation risks. Operational risk includes legal risks, HR risks, model risks, and Information Security risks (eg, data privacy and system protection).” SOLVENCY AND CAPITAL REQUIREMENTS As of January 1, 2016 Sirius’s regulatory Solvency Capital Requirement (SCR) is All employees within Sirius are responsible for the contribution to a well-func- based on Solvency II regulation. Sirius uses the Solvency II standard formula to tioning process for operational risk management and shall see themselves as risk calculate the SCR. The year end 2016 standard formula calculation results in a managers. The Risk Management Function is responsible for developing and im- SCR of SEK 7,234 million and the Minimum Capital Requirement (MCR) amounts proving the operational risk management methodology and thereby supporting the to SEK 1,808 million. The basic own funds are comprised of tier 1 paid up capital of organization and the process owners with the tools needed to manage these risks. SEK 800 million plus a tier 1 reconciliation reserve of SEK 16,205 million, or SEK Operational risks within Sirius are identified through reviews and the reporting 17,005 million in total basic own funds. The reconciliation reserve is comprised of of incidents. Operational risks are also identified and managed by defining controls the excess of assets over liabilities based on Solvency II valuations, after applica- within the processes and through follow up and testing of the effectiveness of the ble tax adjustments. The safety reserve, amounting to SEK 10,690 million, is in- key controls. cluded in the reconciliation reserve. Furthermore, the reconciliation reserve was Sirius always aims at reducing the operational risks to acceptable levels. adjusted for foreseeable dividends of SEK 905 million and it includes net expected COMPLIANCE RISK MANAGEMENT Compliance risk is “the risk of legal or regulatory sanctions, material financial profits in future premiums of SEK 143 million. The company has no ancillary own funds, hence the basic own funds equals total available own funds. As discussed above, all available own funds are classified as tier 1 and thereby loss or loss to reputation that Sirius may suffer as a result of not complying with constitute eligible own funds to meet the SCR as well as the MCR.The Ratio of laws, internal or external regulations and administrative provisions as applicable Eligible Own funds to the SCR is 2.35 whereas the Ratio of Eligible Own Funds to to Sirius activities.” the MCR is 9.40. The responsibility for Sirius’ compliance with internal and external regulation Sirius also uses an internal Economic Risk Capital (ERC) model for a number of lies with all employees. The business organization is also responsible for man- key strategic and management decision processes. The practical applications of aging compliance risks and for reporting of compliance risks to the operationally the internal ERC model include the following: independent Compliance function. The Compliance function supports the Board – Assess the amount of capital necessary to support the underwriting and and business organization by informing, advising and monitoring compliance investment operations over the course of a one-year period issues and risks throughout the Group. Compliance risk assessments are made – Allocate deployed capital in the organization to key underwriting risk areas in of both internal and external compliance risks, continuously and on annual basis. order to establish appropriate risk-adjusted pricing targets Compliance coordinators are appointed in subsidiaries and branches to support – Monitor the risk according to the risk tolerance levels established by the the Chief Compliance Officer and to take specific account of any applicable local Board of Directors regulatory requirements. – Measurement of key risks and their interaction – Evaluate reinsurance purchases SUPERVISION AND SOLVENCY II Sirius is subject to regulation and supervision by the Swedish Financial Superviso- Sirius manages risk and capital levels to maintain an S&P and AM Best “A” grade ry Authority (the ‘‘SFSA’’). As Sweden is a member of the EU, the SFSA supervision or better insurance financial strength profile over the insurance cycle, as this of branches is recognized across all locations within the EU (apart from customer allows Sirius to write targeted reinsurance business. conduct that is regulated and supervised locally across the EU). Regulatory FINANCIAL STRENGTH RATING The financial strength of Sirius has during 2016 been rated by Standard & Poor’s and A. M. Best. GROUP AND PARENT COMPANY Financial Strength Rating Outlook 2016 S&P1) A– Stable A.M. Best2) A Negative 2015 S&P1) A– Stable A.M. Best2) A Under Review 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. 49 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 GROUP PARENT COMPANY Note 3 – Premium income PREMIUM INCOME, GEOGRAPHICAL ALLOCATION 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 2016 4 327 3,016 7,459 10,806 -3,660 7,146 Note 4 – Claims incurred, for own account CLAIMS INCURRED FOR THE YEAR’S OPERATIONS GROUP 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 TOTAL CLAIMS INCURRED FOR THE YEAR’S OPERATIONS Gross -1,037 60 -1,301 -1,828 -206 2016 Ceded 443 0 413 573 0 -4 ,312 1,429 -2 ,883 CLAIMS INCURRED FOR PREVIOUS YEAR’S OPERATIONS GROUP Claims paid Loss portfolios Change in provision for incurred and reported claims Change in provision for incurred but not reported claims (IBNR) TOTAL CLAIMS INCURRED FOR PREVIOUS YEAR’S OPERATIONS TOTAL CLAIMS INCURRED TOTAL CLAIMS PAID GROUP Claims paid Loss portfolios Claims handling expenses TOTAL CLAIMS PAID Gross -4,712 -51 857 2,401 -1,505 -5,817 Gross -5,749 9 -206 -5,946 2016 Ceded 920 0 -226 -550 144 1,573 2016 Ceded 1,363 0 0 1,363 Net -3,792 -51 631 1,851 -1,361 -4,244 Net -4,386 9 -206 -4,583 50 2015 6 297 2,330 7,056 9,689 -2,599 7,090 Net -594 60 -888 -1,255 -206 2016 4 82 1,186 5,523 6,795 -2,868 3,927 2015 Gross Ceded -450 44 -992 -1,486 -238 -3,122 Gross -4,891 -47 1 926 1,568 -1,444 -4,566 Gross -5,341 -3 -238 -5,582 133 0 254 335 0 722 2015 Ceded 1,155 -9 -549 -342 255 977 2015 Ceded 1,288 -9 0 1,279 2015 6 77 1,163 4,655 5,901 -2,250 3,651 Net -317 44 -738 -1,151 -238 -2, 400 Net -3,736 -56 1 377 1,226 -1,189 -3,589 Net -4,053 -12 -238 -4,303 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Note 4 – Cont. CHANGE IN PROVISION FOR OUTSTANDING CLAIMS GROUP Change in provision for ncurred and reported claims Change in provision for incurred but not reported claims (IBNR) TOTAL CHANGE IN PROVISIONS FOR OUTSTANDING CLAIMS CLAIMS INCURRED FOR THE YEAR’S OPERATIONS PARENT COMPANY Claims paid Loss portfolios Change in provision for incurred and reported claims Change in provision for incurred but not reported claims (IBNR) Claims handling expenses TOTAL CLAIMS FOR THE YEAR’S OPERATIONS 2016 Gross Ceded -444 573 129 187 23 210 2016 Gross Ceded -462 60 -843 -844 -120 -2,209 198 0 286 219 0 703 Net -257 596 339 Net -264 60 -557 -625 -120 2015 Gross Ceded 934 82 1,016 -295 -7 -302 2015 Gross Ceded -242 45 -752 -860 -137 96 0 223 231 0 550 Net 639 75 714 Net -146 45 -529 -629 -137 -1,396 -1,506 -1,946 CLAIMS INCURRED FOR PREVIOUS YEAR’S OPERATIONS PARENT COMPANY Gross Ceded Net Gross Ceded Net 2016 2015 Claims paid Loss portfolios Change in provision for incurred and reported claims Change in provision for incurred but not reported claims (IBNR) TOTAL CLAIMS INCURRED FOR PREVIOUS YEAR’S OPERATIONS TOTAL CLAIMS INCURRED TOTAL CLAIMS PAID PARENT COMPANY Claims paid Loss portfolios Claims handling expenses TOTAL CLAIMS PAID -2,194 -52 654 1,116 -476 -2,685 Gross -2,656 8 -120 -2,768 647 1 -205 -247 196 899 2016 Ceded 845 1 0 846 CHANGE IN PROVISION FOR OUTSTANDING CLAIMS PARENT COMPANY Change in provision for incurred and reported claims Change in provision for incurred but not reported claims (IBNR) TOTAL CHANGE IN PROVISION FOR OUTSTANDING CLAIMS 2016 Gross Ceded -189 272 83 81 -28 53 -1,547 -51 449 869 -280 -2,585 -47 1,294 813 -525 -1,786 -2,471 899 -10 -459 -243 187 737 Net -1,811 9 -120 -1,922 Net -108 244 136 Gross -2,827 -2 -137 -2,966 2015 Ceded 995 -10 0 985 2015 Gross Ceded 542 -47 495 -236 -12 -248 -1,686 -57 835 570 -338 -1,734 Net -1,832 -12 -137 -1,981 Net 306 -59 247 51 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Note 5 – Operating costs SPECIFICATION OF INCOME STATEMENT ITEM OPERATING COSTS GROUP PARENT COMPANY Acquisition costs Change in prepaid acquisition costs (+/–) Administrative expenses Provisions and profit shares in ceded reinsurance (–) TOTAL OPERATING COSTS OTHER OPERATING COSTS Operating costs Claims handling expenses included in claims paid Asset management costs included in Investment expenses Expenses for land and buildings included in Investment expenses, net Other operating costs 1) 2016 -2,580 -26 -909 949 - 2,566 GROUP 2016 - 2,566 -206 -84 -1 -362 2015 -2,251 52 -932 606 -2,525 2015 -2,525 -238 -101 -2 -45 TOTAL OTHER OPERATING COSTS -3,219 -2,911 2016 -1,653 95 -509 762 -1,305 PARENT COMPANY 2016 -1,305 -120 -40 -1 -192 -1,658 TOTAL OPERATING COSTS PER TYPE GROUP PARENT COMPANY Direct and indirect personnel costs Premises costs Depreciation/amortization Other expenses related to operations TOTAL OTHER OPERATING COSTS 2016 -1,050 -81 -59 -2,029 -3,219 2015 -787 -71 -48 -2,005 -2,911 2016 -678 -54 -55 -871 -1,658 1) The increase is attributable to costs associated with the change of ownership. 2015 -1,302 30 -549 516 -1,305 2015 -1,305 -137 -48 -2 -3 -1,495 2015 -525 -47 -45 -878 -1,495 52 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Note 6 – Investment income 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 Derivatives GROUP 2016 36 384 35 - 405 789 34 112 - 2015 177 354 12 - 627 404 - 73 - PARENT COMPANY 2016 3,631 101 18 - 202 3 195 88 - 2015 461 133 15 - 478 7 - 55 - TOTAL RETURN ON CAPITAL, INCOME 1,795 1,647 4 ,238 1,149 In the group accounts, gains from acquisition of subsidiareis have been realized and accounted in accordance with IFRS 3. Note 7 – Unrealized gains and losses on investments GROUP PARENT COMPANY Foreign shares and participations Bonds and other interest-bearing securities Derivative financial instruments Gain on Currency TOTAL UNREALIZED GAINS AND LOSSES ON INVESTMENTS 2016 -765 -68 456 -185 -562 Note 8 – Investment expenses and charges Operating expenses for land and buildings Asset management costs Interest expenses Other interest expenses Capital losses on foreign exchange, net Capital losses Group and associated companies Goodwill impairment Impairment of shares in subsidiaries Derivative financial instruments TOTAL GROUP 2016 -2 -84 -1 - - - - -793 -880 2015 116 -78 -261 -195 -418 2015 -2 -101 -4 - - -13 - -95 -215 2016 5 - 456 -210 251 PARENT COMPANY 2016 -1 -40 -6 - - - -98 -793 -938 2015 -8 - -261 -304 -573 2015 -2 -48 -4 - - -22 - -95 -171 53 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 TOTAL 94 -337 417 12 13 199 TOTAL 3,834 -337 182 7 8 Note 9 – Net profit or net loss per category of financial instruments FINANCIAL ASSETS GROUP 2016 Shares and participations Derivative financial instruments Bonds and other interest-bearing securities Deposits with cedants Cash and bank balance TOTAL Financial assets valued at fair value in the income statement Financial assets held for trading Available-for-sale financial instruments Loan receivables and other accounts receivables 94 - 197 - - 291 - -337 - - - -337 - - 220 - - 220 - - - 12 13 25 PARENT COMPANY 2016 Financial assets valued at fair value in the income statement Financial assets held for trading Available-for-sale financial instruments Loan receivables and other accounts receivables Shares and participations 3,834 Derivative financial instruments Bonds and other interest-bearing securities Deposits with cedants Cash and bank balance TOTAL GROUP 2015 Shares and participations Derivative financial instruments Bonds and other interest-bearing securities Deposits with cedants Cash and bank balance TOTAL PARENT COMPANY 2015 Shares and participations Derivative financial instruments Bonds and other interest-bearing securities Deposits with cedants Cash and bank balance TOTAL - - - - - -337 - - - - - 182 - - 182 - - - 7 8 3,834 -337 15 3,694 Financial assets valued at fair value in the income statement Financial assets held for trading Available-for-sale financial instruments Loan receivables and other accounts receivables 684 - 115 - - 799 - -356 - - - -356 - - 127 - - 127 - - - 8 -3 5 Financial assets valued at fair value in the income statement Financial assets held for trading Available-for-sale financial instruments Loan receivables and other accounts receivables 438 - - - - - -356 - - - 438 -356 - - 84 - - 84 - - - 6 6 12 TOTAL 684 -356 242 8 -3 575 TOTAL 438 -356 84 6 6 178 The amounts in the table above constitute a specification of the amounts regarding management costs and (c) exchange rate gains/losses. Currency exchange gains/ financial instruments which are reported in the income statement as (i) return on losses amount to 181 (61) for the Group, of which –49 (39) refer to exchange rate capital, income, (ii) unrealized gains, (iii) return on capital, expenses, (iv) unreal- gains/losses on financial assets. Exchange rate gains/losses on liabilities and ized losses, with exception for (a) potential amortization and write-downs, (b) asset other assets amount to MSEK –132 (22). 54 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Note 10 – Taxes INCOME TAX RECOGNIZED IN INCOME STATEMENT Current tax expense (–) [/revenue (+)] Current tax expenses Current tax adjustment attributable to previous years Deferred tax expense (-) [/revenue (+)] Deferred taxes TOTAL TAX EXPENSE (—)/REVENUE (+) GROUP 2016 -75 -5 147 67 2015 -110 17 -318 -411 RECONCILIATION OF EFFECTIVE TAX Reconciliation of effective income tax rate for the Group and Parent Company to the Swedish income tax rate: Tax according to applicable tax rate for the Parent Company Effects of foreign tax rates Effects from change in tax rates1) 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 and timing differences REPORTED EFFECTIVE TAX GROUP 2016 -22% -4.8% -52% -8.8% 15.3% 1.1% 90.1% 18.9% 2015 – 22 % - 7.9 % - – 1.4% 9.3 % 0.4 % 0.6 % – 21 % PARENT COMPANY 2016 2015 -54 -4 7 -51 PARENT COMPANY 2016 -22% - - -0.8% 21.6% -0.1% - -1.3% -90 0 -1 -91 2015 – 22 % - - – 1.9 % 12.6% - - -11.3% 1) Luxembourg has decided to reduce the corporate income tax rate from 29.22 % to 27.08 % for 2017 and to 26. 01 % for 2018. In calculating deferred taxes, the 2018 tax rate has been applied since most of the tax loss carry-forwards per December 31, 2016 will be utilized after 2017. REPORTED DEFERRED TAX ASSETS AND DEFERRED TAX LIABILITIES GROUP 2016 2015 2016 2015 DEFERRED TAX ASSETS DEFERRED TAX LIABILITIES 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 Netting of deferred assets/liabilities DEFERRED TAX BALANCES, NET 71 186 112 7 - 1,934 2,310 -129 2,181 69 207 38 - - 1,953 2,267 -303 1,964 - - -42 -55 -2,367 - -2,464 129 -2,335 - - -62 -226 -2,365 - -2,653 303 -2,350 NET 2016 71 186 70 -48 -2,367 1,934 -154 - -154 2015 69 207 -24 -226 -2,365 1,953 -386 - -386 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-for- wards 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. PARENT COMPANY 2016 2015 2016 2015 DEFERRED TAX ASSETS DEFERRED TAX LIABILITIES Personnel-related provisions Other provisions DEFERRED TAX BALANCES 43 4 47 36 4 40 - - - - - - NET 2016 43 4 47 2015 36 4 40 55 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Note 10 – Cont. UNRECOGNIZED DEFERRED TAX ASSETS The Group has unrecognized deferred tax assets related to tax loss carry-forwards 360 (359). CHANGES IN DEFERRED TAX Opening balance Recognized in income statement Recognized in other comprehensive income Tax loss carry-forwards CLOSING BALANCE GROUP PARENT COMPANY 2016 -386 147 55 30 -154 2015 -145 -318 32 45 -386 2016 2015 40 7 - - 47 41 -1 - - 40 Taxes recognized in other comprehensive income partially refer to available-for-sale financial assets 7 (5). Note 11 – Intangible assets GROUP Intangible assets –IT Capitalized expenditure for development work Acquired intangible assets – Goodwill Other acquired intangible assets PARENT COMPANY Intangible assets –IT Capitalized expenditure for development work Acquired intangible assets – Goodwill TOTAL TOTAL Accumulated acquisition value Opening balance January 1, 2015 Acquisition for the year Disposal for the year Currency revaluation effects CLOSING BALANCE DECEMBER 31, 2015 Opening balance January 1, 2016 Acquisition for the year Disposal for the year Currency revaluation effect CLOSING BALANCE DECEMBER 31, 2016 Accumulated amortization and impairment Opening balance January 1, 2015 Depreciation for the year Impairment for the year CLOSING BALANCE DECEMBER 31, 2015 Opening balance January 1, 2016 Depreciation for the year Impairment for the year CLOSING BALANCE DECEMBER 31, 2016 Carrying amount Per January 1, 2015 PER DECEMBER 31, 2015 Per January 1, 2016 PER DECEMBER 31, 2016 257 22 - - 279 279 18 - - 297 -177 -26 - -203 -203 -26 - -229 80 76 76 68 87 - - - 87 87 - - - 87 -61 - - -61 -61 - - -61 26 26 26 26 120 - -42 10 88 88 - -46 3 45 -2 - - -2 -2 - 2 0 118 86 86 45 464 22 -42 10 454 454 18 -46 3 429 -240 -26 - -266 -266 -26 2 -290 224 188 188 139 257 22 - - 279 279 18 - - 297 -177 -26 - -203 -203 -26 - -229 80 76 76 68 87 - - - 87 87 - - - 87 -65 -5 - -70 -70 -4 - -74 22 17 17 13 344 22 - - 366 366 18 - - 384 -242 -31 - -273 -273 -30 - -303 102 93 93 81 56 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Note 11 – Cont. Amortization and impairmaent for the year is included in the following rows in the income statement for 2015: Operating costs Other costs Investment expenses TOTAL Amortization for the year is included in the following rows of the income statement for 2016 Operating costs Other costs TOTAL GROUP PARENT COMPANY Intangible assets — IT Capitalized expenditure for development work Acquired intangible assets – Goodwill Other acquired intangible assets Intangible assets –IT Capitalized expenditure for development work Acquired intangible assets – Goodwill Total -26 - -26 -26 - -26 - - - - - - - - - - - - -26 - -26 -26 - -26 -26 - -26 -26 - -26 - -5 -5 - -4 -4 Total -26 -5 -31 -26 -4 -30 The Group and Parent Company goodwill derive from the acquired operation in IT-related intangible assets include acquired licenses and capitalized expenses Belgium, which is an identifiable cash generating unit. The amounts refer both to for development of business-critical systems. Other intangible assets mainly acquisition- and asset deal goodwill and are annually tested for impairment. The include insurance licenses, for a number of American states, identified at the projected future cash flows have been discounted to present value and are based acquisition of subsidiaries. The licenses have been valued at fair vaule by an on a conservative assessment of the unit’s earnings, in the insurance operations, independent advisory firm and are deamed to have an indefinite useful life and are based on historical and future earning patterns. Additional charges for cost of tested annually for impairment. capital have been added representing deployed capital. The discount rate has been For the Group, no depreciation is made on goodwill. For further information determined based on a market rate of return, i.e. WACC. regarding depreciation, see Note 1, Accounting principles. Note 12 – Land and buildings GROUP AND PARENT COMPANY Accumulated acquisition cost Opening balance January 1, 2015 Acquisitions CLOSING BALANCE DECEMBER 31, 2015 Opening balance January 1, 2016 Acquisitions CLOSING BALANCE DECEMBER 31, 2016 Accumulated depreciation Opening balance January 1, 2015 Depreciation for the year CLOSING BALANCE DECEMBER 31, 2015 Opening balance January 1, 2016 Depreciation for the year CLOSING BALANCE DECEMBER 31, 2016 Carrying amount Per January 1, 2015 PER DECEMBER 31, 2015 Per January 1, 2016 PER DECEMBER 31, 2016 32 0 32 32 1 33 -20 -1 -21 -21 -2 -23 12 11 11 10 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. 57 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Note 13 – Shares and participations in group companies NAME OF SUBSIDIARY REGISTERED OFFICES, COUNTRY PARTICIPATING INTEREST, % Passage2Health Ltd. London, Great Britain Sirius Rückversicherungs Service GmbH Hamburg, Germany Sirius Belgium Réassurances S.A. Liége, Belgium Sirius International Holdings (NL) B.V. Amsterdam, The Netherlands S.I. Holdings (Luxembourg) S.à r.l. Luxembourg Sirius International Managing Agency Ltd. London, Great Britain SI Phoenix (Luxembourg) S.à r.l Luxembourg Sirius International Corporate Member Ltd London, Great Britain White Sands Holdings (Luxembourg) S.à r.l. Luxembourg Accumulated acquisition cost Beginning of year Capital contributions Repayment of paid-up capital Companies dissolved End of year Accumulated impairments Beginning of year Impairments Companies dissolved End of year CARRYING AMOUNT DECEMBER 31 2016 - 100 100 100 100 100 100 100 100 PARENT COMPANY 2016 11,348 1,710 -889 -22 12,147 -1,317 -92 22 -1,387 10,760 2015 100 100 100 100 100 100 100 100 100 2015 11,585 - -237 - 11,348 -1,317 - - -1,317 10,031 58 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Note 13 – Cont. SUBSIDIARIES’ SHAREHOLDERS’ EQUITY 2016 Name of subsidiary Shareholders’ equity Shares, % Number of shares Book value Profit/loss Sirius Rückversicherungs Service GmbH Sirius Belgium Réassurances S.A. Sirius International Holdings (NL) B.V. 15 12 362 S.I. Holdings (Luxembourg) S.à r.l. 5,633 Sirius International Managing Agency Ltd. 8 Sirius International Corporate Member Ltd. 149 SI Phoenix (Luxembourg) S.à r.l. 5,810 White Sands Holdings (Luxembourg) S.à r.l. 17 TOTAL 2015 Name of subsidiary Passage2Health Ltd. Sirius Rückversicherungs Service GmbH Sirius Belgium Réassurances S.A. Sirius International Holdings (NL) B.V. S.I. Holdings (Luxembourg) S.à r.l. Sirius International Managing Agency Ltd. White Mountains Re Sirius Capital Ltd. 12,006 Shareholders’ equity -6 38 12 761 4,639 9 28 WM Phoenix (Luxembourg) S.à r.l. 8,003 White Sands Holdings (Luxembourg) S.à r.l. 17 100 100 100 100 100 100 100 100 Share capital total €51,129 consisting of 1 share with nom. value €51,129 Share capital total €1,245,681 consisting of 700,000 shares without nom. value Share capital total €18,000 consisting of 180 shares with nom. value €100 per share Share capital total SEK 105,693,172 consisting of 105,693,172 shares with nom. value SEK1 per share Share capital total £1 consisting of 1 share with nom. value £1 per share Share capital total £1 consisting of 1 share with nom. value £1 per share Share capital total $42,266,200 consisting of 1,690,648 shares with nom. value $25 per share Share capital total SEK 105,693,172 consisting of 105,693,172 shares with nom. value SEK1 per share 0 13 289 4,833 4 0 5,606 15 3 0 -47 391 0 -45 8 -0 10,760 310 Shares, % Number of shares Book value Profit/loss 100 100 100 100 100 100 100 100 100 Share capital total £6,800 consisting of 6,800 shares with nom. value £1 per share Share capital total €51,129 consisting of 1 share with nom. value €51,129 Share capital total €1,245,681 consisting of 700,000 shares without nom. value Share capital total €18,000 consisting of 180 shares with nom. value €100 per share Share capital total SEK 105,693,172 consisting of 105,693,172 shares with nom. value SEK1 Share capital total £1 consisting of 1 share with nom. value £1 per share Share capital total £1 consisting of 1 share with nom. value £1 per share Share capital total $42,266,200 consisting of 1,690,648 shares with nom. value $25 per share Share capital total SEK 145,055 consisting of 145,055 shares with nom. value SEK1 0 0 13 269 3,527 4 0 6,158 15 -0 5 -0 -198 909 1 -26 386 -0 TOTAL 13,501 10,031 1,076 59 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Note 14 – Shares and participations in associated companies NAME OF ASSOCIATED COMPANIES REGISTERED OFFICES NUMBER OF SHARES PARTICIPATING INTEREST, % BE Reinsurance Ltd. Hong Kong 125,000,000 1) Voting share and participating interest are equal. CHANGE DURING THE YEAR Beginning of the year Share of associated companies’ result Translation diference on foreign associated companies CARRYING AMOUNT DECEMBER 31 GROUP 2016 127 8 10 145 Note 15 – Investments in shares and participations Fair value Acquisition cost For further information regarding financial instruments, see Note 19. GROUP 2016 1,918 1,981 2015 122 -8 13 127 2015 5,387 4,543 2016 25 PARENT COMPANY 2016 122 - - 122 PARENT COMPANY 2016 152 203 Note 16 – Bonds and other interest-bearing securities FAIR VALUE ACQUISITION COST GROUP Swedish government Swedish mortgage institutions Other Swedish issuers Foreign governments Other foreign issuers TOTAL Of which listed Difference compared to nominal value Total excess amount Total shortfall PARENT COMPANY Swedish government Swedish mortgage institutions Other Swedish issuers Foreign governments Other foreign issuers TOTAL Of which listed Difference compared to nominal value Total excess amount Total shortfall 60 2016 524 775 560 3,133 15,589 20,581 20,581 423 62 FAIR VALUE 2016 432 619 480 1,312 3,625 6,468 6,468 373 13 2015 0 480 0 1,687 16,261 18,428 18,428 492 736 2015 0 377 0 421 5,504 6,302 375 707 2016 538 779 561 3,116 15,497 20,491 20,491 458 275 ACQUISITION COST 2016 444 622 481 1,280 3,448 6,275 6,275 384 69 2015 25 2015 122 - - 122 2015 126 199 2015 0 457 0 1,680 15,884 18,021 18,021 464 639 2015 0 359 0 413 5,228 6,000 345 617 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Note 17 – Derivative financial instruments Currency derivatives, Sirius Bermuda Insurance Company Ltd. Other derivatives, Endurance TOTAL GROUP 2016 -336 53 -283 2015 -722 -12 -734 PARENT COMPANY 2016 -336 53 -283 2015 -722 -12 -734 The table above show gross positions with individual counterparties in excess of 8.3099. Through foreign exchange options, the currency forward transactions are MSEK 0,5. settled on the basis of an exchange rate cap of 14.177 SEK/USD and an exchange Currency derivatives of nominal MUSD 600 against SEK mainly concern con- rate floor of 6.0759 SEK/USD. tracts with internal counterparties. The company has on February 17 entered into The company has on February 17 sold MUSD 200 on a forward basis to Sirius an internal currency hedging agreement with Sirius Bermuda Insurance Company Bermuda Insurance Company Ltd, with term of three years at exchange rate Ltd. The agreement means that Sirius International has sold MUSD 200 on a for- 8.2376. Through foreign exchange options, the currency forward transactions are ward basis to Sirius Bermuda Insurance Company Ltd, with a term of approximate- settled on the basis of an exchange rate cap of 14.177 SEK/USD and an exchange ly one year at the agreed exchange rate 8.3589. Through foreign exchange options, rate floor of 6.0759 SEK/USD. Outside these ranges, the company takes no hedging the currency forward transactions are settled on the basis of an exchange rate cap measures. of 14.177 SEK/USD and an exchange rate floor of 6.0759 SEK/USD. The currency hedge agreements are valued monthly at fair value via the income The company has on February 17 also sold MUSD 200 on a forward basis to statement. Sirius Bermuda Insurance Company Ltd, with term of two years at exchange rate Note 18 – Other debtors Other debtors, group companies1) Other debtors TOTAL2) GROUP 2016 21 72 93 2015 - 260 260 PARENT COMPANY 2016 444 44 488 2015 869 47 916 1) Group companies are defined as companies within the China Minsheng Group. 2) The majority of the receivables have a duration less than three months. 61 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Note 19 – Categories of financial assets and liabilities and their fair value FINANCIAL ASSETS GROUP 2016 Interest-bearing securities and loans to group companies Shares and participations2) Derivative financial instruments1) Bonds and other interest-bearing securities Cash and bank balances Accrued income Other debtors TOTAL GROUP 2015 Interest-bearing securities and loans to group companies Shares and participations Derivative financial instruments1) Bonds and other interest-bearing securities Cash and bank balances Accrued income Other debtors TOTAL Loan receivables and accounts receivables Financial assets valued at fair value via the income statement Available-for-sale financial assets Total carrying amount Fair value Acquisition value 118 - - - - 19 93 230 — 1,918 53 10,700 2,764 53 - — - 9,881 - 83 - 118 1,918 53 20,581 2,764 155 93 118 1,918 53 20,581 2,764 155 93 118 1,996 - 20,491 2,764 155 93 15,488 9,964 25,682 25,682 25,617 Loan receivables and accounts receivables Financial assets valued at fair value via the income statement Available-for-sale financial assets Total carrying amount Fair value Acquisition value 310 - - - - 29 260 599 - 5,387 - 9,657 2,842 81 - - - - 8,771 - 53 - 310 5,387 - 18,428 2,842 163 260 310 5,387 - 18,428 2,842 163 260 310 4,543 - 18,326 2,842 163 260 17,967 8,824 27,390 27,390 26,444 1) Derivatives are classified as Financial instruments held for trading. PARENT COMPANY 2016 Shares and participations Derivative financial instruments1) Bonds and other interest-bearing securities Cash and bank balances Accrued income Other debtors TOTAL PARENT COMPANY 2015 Loan receivables and accounts receivables Financial assets valued at fair value via the income statement Available-for-sale financial assets Total carrying amount Fair value Acquisition value - - - - 18 488 506 152 53 - 1,420 - - - - 6,468 - 68 - 1,625 6,536 152 53 6,468 1,420 86 488 8,667 152 53 6,468 1,420 86 488 8,667 202 - 6,276 1,420 86 488 8,472 Loan receivables and accounts receivables Financial assets valued at fair value via the income statement Available-for-sale financial assets Total carrying amount Fair value Acquisition value Shares and participations Derivative financial instruments1) Bonds and other interest bearing securities Cash and bank balances Accrued income Other debtors TOTAL - - - - 28 40 68 126 - - 1,104 - - - - 6,302 - 68 - 1,230 6,370 126 - 6,302 1,104 96 40 7,668 126 - 6,302 1,104 96 40 7,668 199 - 6,090 1,104 96 40 7,529 1) Derivatives are classified as Financial instruments held for trading. 2) Financial assets valued at fair value, have for shares been categorized through identification while bonds and other interest-bearing securities are classified based on trading. 62 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Note 19 – Cont. FINANCIAL LIABILITIES GROUP Other liabilities Accrued expenses Derivative financial instruments Total PARENT COMPANY Other liabilities Accrued expenses Derivative financial instruments Total 2016 Financial liabilities valued at fair value via the income statement Carrying amount Fair value Other financial liabilities 2015 Financial liabilities valued at fair value via the income statement Carrying amount Fair value - - 336 336 254 66 336 656 254 66 336 656 154 72 - 226 - - 734 734 154 72 734 960 154 72 734 960 2016 Financial liabilities valued at fair value via the income statement Carrying amount Fair value Other financial liabilities 2015 Financial liabilities valued at fair value via the income statement - - 336 336 179 61 336 576 179 61 336 576 117 66 - 183 - - 734 734 Carrying amount Fair value 117 66 734 917 117 66 734 917 Other financial liabilities 254 66 - 320 Other financial liabilities 179 61 - 240 In the tables below, data is provided regarding the determination of fair value for financial assets and liabilities valued at fair value in the balance sheet. The determination of fair values is categorized Level 1: Based on prices listed on an 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 according to the following three levels: Level 3: Based on input data that is not observable on the market GROUP 2016 Level 1 Level 2 Level 3 TOTAL GROUP 2015 Level 1 Level 2 Level 3 TOTAL Shares and participations Derivative financial instruments 988 - 16 - 914 -283 1,918 Shares and participations -283 Derivative financial instruments 4,824 - 12 - 551 -734 5,387 -734 Bonds and other interest- bearing securities 2,933 17,648 - 20,581 Bonds and other interest- bearing securities 2,724 15,705 - 18,429 TOTAL 3,921 17,664 631 22,216 TOTAL 7,548 15,717 -183 23,082 PARENT COMPANY 2016 Level 1 Level 2 Level 3 TOTAL PARENT COMPANY 2015 Level 1 Level 2 Level 3 TOTAL Shares and participations Derivative financial instruments Bonds and other interest- bearing securities TOTAL 5 - 707 712 16 - 131 -283 152 -283 Shares and participations Derivative financial instruments 5 - 12 - 109 -734 126 -734 5,761 5,777 - 6,468 Bonds and other interest- bearing securities 1,568 4,734 - 6,302 -152 6,337 TOTAL 1,573 4,746 -625 5,694 The fair value of financial assets and liabilities traded on an active market is based Specific valuation techniques applied in valuing financial assets and liabilities on the listed price on balance sheet date. A market is seen to be active in cases include: where listed prices from a stock exchange, broker, industry group, pricing service - Listed market prices or broker listings for similar instruments. or supervisory authority are easily accessible, and where these prices represent - Fair value of interest swaps is determined as the current value of estimated genuine, regularly-occurring market transactions conducted at arm’s length. The future cash flows, based on observable yield curves. listed market price applied in determining the fair value of instruments that are to - Fair value for currency forward exchange agreements is determined through be found in Level 1 is the current buying-rate the use of exchange rates for forward exchanges on balance sheet date, at Fair values of financial assets and liabilities which are not traded on an active which point the resulting value is discounted to current value. market are determined with the aid of valuation techniques. This procedure ap- - Other techniques, such as the calculation of discounted cash-flows, are ap- plies, as far as possible, such market information as is available, while information plied in determining fair value for any financial assets or liabilities not covered specific to a company is applied as little as possible. If all significant input data by the above techniques. required in determining the fair value of an instrument is observable, the instru- ment is to be found in Level 2 or 3. Currency derivatives are included in level 3 due All fair values determined with the aid of these valuation techniques are to be found to their long duration. in Level 2 and 3. 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. 63 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Note 19 – Cont. The tables below shows a reconciliation of opening and closing balance data for financial assets and liabilites valued at fair value in the balance sheet, on the basis on non-observable input data (Level 2 and 3). GROUP 2016 Level 2 Opening balance January 1, 2016 Total reported profit/loss: — reported in profit/loss for the year1) Acquisition cost, purchase Proceeds of sale, sales Transfer from Level 2 Transfer into Level 2 Currency revaluation effect CLOSING BALANCE DECEMBER 31, 2016 Profit/loss reported in profit/loss for the year for assets included in the closing balance December 31, 20161) PARENT COMPANY 2016 Level 2 Opening balance January 1, 2016 Total reported profit/loss: — reported in profit/loss for the year1) Acquisition cost, purchase Proceeds of sale, sales Transfer from Level 2 Transfer into Level 2 CLOSING BALANCE DECEMBER 31, 2016 Profit/loss reported in profit/loss for the year for assets included in the closing balance December 31, 20161) GROUP 2016 Level 3 Opening balance January 1, 2016 Total reported profit/loss: — reported in profit/loss for the year1) Acquisition cost, purchase Proceeds of sale, sales Transfer from Level 3 Transfer into Level 3 Currency revaluation effect CLOSING BALANCE DECEMBER 31, 2016 Profit/loss reported in profit/loss for the year for assets included in the closing balance December 31, 20161) Shares and participations Derivatives 12 4 - - - - - 16 4 — — - - - - - - - Shares and participations Derivatives 12 4 - - - - 16 4 - - - - - - - - Shares and participations Derivatives Bonds 551 19 585 -252 -19 - 30 914 19 -734 -337 -5 793 - - - -283 -337 - - - - - - - - - Bonds 15,705 536 18,527 -16,810 -20 58 -348 17,648 Total 15,717 540 18,527 -16,810 -20 58 -348 17,664 536 532 Bonds 4,734 -554 9,232 -7,667 -20 36 5,761 -554 Total 4,746 -550 9,232 -7,667 -20 36 5,777 -550 Total -183 -318 580 541 -19 - 30 631 -318 1) Reported in net income of financial transactions in profit/loss for the year. 64 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Shares and participations Derivatives Bonds Note 19 – Cont. PARENT COMPANY 2016 Level 3 Opening balance January 1, 2016 Total reported profit/loss: — reported in profit/loss for the year1) Acquisition cost, purchase Proceeds of sale, sales Transfer from Level 3 Transfer into Level 3 CLOSING BALANCE DECEMBER 31, 2016 Profit/loss reported in profit/loss for the year for assets included in the closing balance December 31, 20161) GROUP 2015 Level 2 Opening balance January 1, 2015 Total reported profit/loss: — reported in profit/loss for the year1) Acquisition cost, purchase Proceeds of sale, sales Transfer from Level 2 Transfer into Level 2 Currency revaluation effect CLOSING BALANCE DECEMBER 31, 2015 Profit/loss reported in profit/loss for the year for assets included in the closing balance December 31, 20151) PARENT COMPANY 2015 Level 2 Opening balance January 1, 2015 Total reported profit/loss: — reported in profit/loss for the year1) Acquisition cost, purchase Proceeds of sale, sales Transfer from Level 2 Transfer into Level 2 CLOSING BALANCE DECEMBER 31, 2015 Profit/loss reported in profit/loss for the year for assets included in the closing balance December 31, 20151) 109 17 20 -15 - - 131 17 -734 -337 -5 793 - - -283 -337 Shares and participations Derivatives 12 - - - - - - 12 - - - - - - - - - - Shares and participations Derivatives 12 - - - - - 12 - - - - - - - - - 1) Reported in net income of financial transactions in profit/loss for the year. - - - - - - - - Bonds 14,080 -48 13,851 -13,200 - 342 680 15,705 Total -625 -320 15 778 - - -152 -320 Total 14,093 -48 13,851 -13,200 - 342 679 15,717 -48 -48 Bonds 4,207 40 6,908 -6,571 - 150 4,734 40 Total 4,219 40 6,908 -6,571 - 150 4,746 40 65 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Note 19 – Cont. GROUP 2015 Level 3 Opening balance January 1, 2015 Total reported profit/loss: — reported in profit/loss for the year1) Acquisition cost, purchase Proceeds of sale, sales Transfer from Level 3 Transfer into Level 3 Currency revaluation effect CLOSING BALANCE DECEMBER 31, 2015 Profit/loss reported in profit/loss for the year for assets included in the closing balance December 31, 20151) PARENT COMPANY 2015 Level 3 Opening balance January 1, 2015 Total reported profit/loss: — reported in profit/loss for the year1) Acquisition cost, purchase Proceeds of sale, sales Transfer from Level 2 Transfer into Level 2 CLOSING BALANCE DECEMBER 31, 2015 Profit/loss reported in profit/loss for the year for assets included in the closing balance December 31, 20151) Shares and participations Derivatives Bonds 898 25 108 -542 - - 62 551 25 -469 -265 - - - - - -734 -265 3 - 152 - -155 - - - - Shares and participations Derivatives Bonds 99 33 25 -48 - - 109 33 -469 -265 - - - - -734 -265 3 - 146 - -149 - - - 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. Total 432 -240 260 -542 -155 - 62 -183 -240 Total -367 -232 171 -48 -149 - -625 -232 66 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Zürich 67 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Note 20 – Tangible assets Accumulated acquisition cost Opening balance January 1, 2015 Acquisition Disposals Currency revaluation effect CLOSING BALANCE DECEMBER 31, 2015 Opening balance January 1, 2016 Acquisition Disposals Currency revaluation effect CLOSING BALANCE DECEMBER 31, 2016 Accumulated depreciation Opening balance January 1, 2015 Depreciation for the year Disposals Currency revaluation effect CLOSING BALANCE DECEMBER 31, 2015 Opening balance January 1, 2016 Depreciation for the year Disposals Currency revaluation effect CLOSING BALANCE DECEMBER 31, 2016 Carrying amount Per January 1, 2015 PER DECEMBER 31, 2015 Per January 1, 2016 PER DECEMBER 31, 2016 Group Equipment Parent Company Equipment 199 63 -10 5 257 257 27 -75 3 212 -144 -21 9 -3 -159 -159 -31 74 -2 -118 55 98 98 94 136 59 -9 - 186 186 25 -47 - 164 -99 -18 8 - -109 -109 -26 46 - -89 37 77 77 75 2015 279 0 301 -271 13 322 Note 21 – Deferred acquisition costs Opening balance January 1 Acquired portfolio Capitalization for the year Depreciation/amortization for the year Currency revaluation effect CLOSING BALANCE DECEMBER 31 GROUP PARENT COMPANY 2016 628 0 965 -991 43 645 2015 544 0 570 -518 32 628 2015 322 0 397 -301 13 431 68 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Note 22 – Untaxed reserves PARENT COMPANY Accumulated depreciation in excess of plan Opening balance January 1 Change for the year – goodwill Change for the year – tangible assets CLOSING BALANCE DECEMBER 31 Appropriation to safety reserve Opening balance January 1 Change for the year CLOSING BALANCE DECEMBER 31 TOTAL 2016 2015 29 -4 9 34 10,690 - 10,690 10,724 Note 23 – Provisions for unearned premiums and unexpired risks PROVISIONS FOR UNEARNED PREMIUMS 2016 GROUP Gross Reinsurers’ share Opening balance Acquired portfolio Change in provision Currency revaluation effect CLOSING BALANCE 2,795 185 289 253 3,522 -674 -185 -305 -99 -1,263 PROVISIONS FOR UNEXPIRED RISKS 2016 GROUP Gross Reinsurers’ share Opening balance Change in provision Currency revaluation effect CLOSING BALANCE 84 -11 6 79 -62 8 -5 -59 PROVISIONS FOR UNEARNED PREMIUMS 2016 PARENT COMPANY Gross Reinsurers’ share Opening balance Change in provision Currency revaluation effect CLOSING BALANCE 1,718 676 128 2,522 -640 -349 -78 -1,067 PROVISIONS FOR UNEXPIRED RISKS 2016 PARENT COMPANY Gross Reinsurers’ share Opening balance Change in provision Currency revaluation effect CLOSING BALANCE 84 -11 7 80 -62 8 -4 -58 Net 2,121 0 -16 154 2,259 Net 22 -3 1 20 Net 1,078 327 50 1,455 Net 22 -3 3 22 2015 Gross Reinsurers’ share 2,554 0 86 155 2,795 -536 0 -101 -37 -674 2015 Gross Reinsurers’ share 81 -4 7 84 -59 3 -6 -62 2015 Gross Reinsurers’ share 1,610 20 88 1,718 -523 -79 -38 -640 2015 Gross Reinsurers’ share 81 -4 7 84 -59 3 -6 -62 12 -4 21 29 10,447 243 10,690 10,719 Net 2,018 0 -15 118 2,121 Net 22 -1 1 22 Net 1,087 -59 50 1,078 Net 22 -1 1 22 69 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Note 24 – Claims reserve GROUP 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 year Claims handling expenses Paid claims Currency revaluation effect CLOSING BALANCE Closing balance, reported claims Closing balance, incurred but not reported claims (IBNR) PARENT COMPANY 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 year Claims handling expenses Paid claims Currency revaluation effect CLOSING BALANCE Closing balance, reported claims Closing balance, incurred but not reported claims (IBNR) 2016 Reinsurers’ share -1,540 -841 -2,381 0 -1,429 -144 0 -1,363 -186 -2,777 -1,775 -1,002 2016 Reinsurers’ share -1,046 -345 -1,391 -702 -197 0 -846 -77 -1,520 -1,182 -338 Gross 7,251 5, 885 13,136 0 4,312 1,505 206 5,740 976 13,983 8,191 5,792 Gross 3,983 1,591 5,574 2,209 476 120 2,648 290 5,781 4,375 1,406 Net 5,711 5,044 10,755 0 2,883 1,361 206 4,377 790 11,206 6,416 4,790 Net 2,937 1,246 4,183 1,507 279 120 1,802 213 4,261 3,193 1,068 2015 Reinsurers’ share -1,779 -805 -2,584 0 -722 -255 0 -1,278 -98 -2,381 -1,540 -841 2015 Reinsurers’ share -1,269 -341 -1,610 -550 -187 0 -985 -29 -1,391 -1,046 -345 Gross 7,795 5,568 13,364 0 3,122 1,444 238 5,344 787 13,136 7,251 5,885 Gross 4,413 1,476 5,889 1,946 525 137 2,829 180 5,574 3,983 1,591 Net 6,016 4,763 10,779 0 2,400 1,189 238 4,066 689 10,755 5,711 5,044 Net 3,144 1,135 4,279 1,396 338 137 1,844 151 4,183 2,937 1,246 Note 25 – Equalization provision Note 26 – Claims handling provision GROUP Opening balance January 1 Provision of the year CLOSING BALANCE DECEMBER 31 2016 2015 - - - - - - PARENT COMPANY 2016 2015 Opening balance January 1 Provision of the year CLOSING BALANCE DECEMBER 31 89 -45 44 89 - 89 Opening balance January 1 Acquired portfolio Release of provision made in prior years Provision for the year Currency revaluation effect CLOSING BALANCE DECEMBER 31 GROUP PARENT COMPANY 2016 2015 2016 2015 295 8 -87 76 9 301 260 0 -38 65 8 295 150 0 -48 37 2 141 150 0 -38 39 -1 150 70 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Note 27 – Employee benefits DEFINED BENEFIT PLANS Pension obligations covered by plan assets Plan assets at fair value SURPLUS (-) DEFICIT (+) Pension obligations not covered by plan assets PROVISION FOR DEFINED BENEFIT PENSION PLANS, NET GROUP 2016 135 105 -30 30 30 2015 121 94 -27 27 27 PARENT COMPANY 2016 2015 - - - 16 16 - - - 16 16 Group defined benefit plans In a defined benefit plan, the employer guarantees that the employee will receive The group has defined benefit plans in Sweden (collective agreement) and Germany which are based on the employees’ pension entitlements and length of a defined level of benefit upon retirement, based on one or more factors, such as employment. In Germany all employees are included in the plan. In Sweden only age, length of service and salary. The group calculates its provisions and expenses employees born 1971 or earlier are covered by defined benefit plans and, thus, based on the conditions of the guaranteed pension obligations, as well as on its form part of the FTP2. Paid pension premiums are mainly funded with Skandia own assumptions regarding future development. Liv for employees in Sweden and with Allianz for employees in Germany. The lion The provision reported in the balance sheet for defined benefit plans is the share of the plan assets are funded with Skandia Liv where the assets are invested present value of the defined benefit obligation at the end of the reporting period, in Swedish bonds (33%), Swedish and foreign shares (28%), real-estate (11%), non less the fair value of plan assets, adjusted for actuarial gains and losses recog- listed shares (10%) and other investment assets (18%). nized in Other Comprehensive Income. Actuarial gains and losses arise if actual Furthermore, there are two variations of retirement earlier than at the age of 65. outcome deviates from calculated, defined assumptions, or if there is a change in Employees born 1955 and earlier have the possibility to retire between the ages of 62 assumptions. The defined pension obligation is calculated annually by independent and 65 according to local agreement. Staff employed before 1 January, 2004 have the actuaries, applying the projected unit credit method. The net present value of the right to retire from the age of 64. These plans are also defined benefit plans and are pension obligation is defined by discounting of estimated future cash flows, using reflected in financial statements of both the Group and the Parent Company. interest rates that are based on the same currency in which the obligations are Employees in Sweden born 1972 or later, are covered by a defined contribution to be paid and with durations comparable to the duration of the current pension plan, FTP1. obligation. Other assumptions used to determine the pension obligation and the Employees outside Sweden and Germany are mainly covered by defined contri- fair value of the plan assets are disclosed in this note. bution plans in which the employer has a responsibility for the employees’ pension. PENSION COST RECOGNIZED IN THE INCOME STATEMENT GROUP Current service cost Interest cost on pension obligation Interest income on plan assets PENSION COST FOR DEFINED BENEFIT PLANS Paid premiums, defined contribution plans TOTAL PENSION COST1) 2016 8 3 -3 8 64 72 1) The pension cost for the year does not include special salary tax, which is disclosed in note 31 in the table “Remuneration to employees”. CHANGES IN DEFINED BENEFIT OBLIGATIONS GROUP Opening balance pension obligation Adjustments due to change in discount rates2) Current service cost Interest cost on pension obligation Actuarial gains and losses recognized in OCI Release of obligation by payment Tax Currency revaluation effect CLOSING BALANCE PENSION OBLIGATION 2016 121 - 8 3 8 -5 -2 2 135 2015 9 2 -2 9 68 77 2015 110 15 9 3 -9 -4 -2 -1 121 2) An adjustment of the discount rate used has been made for the German part of the obligation. The amendment implies that the German statutory intrest rate has been replaced by the interest rate stipulated by IAS 19 for the group’s calculation. The change is reported under other comprehensive income. 71 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Note 27 – Cont. CHANGES IN PLAN ASSETS GROUP Opening balance plan assets at fair value Interest income on plan assets Contributions Actuarial gains and losses recognized in OCI Release of obligation by payment Currency revaluation effect CLOSING BALANCE PLAN ASSETS AT FAIR VALUE 2016 94 2 9 2 -2 0 105 2015 96 2 8 1 -13 0 94 The plan assets’ fair value, as per December 31, 2016, is lower than the value of ments are settled when the decision regarding retirement is made. In conjunction the Group’s defined benefit pension commitments. The Group has per December with such a decision, the total pension premium is paid to the company’s pension 31, 2016 a net obligation of MSEK 30 (27). This is mainly due to the Group having administrator for the period up to 65 years of age. During the year, no employees a non-funded commitment, for the portion of the Group’s benefit-based pension have exercised the opportunity to take early retirement. plans which facilitate retirement between 62 and 65 years of age. Actual retire- CHANGES IN ACTUARIAL GAINS/LOSSES RECOGNIZED IN OCI, PRE-TAX GROUP Opening balance actuarial gains/losses Current year change in actuarial gains (–)/losses (+) on pension obligation Current year change in actuarial gains (–)/losses (+) on plan assets Currency revaluation effect CLOSING BALANCE ACTUARIAL GAINS/LOSSES ACTUARIAL ASSUMPTIONS GROUP Discount rate Price inflation Expected salary increases Indexation of benefits Indexation of income base amount Staff turnover 2016 4 8 -2 1 11 2016 2.2% 1.5% 2.7% 1.6% 2.7% 3.0% 2015 7 -2 0 -1 4 2015 2.6 % 1.5% 2.7% 1.6% 2.7% 3.0% When calculating the expense for defined benefit obligations, assumptions are Expected future annual salary increases is mirrored by composition of effects made regarding the future development of factors which may influence the size from collective agreements and salary drift. Final benefits according to FTP are of expected payments. The discount rate is the interest rate applied to discount governed by Swedish base income amount (inkomstbasbeloppet). Consequently, the value of expected payments. This rate is fixed applying a market rate with a there is a requirement to assess future base income amounts. Annual pension in- remaining duration equivalent to the pension obligations. The discount rate applied creases also need to be considered, as these have historically always taken place. for the Swedish defined obligations, is based on high quality Swedish mortgage Assumptions about the beneficiaries’ life expectancy comply with FFFS 2007:31 bonds, issued in the same currency in which the future benefits will be settled and (DUS14) and are updated annually. When establishing the value of defined benefit with durations comparable to the current benefit obligation. The German pension obligations, according to IFRS, it is common practice in Sweden to comply with the obligation is discounted with the discount rate stipulated by IAS 19, taking into above mentioned instruction from the Swedish Financial Supervisory Authority. account both the underlying currency and the duration of the pension obligation, which is normally equal to the interest rate for high quality corporate bonds. The expected duration of the pension obligations is 16 years (16 years). 72 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Note 28 – Other creditors Amounts due to group companies1) Other creditors TOTAL2) GROUP PARENT COMPANY 2016 1 253 254 2015 9 145 154 2016 36 143 179 1) Group companies are defined as companies within the China Minsheng-group. 2) The majority of the liabilities have a duration less than one year. Note 29 – Contingent liabilities and commitments PLEDGED ASSETS FOR OWN LIABILITIES AND PROVISIONS GROUP PARENT COMPANY Bonds and other interest-bearing securities Cash and bank ASSETS FOR WHICH POLICY HOLDERS HAVE PREFERENTIAL RIGHTS 2016 8,387 752 9,139 2015 8,021 430 8,451 2016 5,480 624 6,104 2015 51 66 117 2015 5,732 353 6,085 On the basis of the stipulations in Chapter 7, Section 11 of the Insurance Business operations, the Company has the right to register and de-register assets from Act, registered assets amount to MSEK 5,642. In the case of insolvency, the the register, provided that all insurance commitments are covered by technical insured has preferential rights to the registered assets. During the course of provisions in accordance with the Insurance Business Act. CONTINGENT LIABILITIES AND OTHER COMMITMENTS Nominal amount Guarantees on behalf of subsidiary Future commitments for investments in private equity companies TOTAL GROUP 2016 3,882 824 4,706 2015 3,626 64 3,690 PARENT COMPANY 2016 3,882 7 3,889 2015 3,626 - 3,626 73 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Note 30 – Associated parties SUMMARY OF TRANSACTIONS WITH ASSOCIATED COMPANIES WITHIN THE WHITE MOUNTAINS GROUP GROUP 2016 Sirius Bermuda Insurance Company Ltd- assumed reinsurance Alstead Reinsurance Ltd – ceded reinsurance Alstead Reinsurance Ltd. – assumed reinsurance Sirius Bermuda Insurance Company Ltd – financial services Fund American Holdings AB – group contribution White Schoals Re Ltd. – administrative services Sirius International Insurance Group, Ltd. – administrative services OneBeacon Insurance Group Ltd. – liability insurances and dividends White Mountains Advisors LLC – Asset management services Other associated companies – within WTM- group Other associated companies – within CMI- group Premium income, net Indemnifications, net Purchased/ sold services Receivables Liabilities -326 1 -2 - - - - - - - - 205 - 1 - - - - - - - - - - - - - - -779 138 - 4 27 13 -10 4 0 - 0 3 - - - 5 243 - 1 0 7 0 0 - - - 8 TOTAL -327 206 -741 146 259 PARENT COMPANY 2016 Sirius Bermuda Insurance Company Ltd – assumed reinsurance Alstead Reinsurance Ltd. – ceded reinsurance Sirius America Insurance Company – ceded reinsurance Sirius America Insurance Company – assumed reinsurance Star Re Ltd. – assumed reinsurance Syndicate 1945 – ceded reinsurance Syndicate 1945 – assumed reinsurance Sirius America Insurance Company – administrative services SI Phoenix (Luxembourg) S.à r.l. – dividends Fund American Holdings AB – group contribution Sirius International Holding (NL) B.V. – dividends Sirius International Holding (NL) B.V. – writedown shares Sirius Rückversicherungs Service GmbH – intra group payable Sirius Rückversicherungs Service GmbH – dividends Sirius Belgium Réassurances S.A. – intra group payable Star Re Ltd. – intra group payable S.I. Holdings (Luxembourg) S.à r.l. – dividends /receivable Passage 2 Health – intra group payable Syndicate 1945 – intra group payable Sirius Global Services LLC – administrative services Sirius International Holdings Ltd. – administrative services Sirius International Managing agency Ltd. - administrative services White Sands Holdings (Luxembourg) S.à r.l. – dividends Sirius International Corporate Member Ltd. – intra group payable White Mountains Advisors LLC - asset management services Sirius Bermuda Insurance Company Ltd – financial services White Schoals Re Ltd. – administrative services Other associated companies TOTAL Premium income, net Indemnifications, net Purchased/ sold services Receivables Liabilities -326 1 361 - -125 12 - - - - - - - - - - - - - - - - - - - - - - 205 - -318 10 - 1 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 48 2,030 - 618 -92 -28 30 0 1 950 -5 120 -43 -8 1 - - -4 -783 2 2 - - 1,032 4 - 4 - 16 - - - - - - - - 264 - 119 - - 7 0 20 - 20 0 1 243 - - - - - - - 4 7 - - 29 - 0 - 0 - - 2 - - - - - - - 1 -77 -102 2,838 455 286 74 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Note 30 – Cont. GROUP 2015 White Mountains Advisors LLC – financial services Sirius Bermuda Insurance Company Ltd – financial services Sirius Capital Markets Bermuda Ltd - administrative services White Shoals Re Ltd - administrative services Sirius International Insurance Group Ltd - administrative services OneBeacon Insurance Group Ltd - liability insurance and dividends Other associated companies TOTAL PARENT COMPANY 2015 Sirius America Insurance Company - assumed reinsurance Sirius America Insurance Company - ceded reinsurance Star Re Ltd. – ceded reinsurance Syndicate 1945 – assumed reinsurance Syndicate 1945 - ceded reinsurance Sirius America Insurance Company – administrative services WM Phoenix (Luxembourg) S.à r.l. – dividends Sirius International Holding (NL) B.V. - dividends Sirius Rückversicherungs Service GmbH - intra-group payables Sirius Belgium Réassurances S.A - intra-group payables Star Re Ltd. – financial services S.I. Holdings (Luxembourg) S.à r.l. – dividends/receivables Passage2Health Ltd. - intra-group receivables Syndicate 1945 - intra group receivables Sirius Global Services LLC - administrative services Sirius International Holdings Ltd - administrative services Sirius International Managing agency Ltd - administrative services White Sands Holdings (Luxembourg) S.à r.l. – intra-group payables White Mountains Re Sirius Capital Ltd – intra-group receivables White Mountains Advisors LLC - financial services Sirius Bermuda Insurance Company Ltd – financial services Sirius Capital Markets Bermuda Ltd. - administrative services White Schoals Re Ltd – administrative services Other associated companies TOTAL Premium income, net Indemnifications, net Purchased/ sold services Receivables Liabilities — — — — — — — — — — — — — — — — -41 -149 0 4 28 53 11 -92 - 7 - - 0 - 1 8 8 - - - - - 9 17 Premium income, net Indemnifications, net Purchased/ sold services Receivables Liabilities 177 0 -118 16 -18 - - - - - - - - - - - - - - - - - - -52 23 - 1 11 - - - - - - - - - - - - - - - - - - 57 –17 - - - - - 31 17 50 -30 0 1 381 0 117 -42 -4 2 - - -12 -149 0 3 7 372 423 - - 6 - 9 - - - - - 622 6 167 15 0 2 0 59 - 6 - - 0 - - - - 6 - - - 51 1 - - - - - - - 2 - - - - - 0 556 57 75 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Note 31 – Average number of employees, salaries and other remunerations AVERAGE NUMBER OF EMPLOYEES 2016 Women Total 2015 Women Total GROUP Parent Company Germany USA Canada TOTAL PARENT COMPANY Sweden UK Belgium Switzerland Singapore Bermuda TOTAL Men 156 5 60 6 227 152 9 58 2 221 2016 Men Women 74 37 26 5 5 9 73 28 23 5 13 10 156 152 308 14 118 8 448 Total 147 65 49 10 18 19 308 Men 154 4 59 5 222 146 9 58 2 215 2015 Men Women 75 36 25 4 5 9 70 26 23 5 12 10 154 146 300 13 117 7 437 Total 145 62 48 9 17 19 300 SENIOR MANAGEMENT GROUP AND PARENT COMPANY Men Women Total Men Women Total 2016 2015 Board and CEO Other senior members of management TOTAL REMUNERATIONS TO EMPLOYEES Salaries including bonuses Of which expenses bonus and other similar remunerations Pension expenses — Defined contribution plans — Defined benefit plans (Note 27) Social security contributions, special employer’s contributions on pensions TOTAL 4 1 5 1 - 1 5 1 6 5 1 6 1 - 1 GROUP 2016 2015 2016 PARENT COMPANY 832 386 67 64 7 123 1.022 592 161 74 68 8 95 761 493 230 60 60 0 112 669 6 1 7 2015 369 98 60 58 2 87 516 76 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Note 31 – Cont. OF WHICH PAID REMUNERATIONS FOR THE YEAR TO: GROUP 2016 2015 2016 2015 PARENT COMPANY CEO Salaries including bonuses Of which paid out bonuses Pension expenses — Defined contribution plans — Defined benefit plans TOTAL Former CEO 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 27 23 1 1 - 28 33 33 - - - 33 36 30 3 3 - 39 7 4 1 1 - 8 28 28 - - - 28 20 14 3 3 - 23 27 23 1 1 - 28 33 33 - - - 33 36 30 3 3 - 39 7 4 1 1 - 8 28 28 - - - 28 20 14 3 3 - 23 Salaries and remuneration The Board receives remunerations in accordance with the resolutions of the Remuneration policy Sirius International’s remuneration policy is available on the Company’s home- Annual General Meeting. Board fees are not paid to individuals employed in the page, which follows FFFS 2015:12. company. No board fees were paid in 2015 and 2016. Note 32 – Fees and reimbursements to auditors PwC Audit assignment Tax counseling Other services TOTAL GROUP 2016 15 1 0 16 2015 2016 2015 PARENT COMPANY 14 0 1 15 5 0 0 5 5 0 1 6 Audit assignment refers to the examination of the annual report and accounting observations made during such an examination or the implementation of such oth- records, as well as the administration of the Board of Directors and Managing er duties. Other services than those included in the audit agreement are classified Director, other duties which are the responsibility of the Company’s auditors to as audit services in addition to audit agreement, tax counseling and other services. execute and the provision of advisory services or other assistance resulting from Note 33 – Operational leasing NON-CANCELLABLE LEASES Due for payment within one year Due for payment later than one year but within five years Due for payment after five years TOTAL GROUP 2016 53 148 55 256 2015 50 183 80 313 PARENT COMPANY 2016 31 82 34 147 2015 30 116 49 195 77 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Note 34 – Class analysis PROFIT/LOSS PER INSURANCE CLASS GROUP 2016 Premium income, gross Premium earned, gross Incurred claims, gross Operating expenses, gross Result, ceded reinsurance TECHNICAL RESULT PARENT COMPANY 2016 Premium income, gross Premium earned, gross Incurred claims, gross Operating expenses, gross Result, ceded reinsurance Equalization provision TECHNICAL RESULT GROUP 2015 Premium income, gross Premium earned, gross Incurred claims, gross Operating expenses, gross Result, ceded reinsurance TECHNICAL RESULT PARENT COMPANY 2015 Premium income, gross Premium earned, gross Incurred claims, gross Operating expenses, gross Result, ceded reinsurance Equalization provision TECHNICAL RESULT Personal accident and health Marine, aviation and transport Fire and other property damage Miscellaneous Total direct insurance Assumed reinsurance 2,598 2,484 -1,503 -832 -129 20 31 32 3 -10 -13 12 470 457 -299 -130 -98 -70 248 231 -203 -109 -7 -88 3,347 3,204 -2,002 -1,081 -247 -126 7,459 7,324 -3,815 -2,279 -749 481 Personal accident and health Marine, aviation and transport Fire and other property damage Miscellaneous Total direct insurance Assumed reinsurance 1,188 1,086 -474 -489 -80 43 30 32 3 -10 -13 12 37 28 -17 -28 -8 -25 17 15 -5 -14 -2 -6 1,272 1,161 -493 -541 -103 24 5,523 4,969 -2,192 -1,405 -884 45 533 Personal accident and health Marine, aviation and transport Fire and other property damage Miscellaneous Total direct insurance Assumed reinsurance 2,218 2,117 -1,152 -770 -168 27 54 74 -41 -19 -3 11 140 149 -72 -76 -22 -21 221 182 -168 -73 -13 -72 2,633 2,522 -1,433 -938 -206 -55 7,056 7,085 -3,133 -2,176 -729 1,047 Personal accident and health Marine, aviation and transport Fire and other property damage Miscellaneous Total direct insurance Assumed reinsurance 1,142 1,043 -398 -484 -93 - 68 54 74 -41 -19 -4 - 10 30 34 -24 -29 -9 - -28 20 42 -19 -17 -9 - -3 1,246 1,193 -482 -549 -115 - 47 4,655 4,692 -1,989 -1,259 -819 - 625 Total 10,806 10,528 -5,817 -3,360 -996 355 Total 6,795 6,130 -2,685 -1,946 -987 45 557 Total 9,689 9,607 -4,566 -3,114 -935 992 Total 5,901 5,885 -2,471 -1,808 -934 - 672 78 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Note 35 – Appropriation of profits PROPOSED APPROPRIATION OF PROFITS For 2016, the Parent Company recorded income before appropriations and taxes of MSEK 3,912 (MSEK 1,069). Net income for the year amounted to MSEK 3,855 (MSEK 717). As of December 31, 2016 unrestricted retained earnings in the Group amounted to MSEK 5,400. The following profits are at the disposal of the general meeting of shareholders in the Parent Company Sirius International: (SEK IN THOUSANDS) Retained earnings Non-Restricted reserves Change in restricted reserves Group contribution provided Dividends paid, as resolved by the general meeting of shareholders and extraordinary general meeting of shareholders 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 2,817,736 -14,452 -67,834 -5,162 -2,596,700 3,854,698 3,988,286 905,000 3,083,286 3,988,286 The Company’s financial position does not give rise to any assessment other than Regarding the Company’s and the Group’s results and financial position, that the Company can be expected to fulfill its obligations in both the short-term please refer to the attached income statements and balance sheets, cash flow and in the long-term. It is the opinion of the Board of Directors that the solvency statements and statements of changes in shareholders’ equity, with accompany- capital of the Company, as it has been reported in the annual report, is adequate in ing notes. relation to the scope and risks of the operations. STOCKHOLM, APRIL 25, 2017 ALLAN WATERS Chairman of the Board of Directors JEFFREY DAVIS JAN ONSELIUS LARS EK MONICA CRAMÉR MANHEM President & CEO Our Auditors’ Report was submitted on April 25, 2017 MORGAN SANDSTRÖM Authorised Public Accountant 79 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 For translation purposes only Audit report To the general meeting of the shareholders of Sirius International Insurance Corporation (publ), corporate identity number 516401-8136. Report on the annual accounts and consolidated accounts OPINIONS We have audited the annual accounts and consolidated accounts of Sirius International Insurance Corporation (publ) for the year 2016. In our opinion, the annual accounts have been prepared in accordance with the Annual Accounts Act for Insurance Companies and present fairly, in all material respects, the financial position of parent company as of 31 December 2016 and its financial performance and cash flow for the year then ended in accordance with the Annual Accounts Act for Insurance Companies. The consolidated accounts have been prepared in accordance with the Annual Accounts Act for Insurance Companies and present fairly, in all material respects, the financial position of the group as of 31 December 2016 and their financial performance and cash flow for the year then ended in accordance with International Financial Reporting Standards (IFRS), as adopted by the EU, and the Annual Accounts Act for Insurance Companies. The statutory administration report is consistent with the other parts of the annual accounts and consolidated accounts. We therefore recommend that the general meeting of share- holders adopts the income statement and balance sheet for the parent company and the group. BASIS FOR OPINIONS We conducted our audit in accordance with International Standards on Auditing (ISA) and generally accepted auditing standards in Sweden. Our responsibilities under those standards are further described in the Auditor’s Responsibilities section. We are independent of the parent company and the group in accordance with professional ethics for accountants in Sweden and have otherwise fulfilled our ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinions. RESPONSIBILITIES OF THE BOARD OF DIRECTORS AND THE MANAGING DIRECTOR The Board of Directors and the Managing Director are responsi- ble for the preparation of the annual accounts and consolidated accounts and that they give a fair presentation in accordance with the Annual Accounts Act for Insurance Companies and, concerning the consolidated accounts, in accordance with IFRS as adopted by the EU. The Board of Directors and the Managing Director are also responsible for such internal control as they determine is necessary to enable the preparation of annual accounts and consolidated accounts that are free from material misstatement, whether due to fraud or error. In preparing the annual accounts and consolidated accounts, The Board of Directors and the Managing Director are responsible for the assessment of the company’s and the group’s ability to continue as a going concern. They disclose, as applicable, matters related to going concern and using the going concern basis of accounting. The going concern basis of accounting is however not applied if the Board of Directors and the Managing Director intend to liquidate the company, to cease operations, or has no realistic alternative but to do so. AUDITOR’S RESPONSIBILITY Our objectives are to obtain reasonable assurance about whether the annual accounts and consolidated accounts as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinions. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs and generally accepted auditing standards in Sweden will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these annual accounts and consolidated accounts. A further description of our responsibility for the audit of the annual accounts and consolidated accounts is available on Revisorsnämnden’s website: www.revisorsinspektionen.se/rn/ showdocument/documents/rev_dok/revisors_ansvar.pdf. This description is part of the auditor’s report. Report on other legal and regulatory requirements OPINIONS In addition to our audit of the annual accounts and consolidated accounts, we have also audited the administration of the Board of Directors and the Managing Director of Sirius International Insurance Corporation (publ) for the year 2016 and the proposed appropriations of the company’s profit or loss. We recommend to the general meeting of shareholders that the profit be appropriated in accordance with the proposal in the statutory administration report and that the members of the Board of Directors and the Managing Director be discharged from liability for the financial year. BASIS FOR OPINIONS We conducted the audit in accordance with generally accepted auditing standards in Sweden. Our responsibilities under those standards are further described in the Auditor’s Responsibilities section. We are independent of the parent company and the group in accordance with professional ethics for accountants in Sweden and have otherwise fulfilled our ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinions. 80 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Our objective concerning the audit of the proposed appropria- tions of the company’s profit or loss, and thereby our opinion about this, is to assess with reasonable degree of assurance whether the proposal is in accordance with the Companies Act. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with generally accepted auditing standards in Sweden will always detect actions or omissions that can give rise to liability to the company, or that the proposed appropriations of the company’s profit or loss are not in accordance with the Companies Act. A further description of our responsibility for the audit of the administration is available on Revisorsnämnden’s website: www. revisorsinspektionen.se/rn/showdocument/documents/rev_dok/ revisors_ansvar.pdf. This description is part of the auditor’s report. Stockholm, April 25, 2017 PricewaterhouseCoopers AB MORGAN SANDSTRÖM Authorised Public Accountant RESPONSIBILITIES OF THE BOARD OF DIRECTORS AND THE MANAGING DIRECTOR The Board of Directors is responsible for the proposal for appropriations of the company’s profit or loss. At the proposal of a dividend, this includes an assessment of whether the dividend is justifiable considering the requirements which the company’s and the group’s type of operations, size and risks place on the size of the parent company’s and the group’s equity, consolida- tion requirements, liquidity and position in general. The Board of Directors is responsible for the company’s organization and the administration of the company’s affairs. This includes among other things continuous assessment of the company’s and the group’s financial situation and ensuring that the company’s organization is designed so that the accounting, management of assets and the company’s financial affairs otherwise are controlled in a reassuring manner. The Managing Director shall manage the ongoing administration according to the Board of Directors’ guidelines and instructions and among other matters take measures that are necessary to fulfill the company’s accounting in accordance with law and handle the management of assets in a reassuring manner. AUDITOR’S RESPONSIBILITY Our objective concerning the audit of the administration, and thereby our opinion about discharge from liability, is to obtain audit evidence to assess with a reasonable degree of assurance whether any member of the Board of Directors or the Managing Director in any material respect: • has undertaken any action or been guilty of any omission which can give rise to liability to the company, or • in any other way has acted in contravention of the Companies Act, the Insurance Business Act, the Annual Accounts Act for Insurance Companies or the Articles of Association. 81 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Definitions Combined ratio Net claims incurred in relations to net premiums earned and operating expenses (both commissions and own expenses) in relation to net premiums earned. Other operating costs are excluded when calculating combined ratio as they stem from non-insurance operations. 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 2016. The audited Swedish version is the binding version. Singapore 82 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 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 industrial 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 the President & CEO of Sirius International. 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 companies 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. ON JULY 1, 2011 the wholly owned Syndicate 1945 started to under- write. In the autumn Sirius America (former White Mountains Re America) became part of the Sirius Group. IN 2014 Monica Cramér Manhem became the President & CEO of Sirius International. Sirius launched its own Lloyd’s managing agency. ON APRIL 18, 2016 Sirius International Insurance Group, Ltd. was bought by CM International Holding Pte. Ltd. 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 reinsurance 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. During the ownership of White Mountains, Sirius has had an average combined ratio of 85 % and close to $1 billion in underwriting profits. This long-term track record is perhaps unparalleled. 83 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 Liège 84 Art and production: INEKO AB 2017. Photo: Dan Coleman (p. 2), FotoVoyager (p. 27), Shutterstock (p. 7, 10, 32, 42, 67, 84), Teradat Santivivut (p. 82). SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2016 HEAD OFFICE Sirius International Insurance Corporation (publ) SE-113 96 Stockholm, Sweden Visiting address: Birger Jarlsgatan 57B Telephone: +46 8 458 55 00 Sirius International Insurance Corporation (publ) Belgian Branch Mont Saint Martin 62 B/2 BE 4000 Liège, Belgium Telephone: +32 4 220 86 11 Sirius International Insurance Corporation (publ) Bermuda Branch Hamilton HM11, Bermuda Visiting address: 14 Wesley Street; 5th floor Telephone: +1 441 278 31 40 Sirius Rückversicherungs Service GmbH Neuer Wall 52/Entrance: Bleichenbrücke 1–7 DE-20354 Hamburg, Germany Telephone: +49 403 095 190 Sirius International Insurance Corporation (publ) UK Branch 4th Floor, 20 Fenchurch Street London EC3M 3BY, Great Britain Telephone: +44 203 772 3111 Sirius International Insurance Corporation (publ) Asia Branch 24 Raffles Place #10-01/02 Clifford Centre 048 621 Singapore, Singapore Telephone: +65 643 500 52 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 Sirius International Insurance Corporation (publ) Zurich Branch P.O. Box 2807 CH-8002 Zurich, Switzerland Visiting address: Dreikönigstrasse 12 Telephone: +41 43 443 0180 I S I R 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 6 Annual report 2016 CONTENTS Board of Directors’ Report Five-year summary 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 Income Statement – Parent Company continued Statement of Comprehensive Income – 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 Shares and participations in associated companies Note 15 Investments in shares and participations Note 16 Bonds and other interest-bearing securities Note 17 Derivative financial instruments Note 18 Other debtors Note 19 Categories of financial assets and liabilities and their fair value Note 20 Tangible assets Note 21 Deferred acquisition costs Note 22 Untaxed reserves Note 23 Provisions for unearned premiums and unexpired risks Note 24 Claims reserve Note 25 Equalization provision Note 26 Claims handling provision Note 27 Employee benefits Note 28 Other creditors Note 29 Contingent liabilities and commitments Note 30 Associated parties Note 31 Average number of employees, salaries and other remunerations Note 32 Fees and reimbursements to auditors Note 33 Operational leasing Note 34 Class analysis Note 35 Appropriation of profits Audir Report Definitions History xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx HEAD OFFICE Sirius International Insurance Corporation (publ) SE-113 96 Stockholm, Sweden Visiting address: Birger Jarlsgatan 57B Telephone: +46 8 458 55 00 Sirius International Insurance Corporation (publ) Belgian Branch Mont Saint Martin 62 B/2 BE 4000 Liège, Belgium Telephone: +32 4 220 86 11 Sirius International Insurance Corporation (publ) Bermuda Branch Hamilton HM11, Bermuda Visiting address: 14 Wesley Street; 5th floor Telephone: +1 441 278 31 40 Sirius Rückversicherungs Service GmbH Neuer Wall 52/Entrance: Bleichenbrücke 1–7 DE-20354 Hamburg, Germany Telephone: +49 403 095 190 Sirius International Insurance Corporation (publ) UK Branch 4th Floor, 20 Fenchurch Street London EC3M 3BY, Great Britain Telephone: +44 203 772 3111 Sirius International Insurance Corporation (publ) Asia Branch 24 Raffles Place #10-01/02 Clifford Centre 048 621 Singapore, Singapore Telephone: +65 643 500 52 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 Sirius International Insurance Corporation (publ) Zurich Branch P.O. Box 2807 CH-8002 Zurich, Switzerland Visiting address: Dreikönigstrasse 12 Telephone: +41 43 443 0180 I S I R 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 6 Annual report 2016 CONTENTS Board of Directors’ Report Five-year summary 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 Income Statement – Parent Company continued Statement of Comprehensive Income – 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 Shares and participations in associated companies Note 15 Investments in shares and participations Note 16 Bonds and other interest-bearing securities Note 17 Derivative financial instruments Note 18 Other debtors Note 19 Categories of financial assets and liabilities and their fair value Note 20 Tangible assets Note 21 Deferred acquisition costs Note 22 Untaxed reserves Note 23 Provisions for unearned premiums and unexpired risks Note 24 Claims reserve Note 25 Equalization provision Note 26 Claims handling provision Note 27 Employee benefits Note 28 Other creditors Note 29 Contingent liabilities and commitments Note 30 Associated parties Note 31 Average number of employees, salaries and other remunerations Note 32 Fees and reimbursements to auditors Note 33 Operational leasing Note 34 Class analysis Note 35 Appropriation of profits Audir Report Definitions History xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx