Annual report 2017 A 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 Balance Sheet – Parent Company Change in Shareholders’ Equity – Parent Company Cash flow Statement – Parent Company Performance Analysis – Parent Company Note 1 Accounting principles Note 2 Information on risks Note 3 Premium income Note 4 Claims incurred, for own account Note 5 Operating costs Note 6 Investment income Note 7 Unrealized gains and losses on investments Note 8 Investment expenses and charges Note 9 Net profit or net loss per category of financial instruments Note 10 Taxes Note 11 Intangible assets Note 12 Land and buildings Note 13 Shares and participations in group companies Note 14 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 21 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 82 87 87 C CMIG, our owner CMIG 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 global 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. The principal operating companies are: SIRIUS BERMUDA INSURANCE COMPANY, LTD. (”Sirius Bermuda”) –A Bermuda based reinsurer currently focused primarily on US and Latin America treaty business. Sirius Bermuda is a leading reinsurer for Property, Casualty and Accident & Health business. Sirius Bermuda also writes US treaty business through an advisory agreement with Sirius America Re Managers. SIRIUS INTERNATIONAL INSURANCE CORPORATION (PUBL) (“Sirius International”) – An international (re)insurer based in Sweden primarily focused on property and other short-tail lines of business. Sirius International is the largest reinsurance company in Scandinavia and a leading reinsurer in the European markets. Sirius International’s head office is located in Stockholm with offices in Bermuda, Hamburg, Liège, London, Shanghai, Singapore and Zürich. Sirius International is 100% owned by Sirius Bermuda. SIRIUS AMERICA INSURANCE COMPANY (“Sirius America”) – A U.S.-based international (re)insurance company focused on Accident & Health, Casualty, 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 LTD. The Lloyd’s Managing Agency, established in 2011, is responsible for Syndicate 1945 and 100% owned by Sirius International. The Syndicate focuses primarily on Accident & Health, Casualty, Contingency and Property. 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 2017 Sirius Annual Report for 2017 We can now turn the page on what became a particularly challenging year for the reinsurance industry. Global insured catastrophe losses were amongst the highest recorded in a single year when market rates were at historically low levels. Sirius International inevitably felt the impact of this exceptionally difficult trading environment, recording disappointing results. Look beyond the headline figures, though, and it was also a year of considerable positive progress for the group as we developed new and exciting openings for the future. The third quarter of 2017 brought an unprecedented string of natural catastrophes in North and Central America: Hurricanes Harvey, Irma and Maria, two earthquakes in Mexico and wildfires in California in October and again in December. At the time of writing the estimated total economic damage from these events is a record $344 billion, with the insurance and reinsurance industry facing losses in the region of $140 billion. The frequency and severity of these catastrophe losses are reflected in the results for 2017, mitigated to a significant degree by the fact that our risks are well diversified by both class and geography, with the rest of the portfolio performing profitably. The final outcome of the year was a combined ratio of 110%. This unusually high figure by our standards should be seen in the context of the volatility of our industry where yearly fluctuations of fortune are an unavoidable fact of life; indeed, they are why companies need reinsurance in the first place. It is worth noting that the latest five-year average combined ratio for Sirius International stands at an altogether healthy 90%, which demonstrates our ability to ride the peaks and troughs of our industry in a sustainable and resilient manner. We have also been taking steps to develop and further diversify the business. I am especially excited by the prog- 2 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 ress we have made in China – now our fifth biggest market, where we have been assisted by the profile of our Chinese owners CMIG. Our Shanghai representative office opened in November after receiving regulatory approval. We have also launched our Lloyd's China Platform. fundamentals arguably demanded, we nonetheless went into 2018 in good heart. We retain our strong market position. Our proven client-fo- cused approach and willingness to turn away unprofitable ” …the latest five-year average combined ratio for Sirius International stands at an altogether healthy 90%, which demonstrates our ability to ride the peaks and troughs of our industry…” One of several initiatives in the pipeline will enable us to grow in the Chinese Accident and Health market through IMG – a long-term partner of ours in the travel arena that we acquired during 2017. We plan to distribute A&H products in China together with local carriers, with the first of these schemes due to come to fruition in the first half of 2018. This strategy builds on Sirius' specialist expertise and contacts in this class of business. With this as a starting point there will be other opportunities in Chi- na as well as other countries in Asia. Another acquisition during the year – the US-based MGU Armada, known for its innovative approach to health care – will further enhanced our ability to offer A&H solutions across the Sirius Group. business remain undiluted. Our stable and experienced underwriting teams, long-term commercial relationships, strong risk controls, a rigorous regulatory environment to protect clients wherever we trade and highly supportive owners continue to underpin the business. I would like to finish as always by thanking our staff, clients and brokers. The teams have performed with their usual enthusiasm, professionalism and Our London operations saw some important changes during the year. We took on board a small casualty team to broaden our offering to clients. We also decided, with great regret, to close the Marine account in London, where we wrote XL, direct yacht and direct cargo. Market conditions in these lines had been highly adverse for some time, and were showing little sign of improvement. Looking ahead, the 2017–18 renewal season finally ended five years of falling rates, which had put huge pressure on the industry's margins. Some areas most affected by the losses during 2017 saw double digit increases, whilst the rest were mostly flat. Although we did not experience the rises that the loyalty throughout what has sometimes been a tough year. As for our clients and brokers, they are the reason why Sirius exists. Our strong relationships benefit all parties. We look forward to being of continued service. Monica Cramér Manhem President & CEO 3 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 AT A GLANCE 2017 2016 Net premium income Underwriting result Combined ratio Result before taxes COMBINED RATIO $705 million –$74 million 110 % $835 million $41 million 95 % –$48 million $41 million 83 % 78 % 86 % 95 % 110 % 2013 2014 2015 2016 2017 SOLVENCY CAPITAL, MSEK 17,954 18,632 16,191 16,983 14,870 2013 2014 2015 2016 2017 4 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 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 2017. General information regarding the company Sirius International operates within international insurance and reinsurance. Sirius International was established in 1989. However, 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 of the Group since 1992. Development of the Company’s operations, income and financial position Globally, the number of major catastrophes arising from natural disasters increased in 2017 to one of the highest levels ever expressed in economic losses on both a nominal and inflation- adjusted basis. These disasters have caused significant human- itarian losses. Insurance costs for natural disasters during the year are also among the highest ever and are comparable with record years in 2005 and 2011. The major events for the industry include hurricanes Harvey and Irma in the United States, hurricane Maria in the Caribbean, extensive wildfire outbreaks in the state of California USA, along with major claims from both droughts and floods in Europe and Asia. Sirius Inter national’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. The largest insurance losses for Sirius International during 2017 eminate from hurricanes Harvey, Irma and Maria, the outbreak of wildfires in northern California and two earthquakes in Mexico. These events are estimated to have resulted in claims of approximately MSEK 880 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). These claims derive primarily from hurricanes Harvey, Irma, Maria and the wildfires in the state of California. For the Group these events combined are estimated to have resulted in claims of approximately MSEK 1,245 for own account. Overall, claims reserves from previous accident years have been stable during the year and resulted in a small negative run-off result for the 2017 financial year for the Group. For the Parent company the claims reserves from previous accident years had a very favorable development during the year and resulted in a positive run-off result for the 2017 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 2018, has noted both increased volume and risk adjusted price increases. It is the first time in five years that price increases have been seen across most insurance classes. For the overall portfolio, the pricing and renewal volume for 2018 is deemed to be satisfactory and in line with expectations. During 2017, the business operations for the Syndicate have not achieved plan and results have not reached the profitability tar- gets set, mainly due to larger claims outcome compared to plan. The profitability in the marine portfolio written in the Syndicate has not been satisfactory and the viability of the portfolio in the long run has been evaluated. Despite significant losses in the marine market as a consequence of the large cathastrophes, pricing has not improved as needed and Sirius took the decision to cease underwriting marine excess of loss, marine cargo and yacht business in London. The US operations, primarily conducted in Sirius America reported satisfactory growth in volume. However, due to the large catastrophes mentioned above and some run-off losses from previous years, the results were below expectations. Gross premium income amounted to MSEK 11,053 (10,806) for the Group and MSEK 8,357 (6,795) for the Parent Company. The Group’s premium income for own account amounted to MSEK 6,022 (7,146), and MSEK 4,524 (3,927) for the Parent Company. For the Group the premium volume was 2 % higher than the previous year, and 23 % higher for the Parent Company. The increases in gross premium volume are noted mainly in the lines assumed property reinsurance, while other insurance lines only show a smaller variation compared to the previous year. For the Group a significant increase is noted within the line direct insurance from other countries partly offset by lower gross premium income from assumed property reinsurance compared to previous years. The strengthened SEK, primarily against USD has provided a non-favorable effect on premium volume for the Group as well as the Parent company. The Group’s operating loss from insurance operations amounted to MSEK –784 (profit of MSEK 185) and to MSEK –16 (profit of MSEK 459) for the Parent Company. The combined ratio was 110 % (95 %) for the Group and 100% (85 %) for the Parent Company. The deterioration in insurance operating result is due to the above mentioned increased castastrophe claims. 2017 has been a year with continuing political turbulence. The new president in the United States, the election in Germany, the continuing conflict in Syria and the terror attacks in Europe have 5 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 all contributed to the political turmoil. This political turmoil, has however, not been fully reflected in the financial markets to the extent expected. investment portfolio, excluding currency related derivatives, had the following composition: Bonds and other interest bearing securities 67.6 %, Shares and participations 17.6 %, Bank funds 14.8 %. In view of the political turmoil it is surprising to see the strong development of the world economy. On a global basis, GDP grew 3.7 % during 2017. Generally, the world’s leading stock markets had a positive development where FTSE 100 index increased by 7.6 %, Dow Jones increased by 25.1 % and DAX increased by 12.5 %. OMX 30 in Sweden increased by 3.9 %. As a part of the ongoing restructuring within the Group, a number of subsidiaries in Luxembourg have been liquidated during the first quarter. As a result, Sirius International became the Parent company of the former sub- subsidiary Sirius Re Holdings Inc. In Sweden, the Riksbank continued its expansive monetary pol- icy, with negative repo rates, however purchases of government bonds ceased in June. During the year, the inflation rose to 2 %, the GDP growth rate was 2.7 %, while the unemployment rate remained around 6.5 %. The Swedish economy has continued to develop strongly and demand remains strong in many of its most important export markets. The Swedish krona had a volatile year with large fluctuations to the most important currencies. On an annual basis, SEK has strengthened in relation to USD and GBP. During 2017, USD and GBP have weakened by 9.4 % and 1.1 % respectively against SEK. EUR has strengthened against SEK by 3 % 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 increased 10 basis points whereas the interest rate in the five year tenor has been more or less unchanged. In the US, the interest rates have continued to increase. The three year tenor increased 52 basis points whereas the interest rate in the five year tenor increased 28 basis points. The UK interest rates increased 37 basis points for the three year tenor and the interest rate in the five-year tenor increased 28 basis points. The corresponding interest rates for EURO bonds remained virtually unchanged. Overall, yield on the bond portfolio was 1.0 % adjusted for exchange rate effects. As regards the equity portfolio, including investments in Hedge Funds and Private Equity investments, the yield amounted to 11.7 %, adjusted for exchange rate effects. The realized and unrealized currency exchange rate result, including currency hedging and translation differences from foreign subsidiaries amounted to a loss of MSEK 863. 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 616 (317). The Group’s direct yield was 2.8 % (1.7 %) and the total yield was 2.9 % (–0.8 %). The direct and total yields are calculated according to the recommendations of The Swedish Financial Supervisory Authority. The investment portfolio’s concentration and composition have changed a bit compared to previous years with a larger part of shares. At year-end, the consolidated During the second quarter Sirius Re Holdings Inc Group acquired Armada Corp Capital, LLC, a market-leading provider of supplementary health insurance and administration services in USA. During the third quarter the China Insurance Regulatory Com- mission approved the company’s application for establishment of a representative office in Shanghai; Sweden Sirius International Insurance Corporation Shanghai Representative Office. In the fourth quarter Sirius International Holdings (NL) BV sold the holdings in Star Re Ltd to the group company Sirius Bermuda Insurance Company (SBDA). After the sale, the value of Sirius International (NL) BV has been impaired by MSEK 139. 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 sub- ject to Solvency 2 group reporting. Instead, this is currently done for the Sirius International UK Holdings Ltd-group based in the United Kingdom, the ultimate parent company in EU. Further- more, the Bermuda Monetary Authority (BMA) has assumed the role as group supervisor for SBDA-group, 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. The own funds items for each entity within the group does primarily consist of basic own funds items which has been deemed to be fully eligible to meet the SCR requirement for each company within the group. In the Sirius International UK Holdings Ltd-group the safety reserve from one entity within the group cannot be made fully available for other group companies (13 kap.6–7 §§ Swedish Financial Supervisory Authority’s regulations and general guidelines on Insurance Business (FFFS 2015:8)). This leads to a quantitative limitation of the transfer- ability and eligibility of the safety reserve for Sirius International UK Holdings Ltd-group. For the parent company the ratio of total eligible own funds to the solvency capital requirement is 2,04, and the ratio of total eligible own funds to the minimum capital requirement is 8,09. After deduction of non-available own funds items within the Siri- us International UK Holdings Ltd-group, the ratio of total eligible own funds to the solvency capital requirement is 1,11. For SBDA group, the ratio of total eligible own funds to the solvency capital requirement is 2,98, according to calculations made under the equivalence rules for Bermuda. 6 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 Other events regarding the changes in the Group’s structure are described primarily under the section “Ownership structure” below. 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 one contract in which insufficient insurance risk is assessed to exist, and which, thereby, does not qualify as an insurance contract. This contract is classified as an investment contract. 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 2018 are to achieve a combined ratio of 95% and a Return on adjusted equity of 8%. Sustainability report A sustainability report has been made and the information is available on Sirius Internationals webpage. www.siriusgroup. com 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 2017, 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; Sirius Re Holdings Inc., Delaware, USA; SI Cumberland (Gibraltar) Limited, Gibraltar; 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 and one representative office outside Sweden. These are Sirius International Insurance Corporation (publ) UK branch, London, United Kingdom; Sirius International Insurance Corporation (publ) Stockholm Zurich branch, Zurich, Switzerland; Sirius In- ternational Insurance Corporation (publ) Asia branch, Singapore; Sirius International Insurance Corporation (publ) Labuan branch, Labuan, Malaysia; Sirius International Insurance Corporation (publ) Belgian branch, Liège, Belgium; Sirius International Dan- ish Branch, filial af Sirius International Försäkringsaktie bolag (publ), Copenhagen, Denmark; Sirius International Insurance Corporation (publ) Bermuda Branch, Hamilton, Bermuda; Sirius International Insurance Corporation (publ) Australian Branch, Australia and Sweden Sirius International Insurance Corporation Shanghai Representative Office, Shanghai, China. 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 liqui- dation 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 During the first quarter of 2018 the SIIG group started with an internal restructuring in order to coordinate the groups underwriting operations into one unit and the groups agency and advisory operations in another unit. As a consequence, Sirius divested Armada into the unit that will coordinate the agency and advisory operations. 7 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 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 assets 1) 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 2) Required solvency capital Group based values 2) Capital base Solvency requirement Total Eligible Own Funds4) Of which basic own funds Consolidated Solvency capital requirement 2017 2016 2015 2014 2013 6,022 6,062 196 –4,631 –2,060 –351 –784 376 –694 12,721 19,471 76 % 34 % 110 % 3 % 3 % 12,515 2,358 –2 14,870 247 % - - - - 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 % - - - - 8,732 8,732 7,838 11,059 11,059 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 - - - 1) Includes Investment assets and Cash and bank balances. 2) According to Solvency 1. Include Sirius International with subsidiaries. 3) According to Solvency 1. Include SI Caleta (Gibraltar) .Ltd. 4) According to Solvency 2 requirements. Sirius UK Holdings Ltd. For 2017 and SI Caleta (Gibraltar) Ltd for 2015–2016 8 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 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 Funds3) 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 2017 2016 2015 2014 2013 4,524 4,351 63 –3,007 –1,375 –63 –15 138 4 122 6,938 17,916 69 % 31 % 100 % 1 % 1 % 4,063 10,716 - 14,780 327 % - - 13,410 13,410 1,646 6,584 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 - - - - 9 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 Proposed appropriation of profits For 2017, the Parent Company recorded income of MSEK 118 (MSEK 3,912) income before appropriations and taxes for the year amounted to MSEK 122 (MSEK 3,855). As of December 31, 2017 retained earnings in the Group amounted to MSEK 3,306 (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 Transfer from restricted reserves Dividends paid, as resolved by the general meeting of shareholders Net income for the year Total 3,988,285 –10,073 17,562 –905,000 122,293 3,213,067 The Board of Directors and the president propose that the amount be appropriated as follows: Dividend to the owner To be carried forward 0 3,213,067 3,213,067 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 2017 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 2017 2016 3 3 4 4 5 5 9 6 7 8 14 10 11,053 –5,031 –390 430 6,062 196 –6,409 1,958 –4,451 –1,166 986 –4,631 –2,060 –351 –784 10,806 –3,660 –278 297 7,165 192 –5,946 1,363 –4,583 129 210 –4,244 –2,566 –362 185 –784 185 1,017 –83 –372 10 –196 376 –408 –286 –694 1,795 –562 –880 8 –192 169 354 67 421 11 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 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 Note 27 10 10 2017 –694 16 –4 7 –540 –1 5 –3 –520 TOTAL COMPREHENSIVE INCOME FOR THE YEAR –1,214 2016 421 –6 2 53 575 –11 –97 22 538 959 12 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 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 2017 2016 11 12 14 15,19 16,19 17,19 23 24 10 18, 19 20 19 21 1,033 727 1,760 9 532 142 3,442 14,059 222 17,723 1,064 19,471 1,653 3,843 5,496 484 3,941 474 1,859 175 6,933 91 3,070 3,161 88 516 11 615 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 TOTAL ASSETS 37,437 37,850 13 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 Balance Sheet – Group, cont. DECEMBER 31 (MSEK) Note 2017 2016 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 intrest 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 Derivatives Other liabilities Accrued expenses and deferred income Total liabilities 800 5,480 1,411 8,409 –3,585 12,515 - 12,515 3,718 14,500 18,218 11 162 2,347 106 2,626 699 298 1,760 - 1,241 80 4,078 800 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 23 24, 26 27 10 17, 19 19, 28 19 TOTAL SHAREHOLDERS’ EQUITY, PROVISIONS AND LIABILITIES 37,437 37,850 14 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 Change in Shareholders’ Equity – Group (MSEK) Share Capital1) Additional paid in capital Reserves Retained earnings – restricted1) Retained earnings – non- restricted Total Minority interest Total Share- holders equity Amount January 1, 2017 800 5,480 1,943 8,433 –2,023 14,633 7 14,640 Comprehensive income Net profit/loss for the year Change in untaxed reserves Other comprehensive income, after tax Change of fair value on bonds Change defined benefit pension paid Currency translation differencies Total other comprehensive income Total comprehensive income Transactions with owners Acquisition of minority share Dividend paid 2) Total transactions with owners - - - - - - - - - - - - - - - - - - - - - - 8 - –540 –532 –532 - - - - –24 –694 24 - - - - - 13 - 13 –694 - 8 13 –658 –517 –24 -658 –1,214 - - - - –905 –905 - –905 –905 AMOUNT DECEMBER 31, 2017 800 5,480 1,411 8,409 –3,585 12,515 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 differencies Total other comprehensive income Total comprehensive income Transactions with owners Shareholder’s contribution Dividend paid 2) 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 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 113 SEK (325 SEK) per share. - - - - - - - –7 - - - 0 7 - - - - - 0 7 - - 0 7 –694 - 8 13 –540 –517 –1,214 0 –7 –905 –912 12,515 16,277 428 0 0 –34 –5 575 537 964 0 –5 –2,597 –2,602 14,640 15 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 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, 2017 the share capital comprised 8,000,000 (8,000,000) ordinary shares. The shares have a nominal value of 100 (100) SEK. ADDITIONAL PAID IN CAPITAL Opening additional paid in capital 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 CLOSING 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 2017 2016 8,000,000 8,000,000 8,000,000 8,000,000 2017 2016 5,480 - 5,480 5,479 1 5,480 –21 11 –10 6 –4 2 –15 7 –8 1,958 –540 1,418 8,433 –24 8,409 –2,023 –694 - 13 24 –905 –3,585 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 16 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 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 2017 2016 –408 649 –5 58 293 –57 530 1,307 –2,348 1,077 566 - –38 –38 - –167 –167 361 2,773 361 –64 3,070 102 - 101 –310 196 –649 731 –649 4 –58 11 835 –21 293 1,636 1,434 3,070 354 418 –1 36 50 24 881 764 –1,265 –574 –194 14 –25 –11 - –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 11, 12, 20 6 8 6 8 7 7 6 8 6 14 24 17 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 Performance Analysis – Group Direct Swedish risks — property Direct Swedish risks — aviation Direct Swedish risks — MFL Direct foreign risks Assumed reinsurance 1 JANUARY – 31 DECEMBER 2017 (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 amounts2) 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 1,501 24 –1,288 –661 –424 –701 –1,556 –1,511 –29 Total 6,062 196 –4,631 –2,060 –433 –1,314 4,553 172 –3,320 –1,397 8 –612 –2,160 –3,718 –12,794 –14,324 –147 –176 –3,096 –15,101 –18,218 857 669 1,526 3,867 –2,162 –612 408 1,501 –1,891 886 –44 –518 279 796 3,173 3,969 7,177 –2,868 222 22 4,553 –4,321 1,072 –144 –634 707 –1,288 –3,320 1,653 3,843 5,496 11,053 –5,031 –390 430 6,062 –6,221 1,958 –188 –1,166 986 –4,631 1 1 –1 –1 1 1 1 1 3 3 4 –1 3 4 –23 –2 –21 –1 –2 –18 –20 4 4 –9 –14 –23 1) Exludes other operating costs that are not related to the insurance operations. 2) Defined as result from underwriting year 2016 and earlier 18 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 Income Statement – Parent Company JANUARY 1 — DECEMBER 31 (MSEK) Note 2017 2016 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 8,357 –3,833 –417 244 4,351 63 –3,204 1,304 –1,900 –1,783 676 –3,007 –1,375 –63 15 –16 6,795 –2,868 –665 341 3,603 94 –2,768 846 –1,922 83 53 –1,786 –1,305 –192 45 459 –16 459 285 377 –461 –63 138 –4 118 - 8 126 –4 122 4,238 251 –938 –94 3,457 –4 3,912 - –5 3,906 –51 3,855 19 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 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 2017 122 7 –2 –20 5 –10 112 2016 3,855 69 –15 –88 19 –15 3,840 20 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 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 Interest-bearing securities issued by, and loans to, Group 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 2017 2016 11 12 13 15, 19 16, 19 17, 19 23 24 10 18,19 20 19 21 9 50 59 9 13 68 81 10 10,617 10,760 122 527 1,153 4,114 222 5,489 1,150 17,914 1,236 2,151 3,387 86 3,599 349 34 944 5,012 58 1,386 1,444 46 403 11 460 122 - 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 28,278 26,636 21 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 Balance Sheet – Parent Company, cont. DECEMBER 31 (MSEK) Note 2017 2016 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 liabilies 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 –1 3,142 122 4,063 26 10,690 10,716 2,787 7,510 29 10,326 14 150 - 55 218 403 1 1,566 - 906 2,473 77 77 800 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 22 23 24, 26 25 27 10 17, 19 19, 28 19 TOTAL SHAREHOLDERS’ EQUITY, PROVISIONS AND LIABILITIES 28,278 26,636 22 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 Change in Shareholders’ Equity – Parent Company Restricted reserves Other Reserves1) Retained earnings1) Net profit/loss for the year1) (MSEK) Amount January 1, 2017 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 Dividend paid 2) Total transactions with owners AMOUNT DECEMBER 31, 2017 Amount January 1, 2016 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 3) Dividend paid 2) Total transactions with owners - - - - - - - - 800 800 - - - - - - - - 68 - –18 - - - - - - 50 - - 68 - - - - - - - 124 3,855 18 3,855 –3,855 - Total 4,856 0 0 - - - - –905 –905 3,092 2,078 717 –68 - - - - –5 –2,597 –2,602 124 122 122 - - 122 - - 122 717 –717 - –10 –10 112 –905 –905 4,063 3,618 0 - 3,855 3,855 - - 3,855 - - - 3,855 –14 –14 3,841 –5 –2,597 –2,602 4,856 9 - - - –10 –10 –10 - - –1 23 - - - –14 –14 –14 - - - 9 AMOUNT DECEMBER 31, 2016 800 68 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 113 (SEK 325) per share. 3) Shareholder’s contribution to the parent company Fund American Holdings AB. 23 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 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, 2017 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 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 2017 2016 8,000,000 8,000,000 8,000,000 8,000,000 12 –13 –1 –3 3 0 9 –10 –1 124 3,855 18 - –905 3,092 68 –18 50 29 –17 12 –6 5 –3 23 –14 9 2,078 717 –68 –5 –2,597 124 - 68 68 122 3,855 24 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 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 Net investment of intangible assets Net investments of tangible assets Cash flow from investing activities Investing activities Dividend 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 2017 2016 118 130 –5 123 –1,119 –84 –837 533 –2,255 2,848 289 –11 –9 –20 –167 –167 102 1,420 102 –136 1,386 60 - 170 –32 272 –627 250 –130 –123 –957 –2 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 - –1,119 –3,656 633 753 1,386 585 835 1,420 11,12,20 6 8 6 8 7 7 6 8 6 24 25 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 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 2017 (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 4,351 63 –3,007 –1,375 15 47 3,756 60 –2,689 –1,067 15 75 –995 –1,363 –2,141 –7,060 –129 –29 –2,787 –7,371 –139 –29 588 3 –295 –306 –10 –367 –644 –292 –10 –946 –9,359 –10,326 447 116 563 1 345 –835 –14 91 587 789 2,034 2,823 7,003 –2,997 –403 153 3,756 1,236 2,151 3,387 8,357 –3,833 –417 244 4,351 –618 –2,459 –3,086 310 –9 –54 76 –295 994 –109 –1,715 600 –2,689 1,304 –118 –1,783 676 –3,007 1 1 –1 –1 0 1 1 1 - - - 1 2 2 4 –1 - - 3 4 –23 –2 –21 –1 –2 –18 –20 - - - 4 - - - 4 –9 –14 –23 1) Exludes other operating costs that are not related to the insurance operations. 2) Defined as result from underwriting year 2016 and earlier. 26 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 PROPERTY 27 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 Note 1 – Accounting principles 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, 2017 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), The Group has reviewed all revenue flows and related contracts where the as well as the Swedish Financial Supervisory Authority's regulations and general income statement is not governed by another standard, which for the insurance guidelines on Annual Reports in Insurance Companies (FFFS 2015:12) with amend- company relates to IFRS 4 / IFRS 17 relating to insurance contracts, IAS 39 / IFRS ments, the Swedish Financial Reporting Board RFR 1 Supplementary Accounting 9 relating to income from financial instruments and IAS 17 / IFRS 16 regarding Rules for Groups, as well as International Financial Reporting Standards (IFRS) leasing. The Group has analyzed the contracts based on the five steps in IFRS 15 and IFRIC interpretations as adopted by the EU. and concluded that the standard has no significant impact on the insurance com- pany's income statement. However, the standard will lead to increased disclosure ASSUMPTIONS IN THE PREPARATION OF THE COMPANY’S FINANCIAL REPORTS The Company’s functional currency is the Swedish krona (SEK) and the financial requirements in future annual reports. IFRS 16 Leases was published in January 2016 and will replace IAS 17 Leases and related interpretations. The largest effect from the new rules is that a lessee reports are presented in Swedish kronor. Unless otherwise stated, all amounts shall report a lease asset (the right to use an asset) and financial liability in the are rounded to the nearest million. Assets and liabilities are recorded at acqui- balance sheet. In the income statement, the linear operating leasing cost is sition cost, with the exception of certain financial assets and liabilities which are replaced by depreciation cost of the leased asset and an intrest expense for the valued at fair value. Financial assets and liabilities valued at fair value consist of financial liability. derivative instruments, financial assets classified as financial assets valued at fair At present, a lessee does not recognize an operational lease asset in the value via the income statement or as available-for-sale financial assets. balance sheet . The group’s assessment is that this standard will not have any CHANGES TO STANDARDS, STATEMENTS AND INTERPRETATIONS The Annual Report per December 31, 2017 has been prepared in accordance with significant impact of the group’s financial statements. The standard will come into effect on January 1, 2019 and is not adopted by EU. No other of the IFRS or IFRIC interpretations which have not yet come into force standards, statements and interpretations that have come into force during the are expected to have any significant impact on the Group. year. Furthermore, a number of standards, statements and interpretations have been published but have not yet come into force. Below follows a summary and a preliminary assessment of the effect these standards, statements and interpreta- ASSESSMENTS AND ESTIMATES IN THE FINANCIAL STATEMENTS The preparation of financial statements in conformity with International Financial tions have and may have on the Company’s financial reports. Changes other than Reporting Standards requires the Company’s management to make assessments those given below are not deemed relevant, alternatively are not expected to affect and estimates, as well as assumptions impacting the application of the accounting the Group’s financial reports. principles and the recorded values of assets, provisions, liabilities, income and expenses. These estimates and assumptions are based on historical experience New and amended standards applied by the Group None of the IFRS standards that are mandatory for the first time for the financial and a number of other factors considered reasonable in the current situation. The results of these estimates and assumptions are, subsequently, used to assess the year starting January 1st 2017 has had any significant impact on the group’s recorded values of assets, provisions and liabilities which are not otherwise clear- income statement or balance sheet. ly apparent from other sources. Actual outcome can deviate from these estimates and assessments. 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 came into effect for financial years Estimates and assumptions are reviewed on a regular basis. Changes in estimates are recorded in the period in which the change is made if the change only affects that period, or the period in which the change is made as well as future periods, if such change affects both current and future periods. beginning after 1 January 2017 and have not been applied in the preparation of Significant assessments in the application of the Accounting principles have these financial statements. These new standards and interpretations are expected been made in conjunction with the decision to report financial instruments at fair to impact the group’s financial reports in the following way: value, as well as in conjunction with the decision to classify insurance contracts as IFRS 9 “Financial Instruments” addresses the classification, measurement insurance or investment contracts. and recognition of financial assets and liabilities. The complete version of IFRS 9 was issued in July 2014 and is adopted by EU. It replaces certain parts of IAS 39 that handles classification and valuation of financial instruments. IFRS 9 retains Insurance contracts and financial instruments According to IFRS 4, contracts transferring significant insurance risk should be but simplifies the mixed measurement model and establishes three primary classified as insurance. The Company has made the assessment that insurance measurement categories for financial assets; amortized cost, fair value through risk in excess of five percent should be deemed significant and the contract is thus OCI and fair value through P&L. The basis of classification depends on the entity’s classified as insurance. business model and the contractual cash flow characteristics of the financial All agreements that are insurance contracts have been subject to assessment asset. Investments in equity instruments are required to be measured at fair value regarding whether they signify a transfer of significant insurance risk, so that through P&L with the irrevocable option at the inception to present changes in fair they can also be presented as insurance contracts in the accounts. In the case of value in OCI and no recycling is made at disposal of the instrument. There is now a certain agreements which are a combination of risk and savings, the Company has new expected credit loss model that replaces the incurred loss impairment model. been obligated to undertake an assessment of the contracts which can be consid- For financial liabilities there were no changes to classification and measurement ered to signify a transfer of significant insurance risk. The amount of the insurance except for the recognition of changes in own credit risk in other comprehensive risk has been assessed through a consideration of whether there exists one or income for liabilities designated at fair value through P&L. The standard is effec- more scenarios with commercial implications in which the insurance company 28 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 Note 1 – Cont. would be liable to pay significant further benefits in excess of the amount which As IFRS 3 is not directly applicable on intra-group business combination under would have been paid had the insured event never occurred. common control, such acquisitions are reported according to the “predecessor Certain contracts include an option for the contract holder to insure them- accounting method” or at fair value. The “Predecessor accounting method” im- selves in the future. The Company does not consider such options, in themselves, plies that the acquirer assumes the acquired company’s reported book values as to constitute a material insurance risk. Important sources of uncertainty in estimates The Company makes assessments and estimates forming the basis for the valua- presented in the divested entity’s accounts. Adjustment of the acquired values is to be carried out in the case that these accounts are not prepared in accordance with IFRS. Furthermore, the method implies that goodwill is not reported; any possible difference between the consideration paid and the acquired values is reported tion of certain assets, provisions and liabilities. These assessments and valuations directly against shareholders equity. Intra-group business combinations are val- are made on an ongoing basis and are based on previous experience and future ued and accounted for according to IFRS 3. Subsidiaries’ financial statements are expected outcomes. included in the consolidated accounts from the date of acquisition until the date upon which the controlling influence ceases. Technical provisions The Company’s accounting principles for insurance contracts are described below. The Company’s most critical accounting estimate concerns insurance technical Associated companies Associated companies are those companies in which the Group has a significant, provisions. This estimate is based on historical experience and other relevant but not controlling, influence over the operational and financial administration, factors considered as reasonable. Even if the applied methods and employed usually through the holding of participations between 20% and 50% of the number parameters are assessed as correct, future outcomes may deviate from the of votes. From the point in time when the significant influence is acquired, par- expected value. ticipations in associated companies are recorded in the consolidated accounts The process applied for the determination of central assumptions, forming the according to the equity method. The equity method implies that the value of the basis for the valuation of the provisions, is described in Note 2. shares in the associated company, reported in the Group, corresponds to the Premium estimates Group’s share of the associated companies’ equity and Group goodwill and any other remaining amount of positive or negative group adjustment in consolidation. Accrued premiums are accounted in the income statement based on assumptions The Group’s participations in the associate’s net profit after taxes and minority and estimates of expected premiums and earnings patterns. interests, adjusted for any amortization, impairment or dissolution of acquired Deferred taxes The Group accounts for deferred tax receivables at each closing date to the extent surplus or deficit value, are reported in the consolidated income statement under the item ”Share of associated companies’ income”. Dividends received from asso- ciated companies decrease the book value of the investment. that they are likely to be utilized against future taxable surpluses in coming peri- When the Group’s share of reported losses in an associated company exceeds ods. This is based on estimates of future profitability and return. If these estimates the book value of the Group’s participations in the company, the value of the par- change it may result in deferred tax receivables being reduced in the coming ticipations is reduced to zero. The equity method is applied up to the point in time periods. When future returns are estimated historical experience is considered as when the significant influence ceases. well as assessment of future development of the underlying asset base. 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 20, 2018. 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 April 2018. 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. exception of intra-group acquisitions of subsidiaries under common control. The Translation differences arising in the translation of foreign net investments application of the purchase method implies requirements for the identification and the associated effects of the hedging of net investments are recorded in of the purchaser and the establishment of the acquisition date. The purchase other comprehensive income. Upon disposal of a foreign operation, accumulated method further implies that the acquisition of subsidiaries is considered to be a translation differences attributable to the operation, less any currency hedging, transaction through which the Group indirectly acquires the subsidiary’s assets are realized in the 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. USD EUR GBP Closing rates Average rates 8,21 9,84 11,09 8,54 9,63 11,03 29 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 Note 1 – Cont. INSURANCE CONTRACTS Insurance contracts are recorded and valued in the income statement and balance is an estimate based on historic experience and outcome of claims. The income statement recognizes the change in provision for in outstanding sheet in accordance with their financial substance as opposed to their legal form, claims for the period. in the event that these differ. Contracts transferring material insurance risks from the policyholder to the Company and whereby the Company agrees to compensate Claims adjustment provision the policyholder or other beneficiary in the event that a pre-determined insured The amount of this provision is based on outstanding claims. The provision is equal event occurs are recorded as insurance contracts. to a percentage of reported unpaid claims and a percentage of incurred unreport- Financial instruments are contracts which do not transfer any material insur- ed and not yet fully reported claims. The claims handling reserve for catastrophe ance risk from the policyholder to the Company. The Company has issued a policy insurance is calculated in the same way, but with the difference that they are entailing a mandatory test of whether sufficient insurance risk exists in written calculated on an average of four to five years for those provisions. The period’s contracts for classification as insurance contracts. This test builds upon defini- change in the claims adjustment provision is recorded in the income statement tions in accordance with IFRS 4. For contracts or groups of contracts classified as within the items Claims handling expenses and Operating costs. 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 accord- ing to IAS 39, Financial Instruments or according to IAS 18, Revenue. Accounting of insurance contracts Revenue recognition/Premium income Gross premiums written relate to insurance contracts incepted during the financial year, together with any differences between booked premiums for prior Deferred acquisition costs for insurance contracts Deferred acquisition costs are only recorded for insurance contracts deemed to generate a margin at least covering the acquisition costs. Sirius only records external deferred acquisition costs. Other costs for insurance contracts are recorded as costs when they arise. Provision adequacy testing The Company’s applied accounting and valuation principles for the balance sheet financial years and those premiums previously accrued, and include estimates of items Deferred acquisition costs, Provisions for unearned premiums and Unex- premiums due but not yet receivable or notified, less an allowance for cancella- pired risks automatically entail testing of whether the provisions are sufficient with tions. The gross premium income also includes the net of entered and withdrawn regard to expected future cash flows. premium portfolios. Gross premiums written are stated before deduction of brokerage, taxes, duties levied on premiums and other deductions. Premiums are earned on a pro rata temporis basis over the term of the related contract, except Operating costs All operating costs are allocated in the income statement according to their for those contracts where the period of risk differs significantly from the contract functional nature, acquisition, claims adjustment, administration, commission period, or where the exposure vary during the contract period. In these circum- and profit shares in ceded reinsurance, investment expenses and in certain cases, stances, premiums are recognized as earned over the period of risk in proportion other technical costs. Changes in technical provisions for insurance contracts are to the amount of insurance protection provided. Reinstatement premiums receiv- recorded in the income statement under each heading. Payments to policyhold- able are recognized and fully earned latest when fallen due. Premium revenue ers, due to insurance contracts or incurred claims, during the financial year, are corresponds to the portion of premium income that has been earned. recorded as claims paid, regardless of when the claim was incurred. Acquisition costs By acquisition costs are meant such external operating expenses, such as com- Ceded reinsurance As premiums for ceded reinsurance are recorded amounts paid during the finan- missions, that directly vary with the acquisition or renewal of insurance contracts. cial year and amounts recorded as liabilities to the company that have assumed The deferred acquisition costs are amortized in the same way as corresponding the reinsurance, in accordance with entered reinsurance agreements. Deductions premiums are earned. Technical provisions Technical provisions consist of the Provisions for unearned premiums and are made for amounts credited due to portfolio transfers. Adjustments are also made for change in the reinsurer’s share of proportional reinsurance contracts. The premiums are periodized so that costs are allocated to the corresponding period of the insurance cover. All items relating to ceded reinsurance are shown unexpired risks, Provisions for outstanding claims, claims handling provision and on separate lines in the income statement. equalization provision (in the Parent Company). The reinsurers’ share of technical provisions are recorded as an asset in the balance sheet and corresponds to the reinsurers’ liability for technical provisions Provision for unearned premiums and unexpired risks in accordance with entered agreements. The Company assesses any required In the balance sheet, this provision consists of amounts corresponding to the impairment for assets referring to reinsurance agreements bi-annually. If the Company’s liability for claims, administrative expenses and other costs during recoverable amount is lower than the carrying amount of the asset, the asset is the remainder of the contract period for policies in force. “Policies in force” refers impaired to the recoverable amount and the impairment is recorded in the income to insurance policies in accordance with entered agreements irrespective if they statement. wholly or in part relates to later insurance period. In calculating these provisions, an estimate is made of anticipated costs for any claims that may occur during the remaining terms of these insurance policies, as well as administrative expenses for this period. The estimation of costs is based on the Company’s own experience REPORTING OF INVESTMENT RETURN Investment income allocated to the technical account Investment return is transferred from the non-technical account to the technical and considers both the observed and the forecasted development of relevant costs. account on the basis of average technical provisions for the Company’s own These future costs are tested quarterly against the unexposed portion of the account, less deductions for net receivables in insurance operations. This capital premium for the contracts in force and if the latter exceeds the costs, the unex- base is allocated per currency. The transferred investment return is calculated posed portion of the written premium will form an unearned premium reserve. on the basis of an interest rate per currency equivalent to the actual total yield If the future costs exceed the unexposed portion of the written premium, the from the investment assets belonging to the insurance operations. The weighted deferred acquisition costs are written down, but if that is insufficient, an unexpired average interest rate for 2017 amounted to 1.93%. 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 Applied interest rates the change in provision for unearned premium reserve and unexpired risks. Provision for outstanding claims This balance sheet item comprises of estimated nominal cash flows relating to final costs for settlement of all claims resulting from events occurring before the close of the financial year, with deduction of those amounts that have already been paid, on the basis of receipt of claims payment advices. This amount also includes estimated nominal cash flows regarding future external costs for the settlement of incurred but, as of balance sheet date, outstanding claims, as well as refunds that are due for payment. The provision for incurred but not reported claims (IBNR) includes costs for in- % EUR GBP SEK USD 2017 1.45 % 0.84 % 0.62 % 1.98 % 2016 5.09 % 6.08 % 0.39 % 1.15 % Investment income The item Investment income refers to yield from investment assets and comprises curred but, to date, unknown claims and not yet fully reported claims. This amount rental income from land and buildings, dividends from shares and participations, 30 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 Note 1 – Cont. including dividends from shares in Group companies, interest income, net foreign exchange gains, reversed impairments and net capital gains. Other intangible assets Other intangible assets which have been acquired separately are reported at acquisition cost. Other intangible assets acquired through a business acquisition Investment expenses and charges Charges on investment assets are recorded under the item Investment expenses 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 and charges. The item comprises operating costs for land and buildings, asset which the asset in question was acquired and put into operation. Accounting of an management costs, interest expense, net foreign exchange losses, depreciations intangible asset is based on it useful life. An intangible asset with a finite useful and impairments and net capital losses. Changes in realized and unrealized gains and losses For investment assets valued at acquisition value, capital gain comprises the positive difference between sale price and book value. For investment assets life is amortized while an intangible asset with an indefinite is not amortized but is impaired annually. Establishing the useful life is based on an analysis of each ac- quired intangible asset. The amortized amount of an intangible asset is periodized over the useful life. valued at fair value, a capital gain is the positive difference between sale price and acquisition value. For interest-bearing securities, acquisition value is the Self-developed software Costs for maintenance of software are charged at the time at which they arise. amortized cost value and, for other investment assets, it is the historical acqui- Development costs directly attributable to the development and testing of sition value. At the sale of investment assets, previously unrealized changes in identifiable and unique software products controlled by the Company are value are recognized as adjustment entries under the item Unrealized profits from reported as intangible assets when the following criteria are fulfilled: investment items or Unrealized losses from investment items, as appropriate. As — it is technically possible to prepare the software for use, regards interest-bearing securities classified as available-for-sale financial as- — the Company’s intention is to complete the software and to put it into use, sets, previously unrealized changes in value are recognized as adjustment entries — the conditions for the use of the software are in place, in Other comprehensive income. Capital gains from assets other than investment — the manner in which the software can generate probable future economic assets are recorded as Other income. benefits can be demonstrated, Unrealized gains and losses are recorded net per asset class. Changes due to — adequate technical, financial and other resources for the completion of exchange rate fluctuations are recorded as exchange rate gains or exchange rate development and for the use of the software are accessible, and losses under the item Investment income/expenses. — expenditure attributable to the software during its development period can Share of associated company’s profit or loss Share of associated company’s profit or loss represents Sirius’ share of the Other development costs, which do not fulfill these criteria, are charged at the associated company’s result, accounted for according to the equity accounting time at which they arise. Development costs which have previously been charged method. Currency translation effects are 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 be calculated in a reliable manner. INCOME TAX Income taxes are accounted according to IAS 12 and consist of current tax and does not exceed five years. deferred tax. Income taxes are recorded in the income statement, except when the underlying transaction is recorded in Other comprehensive income, whereupon Other acquired intangible assets Other intangible assets does mainly consists of balances from the acquired Arma- the pertaining tax effect is recorded in Other comprehensive income. da business. The assets from Armada is divided into the following subject assets; 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 Other acquired intangible assets – Licenses Licenses, acquired or otherwise received, are accounted as an intagible asset in sheet date, which also includes the adjustment of current tax referring to previous accordance with IAS 38. distributions partners, technology and software. periods. Deferred tax Deferred tax is calculated according to the balance sheet method on the basis of LAND AND BUILDINGS All properties owned by the Company are operational properties and are valued using the acquisition cost method, in accordance with IAS 16. The Company owns temporary differences between the book values of assets and liabilities and their three properties located in Sweden and Belgium. Sirius reports its properties in tax values. Temporary differences are not considered as regards differences accordance with the acquisition cost method and the capitalized costs are depreci- arising at the initial recording of goodwill and the initial recording of assets and ated over 50 years. No depreciation is carried out on land. liabilities that are not business acquisitions and which did not affect either net profit/loss or taxable profit/loss at the transaction date. Furthermore, temporary differences referring to participations in subsidiaries or associated companies that are not expected to be reversed within the foreseeable future are not consid- FINANCIAL INSTRUMENTS Financial instruments recorded in the balance sheet include, on the asset side, shares and participations, loan receivables, bond and other interest-bearing secu- ered either. The valuation of deferred tax is based on the extent to which underlying rities as well as derivatives. Where appropriate, derivatives with negative market assets and liabilities are expected to be realized or settled. Deferred tax is calcu- value are included among liabilities, other liabilities and shareholders' equity. lated with the application of the tax rates and regulations that have been enacted Acquisitions and disposals of financial assets are recorded on trade date, the or practically enacted as per balance sheet date. date upon which the Company commits to acquire or dispose an asset and thus The Group recognizes deferred tax assets on each closing day to the extent that gains or looses control of the asset. it is probable that they can be used against future taxable income. This is based on assumptions on future profitability and earnings. If these assumptions change it could imply future reductions in deferred tax assets. Estimating future earnings, Classification and valuation Financial instruments are initially recorded at acquisition value corresponding historical experience and assumptions of the future development of the underlying to the fair value of the instrument plus transaction costs, except in the case of asset is considered. INTANGIBLE ASSETS Goodwill Goodwill comprises the amount by which the acquisition cost exceeds the fair instruments belonging to the category Financial assets recorded at fair value via the income statement, which are recorded at fair value exclusive of transaction costs. A financial instrument is classified when it is initially reported, based upon the purpose for which the instrument was acquired. This classification determines the manner in which the financial instrument will be valued after initial recording, value of the Group’s participation in the acquired subsidiary’s or associate’s as described below. identifiable net assets at the point in time of the acquisition. Goodwill on the acquisition of subsidiaries is recognized as an intangible asset. Goodwill is tested annually for impairment and is recognized at acquisition cost less accumulated Financial assets valued at fair value via the income statement This category consists of two sub-groups: financial assets held for trading impairment losses. Impairment losses of goodwill are not reversed. Profit or loss and other financial assets that the Company had initially designated on initial on the sale of a unit includes the remaining carrying value of goodwill referring to recognition as an asset to be measured at fair value trough the income statement the unit sold. Goodwill is distributed to cash-generating units upon testing of any (according to the so-called Fair Value Option). Fair Value Option is used in order write-down requirement. to reduce mismatch between valuation and accounting of financial assets. (i.e. 31 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 ACCIDENT & HEALTH 32 Note 1 – Cont. accounting mismatch). Financial instruments in this category are continually val- ued at fair value, with changes in value recorded in the income statement. The first sub-group includes derivatives with a positive fair value. The second sub-group Write-downs of financial instruments Impairment testing of financial assets At each reporting date, the Company assesses whether there exists any objective consists of financial investments in bonds and other interest-bearing securities evidence indicating that a financial asset or group of assets requires impairment along with shares and participations, with the exception of shares in subsidiaries as a consequence of one or several events occurring after the asset is reported for or associated companies. the first time and that these loss-making events have an impact on the estimated future cash flows from the asset or group of assets. If there is objective evidence Calculation of fair value Financial instruments listed on an active market For financial instruments listed on an active market, fair value is determined on indicating that an impairment requirement may exist, the assets in question are considered to be doubtful. Objective evidence is constituted of observable conditions which have arisen and which have a negative impact on the possibility the basis of the asset’s listed bid rate at balance sheet date, with no added trans- of recovering the acquisition cost. For investments in equity intruments objective action costs (e.g. commission) at the time of acquisition. A financial instrument evidence is also constituded by significant or extended reductions of the fair value is considered to be listed in an active market if listed prices are easily accessible of a financial investment classified as an available-for-sale financial asset. on a stock exchange, with a trader, broker, trade association, company supplying current price information or supervisory authority and these prices represent actual and regularly occurring market transactions under business-like condi- Reversal of impairment An impairment is reversed if an indication exists both that the impairment re- tions. Possible future transaction costs from a disposal are not considered. These quirement no longer exists and that a change has taken place in the assumptions instruments are included in the balance sheet items Shares and participations and forming the basis of the estimation of the impaired amount. The impairment of Bonds and other interest-bearing securities. The predominant proportion of the loans receivable and account receivables, recorded at amortized cost, is reversed Company’s financial instruments has been assigned a fair value with prices quoted if a later increase of the recoverable amount can be objectively related to an event on an active market. occurring after the impairment has been performed. The impairment of interest-bearing instruments, classified as availa- Financial instruments not listed on an active market If the market for a financial instrument is not active, the Company establishes ble-for-sale financial assets, is reversed via other comprehensive income if fair value increases and this increase can objectively be related to an event occurring the fair value by means of various valuation techniques. As far as is possible, the after the write-down was carried out. valuation methods employed are based on market data, while company-specific information is used to the least degree possible. The Company regularly calibrates valuation methods and tests their validity by comparing the outcome of the valua- LEASED ASSETS All lease agreements are classified and recorded in the Group and Parent Compa- tion methods with prices from observable current market transactions in the same ny as operational leases. In operational leasing, the leasing fee is expensed over instrument. the duration of the lease, on the basis of the benefit received, which can differ from The total effect in the Income Statement for the year, and the values at closing the amount paid as a leasing fee during the year. day, 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 TANGIBLE ASSETS Tangible assets are recorded at acquisition value after deduction for accumulat- observable market information, is disclosed in Note 19. ed depreciation and any impairment, with a supplement for any appreciation. In Loans receivables and accounts receivables Loans receivables and accounts receivables are non-derivative financial assets disposal or sale, gains and losses are recorded net in operating cost. Depreciation takes place systematically over the estimated useful lives of the assets. Estimated useful lives for equipment such as cars, furniture and computer equipment which are not listed on an active market and with fixed or determinable payments. amounts to 3–10 years. These assets are measured at amortized cost. Amortized cost is determined by using the effective interest method at time of acquisition. Loans receivables and accounts receivables are reported in the amounts which are expected to be received, that is, after deductions for bad debt provisions. The major posts are Interest bearing investments emitted by, and loans to, group companies and Other debtors. Depreciation of tangible and amortization of intangible assets Impairment testing of, tangible and intangible assets, and participations in subsidiaries and associated companies The reported values of the assets are tested on each balance sheet date. If any indication of an impairment requirement exists, the asset's recoverable amount is estimated in accordance with IAS 36. Available-for-sale financial assets The category available-for-sale financial assets include financial assets not An impairment loss is recognized when the reported value of an asset or cash-generating unit exceeds its recoverable amount. An impairment loss is rec- classified in any other category or financial assets that the Company has initially ognized in the income statement. The impairment of assets related to a cash-gen- chosen to classify in this category. The holding of bonds and other interest-bearing erating unit is primarily allocated to goodwill. The proportional impairment of securities is recorded here. Assets in this category are continuously valued at fair value with changes in value recorded in other comprehensive income, except other assets included in the unit is subsequently performed. The recoverable amount is the highest of fair value less selling expenses and for changes in value due to impairment or to foreign exchange rate differences value in use. In the calculation of value in use, future cash flow is discounted by a on monetary items recorded in the income statement. Furthermore, interest on discount factor that considers the risk-free interest rate and the risk associated interest-bearing instruments is recorded in accordance with the effective interest with the specific asset. method in the income statement. As regards these instruments, any transaction costs will be included in the acquisition value when initially reported, and will, thereafter, be assessed on an ongoing basis at fair value, to be included in other Reversal of impairment An impairment is reversed if an indication exists both that the impairment re- comprehensive income, until that point in time the instruments in question mature quirement no longer exists and that a change has taken place in the assumptions or are disposed. At disposal of the assets, the accumulated profit/loss is recorded forming the basis of the estimation of the recoverable amount. However, the in the income statement. impairment of goodwill is never reversed. Reversals are only performed to the A long-term approach forms the basis for investments in this category, where degree that the asset's reported value after reversal does not exceed the reported the yield granted by these instruments at the time of investment is of significance value that should have been reported, with deduction for depreciation or amortiza- for which investments shall be made. tion when appropriate, if no impairment had been carried out. Other financial liabilities Borrowings and other financial liabilities, for example, accounts payable, are DIVIDENDS Dividends are recorded as liabilities after approval of the dividend by the General included in this category. These liabilities are valued at fair value including trans- Meeting of Shareholders. action costs and are subsequently accounted at amortized cost. Financial guarantees Financial guarantee agreements are recorded as insurance contracts in ac- OTHER PROVISIONS A provision is recognized in the balance sheet when the Company has an existing legal or constructive obligation as a result of past events, when it is likely that an cordance with the accounting principles described in the section Accounting of outflow of resources will be required to settle the obligation and when the amount insurance contracts, above. can be estimated reliably. In cases in which the date of payment has a material 33 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 Note 1 – Cont. effect, the amount of the provision is calculated via the discounting of the expected future cash flow to an interest rate before taxes which reflects the relevant market assessments of the effect of the time value of money and, if applicable, the risks associated with the liability. Pensions and similar commitments The Group companies’ pension plans differ. The pension plans are usually financed through payments to insurance companies or managed funds. These payments are determined based on periodic actuarial calculations. The Group has both defined Differences between accounting principles in the Group and the Parent Company The differences between the accounting principles in the Group and the Parent Company are presented below. The accounting principles stated below for the Parent Company have been consistently applied for all periods presented in the Parent Company’s financial statements, unless stated otherwise. Goodwill Goodwill represents the difference between acquisition cost for business acqui- benefit and defined contribution pension plans. A defined contribution plan is a sitions and the fair value of acquired assets, assumed liabilities and contingent pension plan under which the Group pays fixed contributions into a separate legal liabilities. In the Parent Company, goodwill is amortized in accordance with the entity. The Group has no legal or constructive obligations to pay further contri- Swedish Annual Account Act and is reported in the income statement on a straight- butions if this legal entity does not hold sufficient assets to pay all employees the line basis over the estimated useful life of the asset. The estimated useful life is re- benefits relating to employee service in the current and prior periods. A defined viewed annually. The estimated useful life for goodwill, and goodwill arising from benefit plan is a pension plan that is not a defined contribution plan. A character- the purchase of the net assets of a business, amounts to 20 years. Amortization istic of defined benefit plans is that they indicate a level for the pension benefit an which deviates from plan is handled as an appropriation and is reported under the employee receives after retirement, usually based on one or several factors, such heading Difference between reported depreciation/amortization and depreciation/ as age, duration of employment and salary. amortization according to plan. The liability reported in the balance sheet regarding defined benefit pension plans is the current value of the defined benefit obligation at the end of the period, reduced with the fair value of the managed assets, with adjustments for actuarial Subsidiaries and associated companies The Parent Company records participations in subsidiaries and associates accord- gains and losses. The defined benefit pension plan obligation is calculated annually ing to the cost method. Only dividends which have been received are recognized by independent actuaries applying the so-called projected unit credit method. The as income, provided that such dividends derive from profits earned subsequent current value of the defined benefit obligation is determined through discounting to the acquisition. Dividend amounts exceeding this earned profit are considered of expected future cash flows, using interest rates determined by current market as repayment of the investment and reduce the carrying value of the participations. interest rates. The market rates take into account the caracteristics of the defined In the Parent company’s financial statements transaction costs are capitalized pension obligaton, both in terms of duration and the currency in which the remu- in the balance sheet and are added to the total acquisition amount booked as neration will be paid. shares in subsidiaries. In the consolidated accounts transaction costs are ex- The service cost for current year is recognized in the Income Statement. Costs pensed according to IFRS 3. referring to service during earlier periods are reported directly in the income statement, unless the changes in the pension plan are conditional on the employee remaining employed during a given period (earning period). In this case, the cost Self-developed software An amount corresponding to what has been capitalized is transfered to restricted referring to service during earlier periods is distributed on a straight-line basis over reserves. The reserve is subsequently reversed in line with the amortizations, the earning period. Actuarial gains and losses on the defined benefit obligation and according to ÅRL ch 3.§ 10 a. the fair value 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 Anticipated dividends Anticipated dividends from subsidiaries are recorded in those cases in which the employment. In Germany all employees are included in the plan. In Sweden only Parent Company has the sole right to make decisions regarding the amount of the employees born 1971 or earlier are covered by defined benefit plans and, thus, dividend and the Parent Company has reached a decision on the dividend's amount form part of the FTP2. before the Parent Company has published its financial statements. Furthermore, there are two variations of retirement earlier than at the age of 65. Employees born 1955 and earlier have the possibility to retire between the ages of 62 and 65 according to local agreement. Staff employed before January 1, 2004 have Taxes Untaxed reserves are recorded in the Parent Company including deferred income the right to retire from the age of 64. These plans are also defined benefit plans and tax liabilities. However, untaxed reserves in the consolidated accounts are allocat- are reflected in financial statements of both the Group and the Parent Company. ed between deferred income tax liabilities and shareholders' equity. For defined contribution pension plans, the Group pays fees to publicly or privately administered pension insurance plans on an obligatory, contractual or voluntary basis. The Group has no further payment obligations when all fees are Pensions The Parent Company applies a different form of reporting of defined benefit paid. The fees are reported as personnel costs at the point in time at which they pension plans than stipulated in IAS 19. The Parent Company’s reporting of fall due for payment. Prepaid fees are reported as an asset to the extent that cash defined benefit pension plans follows the Pension Obligations Vesting Act and repayment or reduction of future payments may benefit the Group. the regulations of the Swedish Financial Supervisory Authority, as it is stated in RFR 2 that it is not necessary to apply the regulations in IAS 19 regarding defined Remuneration upon termination of employment Remuneration upon employment of contract is payable when an employee’s em- benefit pension plans in legal entities. Pension costs are reported as Operational expenses in the Parent Company’s income statement and a provision referring to ployment is terminated by the Group before the normal retirement age or when an individuals with the option of retiring at the ages of 62 and 64 is found on the line employee voluntarily accepts the termination of employment in exchange for such Pension provisions in the Parent Company’s balance sheet. remuneration. The Group reports severance payments when it is demonstrably obliged to terminate employees’ employment in accordance with a detailed formal plan, without possibility of revocation. In the case that the Company has submitted Appropriations and untaxed reserves Appropriations and untaxed reserves are only recorded in the Parent Company. an offer to encourage voluntary termination of employment, the calculation of Taxation legislation in Sweden gives companies the option of decreasing taxable severance payment is based on the number of employees which it is estimated will income for the year by making provisions to untaxed reserves. When applicable, accept this offer. untaxed reserves are set off against fiscal loss deductions or become subject to taxation upon resolution. In accordance with Swedish practice, changes in untaxed CONTINGENT LIABILITIES A contingent liability is recognized when there is a possible obligation which reserves are recorded in the income statement. Provisions made to untaxed reserves are recorded in the income statement under the heading Appropriations. arises from past events and whose existence is solely confirmed by one or more The accumulated value of the provisions is recorded in the balance sheet under the uncertain future events, or when there is a commitment which is not recorded as heading Untaxed Reserves. a liability or provision due to the fact that it is unlikely that an outflow of resources A total of 22% of the untaxed reserves can be considered as a deferred tax will be required. liability and 78% as shareholders' equity. The deferred tax liabilities can be described as an interest-free liability with a non-defined duration. In the group PARENT COMPANY’S ACCOUNTING PRINCIPLES The Parent Company’s annual report, as well as its financial statements in 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 general, has been prepared using the same accounting principles and calculation of the untaxed reserves is considered risk capital, as any losses can be covered, methods used in the most recent annual report. to a large extent, by the dissolution of untaxed reserves without taxes becoming 34 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 Note 1 – Cont. payable. The largest item attributable to untaxed reserves refers to the safety reserve. The safety reserve forms a collective security-conditioned reinforcement Group contributions and shareholders’ contributions for legal entities The Company reports group contributions and shareholders' contributions in of the technical provisions. Accessibility is limited to loss coverage and otherwise accordance with the Swedish Financial Reporting Board (RFR2). requires official authorization. Equalization provision The Parent Company’s balance sheet includes an Equalization provision within Shareholders’ contributions are recorded directly against shareholders' equity in the receiving entity and in shares and participations in the entity providing the contribution, to the extent that no impairment is required. Group contributions are recorded according to their financial significance. This Technical provisions, and any changes for the period in this provision are reported implies that group contributions provided and received for the purpose of minimiz- in the income statement. The amount of the provision is calculated as the equiva- ing the Group’s total taxes are recorded directly against retained earnings, with a lent of 150% of the highest net premium income for Class 14, credit insurance, with deduction for the current tax effects of the contribution. Group contributions which equivalent reinsurance, for the five most recent financial years. The provisions can be seen as the equivalent of a dividend are reported as a dividend. This implies for each financial year are equivalent to 75% of the technical surplus in the credit that group contributions received and their current tax effects are recorded in the insurance operations. However, in the consolidated balance sheet, the Equalization income statement. Group contributions provided and their current tax effects are provision is allocated into deferred tax liabilities and shareholders’ equity. recorded directly against retained earnings. In the receiving entity, group contri- Since the new Insurance Business act came into force, the equalization butions which can be seen as the equivalent of a shareholders' contribution are provision have to be dissolved no later than on December 31, 2019 according to law directly recorded in retained earnings, with consideration for current tax effects. 2015:700 12 pt. The contributor records the group contribution and its current tax effects as in- vestments in participations in the Group companies, to the extent that impairments are not required. Note 2 – Information on risks RISK MANAGEMENT The company’s Enterprise Risk Management, ERM, is at the heart of Sirius’ ment team, various risk committees, control functions, policies and procedures, thinking. Sirius defines ERM as the discipline by which the company identifies, risk models and reporting routines. This is described in further detail in the risk assesses, controls, monitors, and discloses risks from all sources for the purpose sections below. of increasing Sirius’ short- and long-term value to its stakeholders. Sirius’ Board of Directors is ultimately responsible for the company’s risk man- ERM is an ongoing process with the objective of creating a risk management agement strategy, risk tolerances and policies and Sirius’ management has the culture that emanates from top management and which permeates throughout the day-to-day responsibility for all ERM activities. To deploy these responsibilities, entire organization. Sirius strives to maintain a risk culture where employees are different risk committees carry out certain pre-defined duties. aware of and measure, assess and communicate risk as part of their responsibil- ities. Management’s role includes communicating, implementing, monitoring and The Risk Management Committee is a sub-committee to the Board of Directors fostering this culture. and has the objective of overseeing and advising risk management processes The objectives of Sirius’ work with ERM are: — Establishment of risk tolerances — Define Sirius’ risk tolerance and develop appropriate operating guidelines — Identification and management of emerging risks consistent with that framework — Quantification and subsequent monitoring of exposures — Optimize profitability within the established risk tolerance framework — Implementation of risk reduction/reward expansion strategies — Provide clear information for strategic management decisions — Risk reporting — Demonstrate strong risk management through a well-defined process including: including identification, quantification, monitoring, and appropriate Sirius’ functions for risk management and compliance are responsible for the in- management response dependent monitoring of Sirius’ risks. The functions submit quarterly risk reports — Provide all stakeholders with transparent risk management information and compliance reports to the CEO, the Management Group and to the Board of — Comply with current Solvency II standards and with all regulatory require- Directors. Additionally, ad hoc reporting is done when deemed necessary. ments RISK STRATEGY AND THE COMPANY’S RISK TOLERANCE Risk strategy and risk tolerance comprise the foundation of the risk management processes. Sirius' risk strategy and risk tolerance have been established by Sirius’ Board of Directors. The aim is to secure a balance between risk, return and capital Internal Audit fulfils an important role in the independent evaluation of risk management and control systems. This includes the evaluation of the reliability of reporting, the effectiveness and efficiency of operations, and compliance with laws and regulations. The Internal Audit department reports directly to the Board of Directors. requirements. As part of the planning process, strategic limits are explicitly discussed and specified. The strategic risk tolerance is expressed either in quanti- tative terms or in qualitative terms. From these overall risk tolerance statements, INSURANCE RISK MANAGEMENT Goals, principles and methods A clear focus on managing insurance risks is vital for Sirius’ continued success. risk limits are applied at a detailed level throughout the organization in the form These risks are mainly managed by an evaluation of the degree of gross and net of maximum risk exposure, retrocession limits, foreign exchange exposure limits, risk (after retrocessional protections) that Sirius is willing to assume. Sirius maximum equity exposure in the investment portfolio, etc. divides insurance risk into two principal areas; underwriting risk and reserve risk. As part of the ERM culture, Sirius embraces the following qualitative principles: — Controlled/moderate risk taking and adequate capitalization Underwriting risk Underwriting risk refers to premium and accumulation assessment, which is — Reduce risk by proper risk selection and active portfolio diversification defined as premium risk and catastrophe risk respectively. The underwriting risk — All insurance transactions are expected to yield positive technical results assessment is performed by underwriters on each individual risk and the Chief — Active use of retrocession as part of business and capital planning Underwriting Officer is ultimately responsible for managing these risks. — Positive investment returns through a diversified portfolio of high quality The goal for all underwriting is to maximize profitability for each selected risk debt and equity investments — Strong accumulation control level. The anticipated profitability of each underwriting decision shall be the basics of all underwriting. Other underwriting guiding principles include diversification, — Strong and independent control functions strong accumulation control and an active use of retrocession in order to adjust — Motivate employees to further develop their risk management capabilities risks to acceptable risk tolerance levels. RISK GOVERNANCE The risk management processes within Sirius are supported by a risk manage- assigned to each underwriting unit. This is primarily a question of direct Accident & Health (A&H) as the reinsurance book is transferred to SBDA. For this line of ment infrastructure consisting of the Board of Directors, an experienced manage- business, the Global Head of A&H in conjunction with the America Underwriting At Sirius America the ultimate responsibility for managing these risks is 35 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 Note 2 – Cont. Manager is responsible. The cat exposure is handled in combination with the catastrophe Probable Maximum Loss (PML) reporting applicable for the whole SENSITIVITY ANALYSIS — LOSSES DIVIDED BY GEOGRAPHICAL AREA AND RETURN PERIODS FOR THE GROUP group. The insurance premiums for assumed business are to cover expected losses MSEK 2017 2016 and expenses as well as provide a reasonable return on deployed capital. The premium risk is therefore associated with the possibility that losses deviate from expected levels. The premium risk is generally managed through the application of pricing models and underwriting procedures, but also through a restructuring Global — Gross of under-performing business, active use of retrocession or through by to accept such business. If a larger catastrophic event occurs, simultaneously impacting a large number of cedants, this may result in a single loss that could offset the expected annual profit, or even consume a portion of the solvency capital. This catastrophic risk is managed with the assistance of underwriting methods and tools which monitor and control the company’s total aggregate risks, both gross and net. Catastrophe risk is also managed by the effective use of retrocessional protections. In order to ensure consistency in the underwriting process, all underwriting within Sirius complies with specific rules and procedures. Detailed underwriting Global — Net Europe — Gross Europe — Net US — Gross US — Net Once per 100 years Once per 250 years Once per 100 years Once per 250 years 3,376 2,104 3,144 1,001 2,442 2,059 4,146 2,512 4,049 1,265 2,928 2,480 3,975 2,435 3,431 891 3,105 2,353 4,917 2,968 4,604 1,081 3,940 2,911 guidelines constitutes the framework for all risk acceptances, and these guide- In addition, to manage its aggregate exposure to very large catastrophe events, lines contain sections regarding i.a. limits, underwriting authorities and restricted among other measures Sirius has been monitoring the largest net financial impact business. A Four-Eyes underwriting system, i.e. a system in which at least two (“NFI”) that third-party models predict it would suffer based on the extreme tail of individuals participate in each decision, is applied for the majority of the business. the modeled losses. Sirius monitors multiple indicators of catastrophe tail risk to The underwriting guidelines are reviewed at least annually and updated when measure its financial exposure to such scenarios. Sirius focuses on monitoring appropriate. NFI TVaR at different return periods in order to manage the potential impact of re- There are several levels of control functions as well as technical systems mote events on Sirius’ financial position. The calculation of the NFI begins with the in place to monitor and control that underwriting policies and procedures are modeled TVaR PML and takes estimated reinstatement premiums, reinsurance followed. At Sirius International, there is an underwriting control unit reporting recoverables net of estimated uncollectible balances and tax benefits into account. to the Chief Underwriting Officer. This unit focuses in detail on how the business This amount is deducted from Sirius’ planned legal entity comprehensive net is underwritten and that the underwriters follow issued policies and procedures. income for the year (before any planned losses for catastrophe events) to arrive at Another unit controls the underwriting systems and ensures that they are used the NFI. The NFI does not include the potential impact of the loss events on Sirius' correctly and that input data is accurate. Finally, Risk Management, Compliance investment portfolio. and Internal Audit monitor these control groups, carrying out random inspections/ Within Aviation reinsurance, Sirius applies another licensed third-party model, tests, in detail ensuring that sufficient controls are implemented and performed. ALPS, in which the exposure per airline company can be modeled and monitored. Retrocession Sirius International uses retrocession as a tool to manage net risk and has a Within the insurance classes A&H, Property and Trade Credit, the company has models which it has developed internally. centralized unit responsible for the purchase and administration of its outwards reinsurance. The reinsurance purchases are based on the strategic direction of Reserve risk The reserve risk, i.e. the risk that insurance technical provisions will be insuf- the inwards portfolio, overall risk tolerances and the search for an optimal portfo- ficient to settle incurred and future claims, is foremost handled by actuarial lio mix. Catastrophe models and capital modeling tools are used in the analytical methods and a careful continuous review of reported claims. and decision making process. Sensitivity to risks attributable to insurance agreements Within the insurance operations, natural catastrophe exposure (wind, flooding Provisions are made to obtain a correct balance sheet and match revenues and costs with the period in which they emerged. The amount of the provision shall cor- respond to the amount that is required to fulfill all expected obligations and reflect the best knowledge available to Sirius. Acknowledged and appropriate methods and earthquakes) constitutes the company’s greatest risk. In order to manage are used in these estimations. this catastrophe risk, and the resulting accumulated risks, the company utilizes a Sirius supports its decisions on provisions by a combination of several actuarial number of different models. In 2012, Sirius started using a new proprietary prop- methods, such as the Chain Ladder method, the Bornhuetter- Ferguson method erty underwriting and pricing tool (“GPI”), which consolidates and reports on all its and the Benktander method. A combination of benchmarks and underwriting worldwide property exposures. GPI is used to calculate individual and aggregate judgment is used for the most recent years. PMLs by statistical blending of multiple third-party and proprietary models. There Regarding run-off results and claims development from previous years please is a process in place to evaluate and select a model of choice per territory and peril. Based on the new tool, reports and analyses can be produced on an “as re- 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 quired” basis demonstrating the various degrees of likelihood of estimated claims. years is made. Everything from average claims per year to claims that are only expected to occur The Group has asbestos and environmental claims amounting to MSEK 1,660 once every 10,000 years can be stochastically estimated using these models. Aside (1,633) net in the Group balance sheet. These claims are actively managed and are from the possibility of modeling single events, multiple occurrences within one subject to in depth analyses, the latest during the first half of 2017. The reserve calendar year are also modeled. increase during 2017 stems from the alignment of the reserves to the result of the Sensitivity analyses are undertaken based on a comparison of claims estimated review. by various models, but also through changes to the assumptions applied by the different models, such as return periods. In addition, Sirius utilizes a system linked to the underwriting system. In this Historical Loss Reserve Trends The table below shows historical loss reserve trends. When reading the table it system the company’s exposure is measured via a number of predefined catastro- should be noted that amounts in other currencies are converted to the closing phe scenarios. exchange rate for 2017. The table below is thus not directly comparable to the Sirius also registers and monitors total exposed limits to wind and earthquake income statement. The changes in claims costs shown in the table should be seen losses per country and/or zone. in relation to earned exposure. The amounts shown do not include internal claims adjustment expenses. Generally development of runoff portfolios are included Concentrations and sensitivity analysis Through the use of the simulation models discussed in the previous section, only after they are acquired. This implies that the table only shows the loss devel- opment from the date of acquisition, which is the point of time when controlling the company can obtain an estimate of catastrophe risk, both prior to and after influence was obtained. retrocession. The table below shows a summary of the manner in which Sirius analyzes catastrophe risks, divided by geographical area and return period. Sirius analyzes catastrophe risks each quarter during the financial year. The figures show the situation at the end of Q4 2016 and Q4 2017. 36 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 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) 2007 AND PRIOR YEARS TOTAL 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 TOTAL 4,179 5,198 5,189 8,861 8,824 8,807 8,774 8,736 8,726 8,707 8,707 8,543 164 - - 4,047 5,871 8,940 8,797 8,720 8,652 8,667 8,646 8,644 8,644 8,508 136 - - 3,395 8,465 8,326 8,276 8,110 8,068 8,054 8,001 8,001 7,787 214 - - 4,893 6,365 6,551 6,395 6,356 6,337 6,311 6,311 6,176 135 - - 3,404 4,508 4,336 4,254 4,223 4,212 4,212 3,968 244 - - 3,288 4,757 4,616 4,518 4,492 2,844 4,732 4,886 4,850 2,847 4,768 4,800 3,695 6,056 4,467 4,492 4,211 281 - - 4,850 4,415 435 - - 4,800 3,889 910 - - 6,056 3,532 2,523 - - 4,467 467 4,000 - - 9,044 5,170 14,214 GROUP – CLAIMS, NET OF REINSURANCE UNDERWRITING YEAR 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 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) 2007 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) 2007 AND PRIOR YEARS TOTAL 3,826 4,581 4,532 8,498 7,743 7,627 7,592 7,570 7,569 7,552 7,552 7,400 152 - - 3,497 4,561 7,767 7,344 7,274 7,210 7,243 7,224 7,222 7,222 7,106 116 - - 2,780 7,733 7,466 7,423 7,240 7,201 7,196 7,156 7,156 6,966 190 - - 4,381 5,980 5,921 5,569 5,540 5,517 5,500 5,500 5,382 118 - - 3,117 3,885 3,614 3,521 3,494 3,467 3,467 3,283 185 - - 2,351 3,417 3,338 3,256 3,239 3,239 3,061 178 - - 2,056 3,580 3,776 3,750 2,118 3,592 3,790 2,668 4,350 2,351 3,750 3,430 320 - - 3,790 3,086 704 - - 4,350 2,509 1,841 - - 2,351 – 45 2,396 - - 6,200 4,172 10,371 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 TOTAL 4,179 5,198 5,189 5,106 5,113 5,093 5,049 5,002 4,980 4,970 4,970 4,896 75 - - 4,047 5,871 5,591 5,507 5,469 5,411 5,434 5,429 5,450 5,450 5,350 100 - - 3,395 5,141 4,970 4,940 4,840 4,814 4,789 4,753 4,753 4,604 149 - - 2,387 3,517 3,352 3,167 3,132 3,134 3,108 3,108 2,920 188 - - 2,200 2,889 2,733 2,677 2,701 2,690 2,690 2,487 203 - - 2,449 3,382 3,181 3,133 3,125 3,125 2,891 234 - - 1,922 2,780 2,649 2,673 1,804 2,529 2,531 2,045 3,704 3,310 2,673 2,352 322 - - 2,531 1,971 559 - - 3,704 1,958 1,745 - - 3,310 194 3,116 - - 6,692 680 7,372 PARENT COMPANY – CLAIMS , NET OF REINSURANCE UNDERWRITING YEAR 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 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) 2007 AND PRIOR YEARS TOTAL 3,826 4,581 4,532 4,445 4,460 4,447 4,404 4,374 4,359 4,353 4,353 4,303 51 - - 3,497 4,561 4,321 4,315 4,288 4,233 4,249 4,234 4,251 4,251 4,192 60 - - 2,780 4,269 4,089 4,063 3,945 3,923 3,902 3,880 3,880 3,762 118 - - 1,845 2,662 2,522 2,340 2,314 2,312 2,294 2,294 2,125 169 - - 1,773 2,215 2,052 1,984 2,012 1,986 1,986 1,841 144 - - 1,514 2,125 2,002 1,969 1,969 1,969 1,837 132 - - 1) For reconciliation against Balance Sheet, see Note 24. 1,250 1,816 1,706 1,727 1,246 1,753 1,777 1,365 2,756 1,594 1,727 1,514 213 - - 1,777 1,351 426 - - 2,756 1,242 1,513 - - 1,594 – 197 1,791 - - 4,616 604 5,220 37 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 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 2017 yielded a total return of the internal control in the company, has determined guidelines for the financial 2.9 percent (2.1 percent in 2016), expressed in SEK. The duration in the portfolio operations. with interest-bearing investments at the end of 2017 was 2.4 years which was The overall investment objective is to achieve consistent positive returns and lower compared to 2016 (3.1 years). During the year the group has increased the to maximize long-term after-tax return on invested assets within prudent levels portion of shares and participations compared to 2016. 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. 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. INVESTMENT ASSETS, DIVISION BY CLASS OF ASSET, PERCENTAGE SPLIT 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). GROUP PARENT COMPANY 2017 2016 2017 2016 Bonds and other interest-bearing securities 67.97 81.99 11.07 34.70 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 Shares and participations utilize a mixture of fixed income, equity and private investments with a focus on - whereof venture capital companies maximizing total return and preserving capital. Derivatives 0.66 16.03 5.96 1.04 0.55 7.60 1.41 –1.12 Market risk Market risk is the risk that an actual value on current or future cash flows from a Cash and bank balances 14.30 10.98 70.74 58.38 7.60 0.91 1.47 9.12 0.82 0.72 –1.52 7.62 financial instrument varies due to changes in market prices and due to changes in TOTAL 100.00 100.00 100.00 100.00 their respective volatilities. There are three types of market risk: interest rate risk, currency risk and other price risk, primarily equity risk. 38 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 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, 2017 and December Interest Rate Risk The company is exposed to the risk that the market value on its fixed-interest 31, 2016. 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 2017 1,738 771 11,550 14,059 EXPOSURE (MSEK) 2017 1,406 771 1,937 4,114 2016 1,859 1,574 17,149 20,582 2016 1,531 1,574 3,363 6,468 2017 100 bp 100 bp 100 bp - SCENARIO, STRESS TEST 2017 100 bp 100 bp 100 bp - 2016 100 bp 100 bp 100 bp - 2016 100 bp 100 bp 100 bp - CAPITAL REQUIREMENTS (MSEK) 2017 2016 76 27 231 334 77 82 472 631 CAPITAL REQUIREMENTS (MSEK) 2017 2016 62 27 37 126 64 82 106 252 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, 2017 and December 31, 2016. 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) 2017 3,442 142 3,584 EXPOSURE (MSEK) 2017 1,153 10,739 11,892 2016 1,918 145 2,063 2016 152 10,882 11,034 2017 35% 35% - SCENARIO, STRESS TEST 2017 35% 35% - 2016 35% 35% - 2016 35% 35% - 2017 1,204 50 1,254 CAPITAL REQUIREMENTS (MSEK) 2017 403 3,759 4,162 2016 671 51 722 2016 53 3,809 3,862 39 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 Note 2 – Cont. CURRENCY RISK Currency risk arises if assets and liabilities in the same foreign currency vary in amounts. lated to Policyholder Funds, which is matched with the corresponding assets, and 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 The Investment Committee meets at least quarterly in order to monitor curren- net insurance liabilities in foreign currency with corresponding assets on timely cy exposure and limit currency risk. The Finance Department monitor the currency basis. The Group’s total net exposure for currency risk, i.e. including both Policy- exposure on an ongoing basis. In addition, it is the responsibility of the group to holder and Owners’ Funds, before and after any hedging by derivatives is shown in review and update the Currency Risk Policy and ensure it is approved by the Invest- the table below (the table is only presented for the Group since the exchange rate ment 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 and exposure is taken into consideration). 2017 2016 USD EUR GBP Other USD EUR GBP Other EXCHANGE RATE EXPOSURE — INVESTMENT ASSETS GROUP Shares and participations Bonds and other interest-bearing securities Other financial investment assets Other assets and liabilities, net 2,857 9,354 2,294 6,803 220 1,276 60 678 Total assets 21,308 2,234 Technical provisions, net Total liabilities and provisions –10,218 –1,823 –10,218 –1,823 Net exposure before financial hedging with derivatives 11,090 412 Nominal value currency forwards NET EXPOSURE AFTER FINANCIAL HEDGING WITH DERIVATIVES –4,923 6,167 - 412 4 180 110 –45 249 –315 –315 –66 - –66 36 36 334 213 619 –501 –501 119 2,450 17 4 13,950 1,615 1,520 2,014 4,539 125 178 32 –39 22,953 1,935 1,517 –11,166 –1,291 –11,166 –1,291 11,787 644 –244 –244 1,273 - –5,433 - - 119 6,354 644 1,273 - - 394 214 608 –563 –563 45 - 45 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 7 Change 25 basis points 1 0 2 Change 10% 6 Change 25 basis points 1 0 2 Change 10% USD 188 617 175 635 EUR 10 41 17 64 GBP –1 –7 28 127 Other - 12 - 4 Total 197 663 220 830 40 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 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 2017 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 2017 14,590 2,632 1,118 133 10,707 142 3,442 223 18,397 2016 20,699 3,657 775 560 15,707 145 1,918 –283 22,479 PARENT COMPANY 2017 4,641 1,173 890 102 2,475 10,739 1,153 223 16,756 2016 6,468 1,744 618 480 3,626 10,882 152 –283 17,219 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 2017 Name of security Type of security Market value (MSEK) % of financial assets Doubleline Total Return Bond CL MF Fund International Medical Group, Inc Note – SIIG Group JPMorgan Chase & Co Sveriges Säkerställda Obligationer AB Bond Bond New Energy Capital Infrastructure Credit Fund L.P Share STS Partners Fund Adimab, LLC New Energy Capital Infra Offshore Länsförsäkringar Hypotek AB Schlumberger Holdings Corp TOTAL Share Share Share Bond Bond 841 527 362 323 227 209 205 155 144 143 4.57% 2.86% 1.97% 1.75% 1.24% 1.14% 1.11% 0.84% 0.78% 0.78% 3,136 17.04% 41 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 Note 2 – Cont. PARENT COMPANY 2017 Name of security Type of security Market value (MSEK) % of financial assets Sirius Re Holdings Inc Shares in Subsidiary S.I. Holdings (Luxembourg) S.à r.l Shares in Subsidiary International Medical Group, Inc Note – SIIG Group JPMorgan Chase & Co Sveriges Säkerställda Obligationer AB Bond Bond Sirius International Holdings (NL) BV Shares in Subsidiary Be Reinsurance Ltd Shares in Associated Company Länsförsäkringar Hypotek AB Stadshypotek AB MLSSS Ltd TOTAL Bond Bond Shares 5,602 4,833 527 362 256 150 142 115 110 89 12,186 33.43% 28.84% 3.15% 2.16% 1.53% 0.89% 0.84% 0.69% 0.66% 0.53% 72.72% 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.l 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% 42 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 AVIATION & SPACE 43 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 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, % 2017 2016 GROUP AAA AA A BBB CCC Bonds and other interest-bearing securities - Swedish government - Swedish mortgage institutions - Other Swedish institutions - Foreign governments - Other foreign issuers 50 100 100 7 87 39 9 0 0 26 13 9 23 16 0 0 22 0 29 0 0 25 0 20 0 0 0 0 0 0 Not rated 2 0 0 20 0 3 TOTAL AAA AA A BBB CCC Not rated TOTAL 100 100 100 100 100 100 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 EQUITY INVESTMENTS, DIVIDED BY GEOGRAPHICAL AREA, % GROUP PARENT COMPANY Western Europe North America Other Total 2017 19.52 75.66 4.82 100 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 2017 5.11 81.55 12.64 0.70 100 GROUP 2017 18.72 7.95 0.95 72.38 100 2016 1.69 97.68 0.63 100 2016 14.01 76.73 9.03 0.23 100 2016 17.77 3.76 2.72 75.75 100 2017 63.95 21.67 14.38 100 PARENT COMPANY 2017 8.86 53.66 34.54 2.95 100 PARENT COMPANY 2017 28.52 21.63 2.49 47.36 100 100 100 100 100 100 100 2016 3.77 96.03 0.2 100 2016 44.57 31.03 23.67 0.73 100 2016 26.96 9.56 7.42 56.05 100 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 occur for example, in the case of a severe European windstorm. An event such as months and over 1 year. These analyses comprise the basis for various collection this would trigger recoveries from major portions of Sirius’ outwards reinsurance activities, as does the supporting documentation regarding the assessment of the program. counterparty’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, 2017, to MSEK 84 for the Group, whereof MSEK 31 at Sirius International (2016 MSEK 100 for the Group, MSEK 36 at Sirius International). 44 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 Note 2 – Cont. GROUP 2017 2016 Due for <1 Month 1–3 Months 4–6 Months 7–9 Months 10–12 Months >1 Year Net receivables Net receivables 1,421 948 109 141 –32 49 10 –6 10 1 57 51 Total 1,575 1,184 PARENT COMPANY Due for <1 Month 1–3 Months 4–6 Months 7–9 Months 10–12 Months >1 Year Total 2017 2016 Net receivables Net receivables 585 –25 61 43 –40 22 6 0 7 2 38 35 657 77 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 2 (1) at December 31, 2017. 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 2017 2016 AAA AA+ AA AA- A+ A A- BBB+ BBB or lower Special approval TOTAL 0 335 205 476 631 190 2,918 1 606 135 5,497 0 1 6 2 42 4 244 1 379 125 804 0 334 200 474 590 186 2,673 0 227 9 0% 6 % 5 % 9 % 11 % 3 % 53 % 0 % 11 % 2 % 0 474 218 307 643 227 1,100 35 398 697 4,693 100 % 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 % 3,748 100 % PARENT COMPANY Gross Collateral Net Percentage split Gross Collateral Net Percentage split 2017 2016 AAA AA+ AA AA- A+ A A- BBB+ BBB or lower Special approval TOTAL 0 0 196 152 258 150 2,333 1 167 130 3,387 0 0 5 0 4 3 8 1 144 125 290 0 0 191 152 254 147 0 % 0 % 6 % 5 % 7 % 4 % 0 0 214 155 315 170 2,325 69 % 1,005 0 23 5 0 % 5 % 4 % 33 84 669 3,097 100 % 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 % 45 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 Note 2 – Cont. Significant credit losses can potentially arise from unusually large and infrequent 2017 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 2017 2016 PARENT COMPANY Gross Collateral 0 57 484 2,093 206 1,3631) 84 74 288 0 0 0 0 0 718 62 91 378 Net 0 57 484 2,093 206 6451) 22 –16 –90 Percentage split Gross Collateral 0 % 2 % 14 % 61 % 6 % 19 % 1 % 0 % –3 % 100 % 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 0 % 3 % 16 % 56 % 6 % 19 % 1 % –1 % 0 % 3,950 100 % AA+ AA AA- A+ A A- BBB+ BBB or lower Special approval TOTAL 4,649 1,249 3,400 1) Additional to above table a Quota Share reinsurance treaty exist with SBDA, for details see note 30, Associated parties. LIQUIDITY RISK Liquidity risk is the risk that the company will have difficulties fulfilling payment assets was 2.3 years (3.1 years at the end of 2016) and the duration of insurance liabilities was 4.9 years (4.9 years at the end of 2016). The liquidity is monitored obligations, mainly those related to insurance liabilities. Liquidity risk can also be continuously and stress tests are performed for different scenarios. The compa- expressed as the risk of loss or impaired earning potential as a result of the com- ny’s claims payment capabilities are further strengthened with its high portion of pany not being able to fulfill payment obligations in due time. Liquidity risks arise cash and bank deposits of the total investment assets. as assets and debts including derivatives instruments have different durations. The cash flow analysis also provides an illustration of the company’s liquidity The company’s strategy for dealing with liquidity risk aims to match expected situation. payments and receipts of payment (so called asset-liability management, ALM). The tables below show a more detailed maturity profile for the Group and This is accomplished through advanced liquidity analysis of financial assets and Parent Company in respect of both financial assets and debts. insurance liabilities. At the end of 2017 the duration of interest-bearing investment 46 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 Note 2 – Cont. LIQUIDITY PROFILE — FINANCIAL ASSETS (CONTRACTUAL INFLOWS) GROUP 2017 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 2016 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 - - - 3,070 - - - - 688 1,401 8,342 3,628 - - - 395 1,038 87 9 - - - - 2,852 19 89 - - - - 51 46 1 - - - - - - - - 142 3,442 - 89 - 23 - 14,059 142 3,442 3,070 484 3,941 175 99 3,070 2,217 4,361 8,440 3,628 3,696 25,412 On demand <3 months 3 months– 1 year 1–5 years >5 years No duration - - - 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 - Total 20,699 145 1,918 2,764 236 3,524 93 155 TOTAL 2,764 1,555 4,814 10,468 7,698 2,235 29,742 PARENT COMPANY 2017 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 - - - 1,386 - - - - 167 143 3,143 661 - - - - - - - - 551 3,015 - 9 4 47 - - - - 32 76 1 - - - - - - - - 10,739 1,153 - 86 - 864 - 4,114 10,739 1,153 1,386 86 3,598 944 57 TOTAL 1,386 718 3,209 3,252 661 12,842 22,077 PARENT COMPANY 2016 On demand <3 months 3 months– 1 year 1–5 years >5 years No duration 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 - - 1,420 - - - - 1,420 18 - - - - 18 - 9 45 530 3,716 2,204 - - - - 2,094 3 76 - - - - 35 41 1 - - - - - - - - 10,882 152 - 63 28 444 - Total 6,468 10,882 152 1,420 63 2,175 488 86 2,703 3,793 2,204 11,569 21,734 47 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 Note 2 – Cont. LIQUIDITY PROFILE — FINANCIAL DEBTS (CONTRACTUAL OUTFLOWS) GROUP 2017 Payables, direct insurance Payables, reinsurance Other creditors Accrued expenses and deferred income TOTAL GROUP 2017 Payables, direct insurance Payables, reinsurance Other creditors Accrued expenses and deferred income TOTAL PARENT COMPANY 2017 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 On demand <3 months 3 months– 1 year 1–5 years >5 years No duration TOTAL - - - - - - - 177 - 177 278 1,409 540 137 2,364 - - - 41 41 - - - - - 20 351 0 9 298 1,760 717 187 379 2,962 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 - - - - - - - - - - - 1,215 126 108 1,450 - - - 16 16 - - - - - 1 351 780 8 1 1,566 906 132 1,140 2,606 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 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 3 months– 1 year 1–5 years >5 years TOTAL 2017 2016 986 905 2,678 2,790 4,613 4,607 3,463 4,171 11,740 12,473 628 381 1,639 1,198 2,822 1,973 1,126 1,524 6,215 5,076 48 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 Note 2 – Cont. OPERATIONAL RISK MANAGEMENT Sirius has defined operational risks as “The risk of loss arising from inadequate SUPERVISION AND SOLVENCY II Sirius is subject to regulation and supervision by the Swedish Financial Superviso- or failed internal processes, personnel or systems, or from external events. Oper- ry Authority (the ‘‘SFSA’’). As Sweden is a member of the EU, the SFSA supervision ational risk includes legal risks, HR risks, model risks, and Information Security of Sirius branches is recognized across all locations within the EU (apart from cus- risks (e.g. data privacy and system protection). Operational risk excludes risks tomer conduct that is regulated and supervised locally across the EU). Regulatory arising from strategic decisions. While reputational risk is commonly considered requirements are based on the European Solvency II legislation. The SFSA and to be a potential outcome of operational failure, Sirius treats reputational risk as a the Bermuda Monetary Authority perform group supervision over Sirius at EU and separate risk class in its risk register”. global level respectively. Operational risk is actively managed throughout Sirius, its branches and sub- sidiaries. The ownership of operational risks lies with all employees. The work is conducted through a self-assessment process where all employees within Sirius SOLVENCY AND CAPITAL REQUIREMENTS As of January 1, 2016 Sirius’s regulatory Solvency Capital Requirement (SCR) is are responsible for the risk identification and shall contribute to a well-func- based on Solvency II regulation. Sirius uses the Solvency II standard formula to tioning process for operational risk management. The organization reports on calculate the SCR. Details about capitalization is found in the Board of directors’ a continuous basis identified operational risks to the operationally independent report. Risk Management Function. The Risk Management Function is responsible for Sirius also uses an internal Economic Risk Capital (ERC) model for a number of key developing and improving the operational risk management methodology and strategic and management decision processes. The practical applications of the thereby supporting the organization and the process owners with the tools needed internal ERC model include the following: to manage these risks. - Assess the amount of capital necessary to support the underwriting and invest Sirius always aims at reducing the operational risks to acceptable levels. The ment operations over the course of a one-year period company’s tolerance for operational risk is Low. - Allocate deployed capital in the organization to key underwriting risk areas in COMPLIANCE RISK MANAGEMENT order to establish appropriate risk-adjusted pricing targets - Monitor the risk according to the risk tolerance levels established by the Board Compliance risk is “the risk of legal or regulatory sanctions, material financial of Directors loss or loss to reputation that Sirius may suffer as a result of not complying with - Measurement of key risks and their interaction laws, internal or external regulations and administrative provisions as applicable - Evaluate reinsurance purchases to Sirius activities.” The responsibility for Sirius’ compliance with internal and external regulation Sirius manages risk and capital levels to maintain a Standard & Poor’s (S&P) and lies with all employees. The business organization is also responsible for man- A.M. Best “A” grade or better insurance financial strength profile over the insur- aging compliance risks and for reporting of compliance risks to the operationally ance cycle, as this allows Sirius to write targeted reinsurance business. independent Compliance function. The Compliance function supports the Board and business organization by informing, advising and monitoring compliance issues and risks throughout the Group. Compliance risk assessments are made of both internal and external compliance risks, continuously and on annual basis. Compliance coordinators are appointed in subsidiaries and branches to support the Chief Compliance Officer and to take specific account of any applicable local regulatory requirements. FINANCIAL STRENGTH RATING The financial strength of Sirius has during 2017 been rated by Standard & Poor’s and A. M. Best. GROUP AND PARENT COMPANY Financial Strength Rating Outlook 2017 S&P1) A- Stable A.M. Best2) A Negative 2016 S&P1) A- Stable A.M. Best2) A Negative 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 2017SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 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 2017 9 305 3,562 7,177 11,053 –5,031 6,022 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 2017 Gross Ceded –824 378 –1,894 –2,105 –188 488 0 745 866 0 GROUP PARENT COMPANY 2016 4 327 3,016 7,459 10,806 –3,660 7,146 Net –336 378 Gross –1,037 60 –1,149 –1,301 –1,239 –188 –1,828 –206 2017 9 89 1,256 7,003 8,357 –3,833 4,524 2016 Ceded 443 0 413 573 0 2016 4 82 1,186 5,523 6,795 –2,868 3,927 Net –594 60 –888 –1,255 –206 –4,633 2,099 –2,534 –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 2017 Gross Ceded –5,688 –87 1,352 1,481 –2,942 –7,575 1,322 148 –324 –301 845 2,944 2017 Gross Ceded –6,512 291 –188 –6,409 1,810 148 0 1,958 Net –4,366 61 1,028 1,180 –2,097 –4,631 Net –4,702 439 –188 –4,451 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 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 –3,402 1,725 –1,677 –2,209 Note 4 – Cont. CHANGE IN PROVISION FOR OUTSTANDING CLAIMS GROUP Change in provision for incurred and reported claims Change in provision for incurred but not reported claims (IBNR) TOTAL CHANGE IN PROVISIONS FOR OUTSTANDING CLAIMS 2017 Gross Ceded –542 –624 –1,166 421 565 986 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 -575 377 –1,515 –1,571 –118 395 0 722 608 0 Net –121 –59 –180 Net –180 377 –793 –963 –118 CLAIMS INCURRED FOR PREVIOUS 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) 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 Gross –2,802 –87 838 466 –1,584 –4,987 2017 Ceded 761 148 –383 –271 255 1,980 2017 Gross Ceded –3,376 290 –118 –3,204 1,156 148 0 1,304 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 2017 Gross Ceded –677 –1,106 –1,783 339 337 676 Net –2,040 61 455 195 –1,330 –3,007 Net –2,220 438 –118 –1,900 Net –338 –769 –1,107 2016 Gross Ceded –444 573 129 187 23 210 2015 Gross Ceded –462 60 –843 –844 -120 Gross –2,194 –52 654 1 116 –476 –2,685 Gross –2,656 8 –120 –2,768 198 0 286 219 0 703 2016 Ceded 647 1 –205 –247 196 899 2016 Ceded 845 1 0 846 2016 Gross Ceded –189 272 83 81 –28 53 Net –257 596 339 Net –264 60 –557 –625 –120 –1,506 Net –1,547 –51 449 869 –280 –1,786 Net –1,811 9 –120 –1,922 Net –108 244 136 51 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 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 TOTAL OTHER OPERATING COSTS TOTAL OPERATING COSTS PER TYPE Direct and indirect personnel costs Premises costs Depreciation/amortization Other expenses related to operations TOTAL OTHER OPERATING COSTS 2017 –2,632 –74 –817 1,463 –2,060 GROUP 2017 –2,060 –188 –69 –2 –351 –2,670 GROUP 2017 –804 –83 –69 –1,714 –2,670 2016 –2,580 –26 –909 949 –2,566 2016 –2,566 –206 –84 –1 –362 –3,219 2016 –1,050 –81 –59 –2,029 –3,219 2017 –2,150 2 –388 1,161 –1,375 PARENT COMPANY 2017 –1,375 –118 –40 –2 –63 –1,598 PARENT COMPANY 2017 –420 –41 –58 –1,079 –1,598 2016 –1,653 95 –509 762 –1,305 2016 –1,305 –120 –40 –1 –192 –1,658 2016 –678 –54 –55 –871 –1,658 52 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 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 TOTAL RETURN ON CAPITAL, INCOME GROUP 2017 58 313 336 - - 20 290 - - 1,017 2016 36 384 35 - 405 789 - 112 - 1,795 PARENT COMPANY 2017 123 67 63 - - 11 - 20 - 285 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 Foreign shares and participations Bonds and other interest-bearing securities Derivative financial instruments Gain on Currency TOTAL UNREALIZED GAINS AND LOSSES ON INVESTMENTS GROUP PARENT COMPANY 2017 138 - 510 –731 –83 2016 –765 –68 456 –185 –562 2017 117 - 510 –250 377 Note 8 – Investment expenses and charges GROUP PARENT COMPANY Operating expenses for land and buildings Asset management costs Interest expenses Other interest expenses Capital losses on foreign exchange, net Capital losses Foreign shares and participations Sales and liquidation of Group and associated companies Other interest-bearing assets Impairment of shares in subsidiaries Derivative Financial Instruments Impairment of investment assets TOTAL 2017 –2 –69 –4 –101 - –22 –41 - –133 - –372 2016 –2 –84 –1 - - - - - –793 - –880 2017 –2 –40 –4 –143 - - - - –133 –139 –461 2016 3,631 101 18 - 202 3 - 88 - 4,238 2016 5 - 456 –210 251 2016 –1 –40 –6 - - - - –98 –793 - –938 53 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 Note 9 – Net profit or net loss per category of financial instruments FINANCIAL ASSETS GROUP 2017 Shares and participations Derivative financial instruments Bonds and other interest-bearing securities Deposits with cedants Cash and bank balance TOTAL PARENT COMPANY 2017 Shares and participations Derivative financial instruments Bonds and other interest-bearing securities Deposits with cedants Cash and bank balance TOTAL 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 194 - 458 - - 652 - 377 - - - 377 - - 158 - - 158 - - 257 19 15 291 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 252 - - - - 252 - 377 - - - 377 - - 133 - - 133 - - - 14 20 34 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 - - - - - –337 - - - - - 182 - - 182 - - - 7 8 3,834 –337 15 3,694 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 -309 (181) for the Group, of which -460 (-49) refer to exchange capital, income, (ii) unrealized gains, (iii) return on capital, expenses, (iv) unreal- rate 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 -151 (-132). 54 TOTAL 194 377 873 19 15 1,478 TOTAL 252 377 133 14 20 796 TOTAL 94 –337 417 12 13 199 TOTAL 3,834 –337 182 7 8 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 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 2017 –37 31 –280 –286 2016 2017 2016 PARENT COMPANY –75 –5 147 67 –17 26 –13 –4 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 rates Tax effect from non-deductible expenses Tax effect from non-taxable income Current tax regarding previous years Recognition of tax loss carry-forwards related to previous years and timing differences REPORTED EFFECTIVE TAX GROUP 2017 –22.0% –1.0% –60.5% –10.3% 2.7% 9.1% –35.8% –73.8% 2016 –22.0% –4.8% –52% –8.8% 15.3% 1.1% 90.1% 18.9% PARENT COMPANY 2017 –22.0% - - –27.5% 22.8% 19.6% 3.9% –3.2% REPORTED DEFERRED TAX ASSETS AND DEFERRED TAX LIABILITIES GROUP 2017 2016 2017 2016 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 35 75 41 - - 1,839 1,990 –131 1,859 71 186 112 7 - 1,934 2,310 –129 2,181 - - –27 –85 –2,366 - –2,478 131 –2,347 - - –42 –55 –2,367 - –2,464 129 –2,335 NET 2017 35 75 14 –85 –2,366 1,839 –488 - –488 –54 –4 7 –51 2016 –22.0% - - –0.8% 21.6% -0.1% - –1.3% 2016 71 186 70 –48 –2,367 1,934 –154 - –154 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 2017 2016 2017 2016 DEFERRED TAX ASSETS DEFERRED TAX LIABILITIES Personnel-related provisions Other provisions DEFERRED TAX BALANCES 31 3 34 43 4 47 - - - - - - NET 2017 31 3 34 2016 43 4 47 55 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 Note 10 – Cont. UNRECOGNIZED DEFERRED TAX ASSETS The Group has unrecognized deferred tax assets related to tax loss carry-forwards 479 (360). CHANGES IN DEFERRED TAX Opening balance Recognized in income statement Recognized in other comprehensive income Tax loss carry-forwards CLOSING BALANCE GROUP PARENT COMPANY 2017 –154 –280 –10 –44 –488 2016 –386 147 55 30 –154 2017 47 –13 - - 34 2016 40 7 - - 47 Taxes recognized in other comprehensive income partially refer to available-for-sale financial assets 2 (7). 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, 2016 Acquisition for the year Disposal for the year Currency revaluation effects CLOSING BALANCE DECEMBER 31, 2016 Opening balance January 1, 2017 Acquisition for the year Disposal for the year Currency revaluation effect 279 18 - - 297 297 11 –2 - 87 - - - 87 87 1,048 - –41 CLOSING BALANCE DECEMBER 31, 2017 306 1,094 Accumulated amortization and impairment Opening balance January 1, 2016 Depreciation for the year Impairment for the year CLOSING BALANCE DECEMBER 31, 2016 Opening balance January 1, 2017 Depreciation for the year Impairment for the year Currency revaluation effect –203 –26 - –229 –229 –29 2 - –61 - - –61 –61 - - 88 - –46 3 45 45 696 - –32 710 –2 - 2 0 0 –34 - 1 454 18 –46 3 429 429 1,755 –2 –73 2,110 –266 –26 2 –290 –290 –63 2 1 279 18 - - 297 297 11 –2 - 306 –203 –26 - –229 –229 –29 2 - 87 - - - 87 87 - - - 87 –70 –4 - –74 –74 –4 - - 366 18 - - 384 384 11 –2 - 393 –273 –30 - –303 –303 –33 2 - CLOSING BALANCE DECEMBER 31, 2017 –256 –61 –33 –350 –256 –78 –334 Carrying amount Per January 1, 2016 PER DECEMBER 31, 2016 Per January 1, 2017 PER DECEMBER 31, 2017 76 68 68 50 26 26 26 86 45 45 1,033 677 188 139 139 1,760 76 68 68 50 17 13 13 9 93 81 81 59 56 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 Note 11 – Cont. 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 Amortization and impairmaent for the year is included in the following rows in the income statement for 2016: Operating costs Other costs TOTAL Amortization for the year is included in the following rows of the income statement for 2017: Operating costs Other costs TOTAL –26 - –26 –29 - –29 - - - - - - - - - –34 - –34 –26 - –26 –63 - –63 –26 - –26 –29 - –29 - –4 –4 - –4 –4 Total –26 –4 –30 –29 –4 –33 The Group and Parent Company goodwill derive from the acquired operation in Belgium, which is an identifiable cash generating unit and since 2017 also goodwill 1. Armada has good relationships with existing distributuin partners from the acquisition of Armada. The amounts refer both to acquisition- and asset (“Distribution partners”) deal goodwill and are annually tested for impairment. The projected future cash 2. Internally developed, proprietary software, systems, platforms, etc. flows have been discounted to present value and are based on a conservative (“Technology”) assessment of the unit’s earnings, in the insurance operations, based on historical 3. Trademarks that is well recognized on the market will help generate and future earning patterns. Additional charges for cost of capital have been added a stable demand in the company’s services. (“Trademarks”) representing deployed capital. The discount rate has been determined based on a market rate of return, i.e. WACC. For the Group, no depreciation is made on goodwill. For further information IT-related intangible assets include acquired licenses and capitalized expenses regarding depreciation, see Note 1, Accounting principles. for development of business-critical systems. Other intangible assets does mainly consist of balances from the acquired Armada business.The assets from Armada is divided into the following subject assets; Note 12 – Land and buildings GROUP AND PARENT COMPANY Accumulated acquisition cost Opening balance January 1, 2016 Acquisitions CLOSING BALANCE DECEMBER 31, 2016 Opening balance January 1, 2017 Acquisitions CLOSING BALANCE DECEMBER 31, 2017 Accumulated depreciation Opening balance January 1, 2016 Depreciation for the year CLOSING BALANCE DECEMBER 31, 2016 Opening balance January 1, 2017 Depreciation for the year CLOSING BALANCE DECEMBER 31, 2017 Carrying amount Per January 1, 2016 PER DECEMBER 31, 2016 Per January 1, 2017 PER DECEMBER 31, 2017 32 1 33 33 1 34 –21 –2 –23 –23 –2 –25 11 10 10 9 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 2017SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 Note 13 – Shares and participations in group companies NAME OF SUBSIDIARY REGISTERED OFFICES, COUNTRY PARTICIPATING INTEREST, % Sirius Rückversicherungs Service GmbH Hamburg, Germany Sirius Belgium Réassurances S.A. Liège, Belgium Sirius International Holdings (NL) B.V. Amsterdam, The Netherlands S.I. Holdings (Luxembourg) S.à r.l. Luxembourg Sirius International Managing Agency Ltd. London, Great Britain Sirius Re Holdings Inc SI Phoenix (Luxembourg) S.à r.l Dealware, USA 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 2017 100 100 100 100 100 100 - 100 100 PARENT COMPANY 2017 12,147 - –4 - 12,143 –1,387 –139 - –1,526 10,617 2016 100 100 100 100 100 - 100 100 100 2016 11,348 1,710 –889 –22 12,147 –1,317 –92 22 –1,387 10,760 58 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 Note 13 – Cont. SUBSIDIARIES’ SHAREHOLDERS’ EQUITY 2017 Name of subsidiary Sirius Rückversicherungs Service GmbH Sirius Belgium Réassurances S.A. Sirius International Holdings (NL) B.V. S.I. Holdings (Luxembourg) S.à r.l. 24 12 150 4,405 Sirius International Managing Agency Ltd. 9 Sirius International Corporate Member Ltd. –295 Sirius Re Holdings Inc 5,057 White Sands Holdings (Luxembourg) S.à r.l. –0 TOTAL 2016 9,362 Shareholders’ equity Name of subsidiary 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 12,006 Shareholders’ equity Shares, % Number of shares Book value Profit/loss 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 500 outstanding shares without nom. value Share capital total SEK 145,055 consisting of 145,055 shares with nom. value SEK1 per share 0 13 150 4,833 4 0 5,602 15 10,617 10 -0 –69 –197 1 –191 –377 –0 –823 Shares, % Number of shares Book value Profit/loss 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 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 13 289 4,833 4 0 5,606 15 10,760 3 0 –47 391 0 –45 8 -0 310 59 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 Note 14 – Shares and participations in associated companies NAME OF ASSOCIATED COMPANIES REGISTERED OFFICES NUMBER OF SHARES PARTICIPATING INTEREST, %1) 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 difference on foreign associated companies CARRYING AMOUNT DECEMBER 31 GROUP 2017 145 10 –13 142 Note 15 – Investments in shares and participations Fair value Acquisition cost For further information regarding financial instruments, see Note 19. GROUP 2017 3,442 3,507 2016 127 8 10 145 2016 1,918 1,981 2017 25 PARENT COMPANY 2017 122 - - 122 PARENT COMPANY 2017 1,153 1,113 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 2017 524 1,118 133 2,108 10,176 14,059 14,059 245 34 FAIR VALUE 2017 423 890 103 750 1,948 4,114 4,114 139 9 2016 524 775 560 3,133 15,589 20,581 20,581 423 62 2016 432 619 480 1,312 3,625 6,468 6,468 373 13 2017 527 1,119 133 2,105 10,276 14,160 14,160 280 8 ACQUISITION COST 2017 427 891 102 752 1,927 4,099 4,099 120 11 2016 25 2016 122 - - 122 2016 152 203 2016 538 779 561 3,116 15,497 20,491 20,491 458 275 2016 444 622 481 1,280 3,448 6,275 6,275 384 69 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 Note 17 – Derivative financial instruments Currency derivatives, Sirius Bermuda Insurance Company Ltd. Other derivatives, Endurance Endurance Speciality Insurance Ltd. TOTAL GROUP 2017 211 6 5 222 2016 –336 - 53 –283 PARENT COMPANY 2017 211 6 5 222 2016 –336 - 53 –283 The table above show gross positions with individual counterparties in excess of options, the currency forward transactions are settled on the basis of an exchange MSEK 0,5. rate cap of 14.177 SEK/USD and an exchange rate floor of 6.0759 SEK/USD. The Currency derivatives of nominal MUSD 600 against SEK mainly concern con- company has on March 1 2017 sold MUSD 200 on a forward basis to SBDA, with tracts with internal counterparties. a term of approximately four years at the exchange rate 8.5515. Through foreign The company has on February 17 2016 entered into an internal currency exchange rate options, the currency forward transactions are settled on the basis hedging agreement with SBDA. The agreement means that Sirius International of an exchange rate cap of 15.0828 SEK/USD and an exchange rate floor of 6.4641 has sold MUSD 200 on a forward basis to SBDA, with a term of approximately two SEK/USD. Outside these ranges, the company takes no hedging measures. years at the agreed exchange rate 8.3099. Through foreign exchange options, the The currency hedge agreements are valued monthly at fair value via the income currency forward transactions are settled on the basis of an exchange rate cap of statement. 14.177 SEK/USD and an exchange rate floor of 6.0759 SEK/USD. The company has on February 17 2016 sold MUSD 200 on a forward basis to SBDA, with a term of approximately three years at the exchange rate 8.2376. Through foreign exchange Note 18 – Other debtors Other debtors, group companies1) Other debtors TOTAL2) GROUP PARENT COMPANY 2017 23 152 175 2016 21 72 93 2017 864 80 944 2016 444 44 488 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 2017SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 Note 19 – Categories of financial assets and liabilities and their fair value FINANCIAL ASSETS GROUP 2017 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 2016 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 532 - - - - 11 175 718 - 3,442 222 8,035 3,070 39 - - - - 6,024 - 49 - 532 3,442 222 14,059 3,070 99 175 532 3,442 222 14,059 3,070 99 175 532 3,507 - 14,160 3,070 99 175 14,808 6,073 21,599 21,599 21,543 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 1) Derivatives are classified as Financial instruments held for trading. PARENT COMPANY 2017 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 PARENT COMPANY 2016 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 527 - - - - 11 944 1,482 - 1,153 222 - 1,386 - - - - - 4,114 - 46 - 2,761 4,160 527 1,153 222 4,114 1,386 57 944 8,403 527 1,153 222 4,114 1,386 57 944 8,403 527 1,113 - 4,099 1,386 57 944 8,141 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 - - - - 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 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 2017 Note 19 – Cont. FINANCIAL LIABILITIES GROUP Other liabilities Accrued expenses Derivative financial instruments TOTAL PARENT COMPANY Other liabilities Accrued expenses Derivative financial instruments TOTAL 2017 Financial liabilities valued at fair value via the income statement Carrying amount Fair value Other financial liabilities 2016 Financial liabilities valued at fair value via the income statement Carrying amount Fair value - - - - 1,241 1,241 80 - 80 - 1,321 1,321 254 66 - 320 - - 336 336 254 66 336 656 254 66 336 656 2017 Financial liabilities valued at fair value via the income statement Carrying amount Fair value Other financial liabilities 2016 Financial liabilities valued at fair value via the income statement - - - - 906 77 - 983 906 77 - 983 179 61 - 240 - - 336 336 Carrying amount Fair value 179 61 336 576 179 61 336 576 Other financial liabilities 1,241 80 - 1,321 Other financial liabilities 906 77 - 983 In the tables below, data is provided regarding the determination of Level 1: Based on prices listed on an active market for identical assets or liabilities fair value for financial assets and liabilities valued at fair value in Level 2: Based on directly (according to price listings) or indirectly (derived from price listings) the balance sheet. The determination of fair values is categorized 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 2017 Level 1 Level 2 Level 3 TOTAL GROUP 2016 Level 1 Level 2 Level 3 TOTAL Shares and participations Derivative financial instruments 1,845 - 15 - 1,582 3,442 Shares and participations 223 223 Derivative financial instruments 988 - 16 - 914 –283 1,918 –283 Bonds and other interest- bearing securities 2,603 11,456 - 14,059 Bonds and other interest- bearing securities 2,933 17,648 - 20,581 TOTAL 4,448 11,471 1,805 17,724 TOTAL 3,921 17,664 631 22,216 PARENT COMPANY 2017 Level 1 Level 2 Level 3 TOTAL PARENT COMPANY 2016 Level 1 Level 2 Level 3 TOTAL Shares and participations Derivative financial instruments 1,001 - 15 - 137 223 1,153 Shares and participations 223 Derivative financial instruments Bonds and other interest- bearing securities 1,173 2,941 - 4,114 Bonds and other interest- bearing securities TOTAL 2,174 2,956 360 5,490 TOTAL 5 - 707 712 16 - 131 –283 152 –283 5,761 5,777 - 6,468 –152 6,337 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 2017SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 Note 19 – Cont. The tables below show 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 2017 Level 2 Opening balance January 1, 2017 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, 2017 Profit/loss reported in profit/loss for the year for assets included in the closing balance December 31, 2017) PARENT COMPANY 2017 Level 2 Opening balance January 1, 2017 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, 2017 Profit/loss reported in profit/loss for the year for assets included in the closing balance December 31, 2017) GROUP 2017 Level 3 Opening balance January 1, 2017 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, 2017 Profit/loss reported in profit/loss for the year for assets included in the closing balance December 31, 20171) Shares and participations Derivatives 16 –1 - - - - - 15 –1 - - - - - - - - - Shares and participations Derivatives 16 –1 - - - - 15 –1 - - - - - - - - Bonds 17,648 –385 5,450 –9,994 –396 - –867 11,456 –385 Bonds 5,761 –163 2,189 –4,367 –479 - 2,941 –163 Shares and participations Derivatives Bonds 914 –33 1,219 –376 –74 - –68 1,582 –33 –283 510 129 –133 - - - 223 510 - - - - - - - - - Total 17,664 –386 5,450 –9,994 –396 - –867 11,471 -386 Total 5,777 –164 2,189 –4,367 –479 - 2,956 -164 Total 631 477 1,348 –509 –74 - –68 1,805 477 1) Reported in net income of financial transactions in profit/loss for the year. 64 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 Note 19 – Cont. PARENT COMPANY 2017 Level 3 Opening balance January 1, 2017 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, 2017 Profit/loss reported in profit/loss for the year for assets included in the closing balance December 31, 20171) 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) Shares and participations Derivatives Bonds 131 - 19 –14 1 - 137 - –283 510 129 –133 - - 223 510 - - - - - - - - Shares and participations Derivatives Bonds 12 4 - - - - - 16 4 - - - - - - - - - Shares and participations Derivatives 12 4 - - - - 16 4 - - - - - - - - 15,705 536 18,527 –16,810 –20 58 –348 17,648 536 Bonds 4,734 –554 9,232 –7,667 –20 36 5,761 –554 1) Reported in net income of financial transactions in profit/loss for the year. Total –152 510 148 –147 1 - 360 510 Total 15,717 540 18,527 –16,810 –20 58 –348 17,664 540 Total 4,746 –550 9,232 - 7,667 –20 36 5,777 –550 65 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 Note 19 – Cont. 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) 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 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) Shares and participations Derivatives Bonds 551 19 585 –252 –19 - 30 914 19 –734 –337 –5 793 - - - –283 –337 - - - - - - - - - Shares and participations Derivatives Bonds 109 17 20 –15 - - 131 17 –734 –337 –5 793 - - –283 –337 - - - - - - - - 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 –183 –318 580 541 –19 - 30 631 –318 Total –625 –320 15 778 - - –152 –320 66 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 CASUALTY 67 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 Note 20 – Tangible assets Accumulated acquisition cost Opening balance January 1, 2016 Acquisition Disposals Currency revaluation effect CLOSING BALANCE DECEMBER 31, 2016 Opening balance January 1, 2017 Acquired balances Acquisition Disposals Currency revaluation effect CLOSING BALANCE DECEMBER 31, 2017 Accumulated depreciation Opening balance January 1, 2016 Depreciation for the year Disposals Currency revaluation effect CLOSING BALANCE DECEMBER 31, 2016 Opening balance January 1, 2017 Acquired balances Depreciation for the year Disposals Currency revaluation effect CLOSING BALANCE DECEMBER 31, 2017 Carrying amount Per January 1, 2016 PER DECEMBER 31, 2016 Per January 1, 2017 PER DECEMBER 31, 2017 Group Equipment Parent Company Equipment 257 27 –75 3 212 212 26 35 –10 –9 255 –159 –31 74 –2 –118 –118 –20 –40 8 6 –164 98 94 94 91 186 25 –47 - 164 164 - 12 –10 - 166 –109 –26 46 - –89 –89 - –27 8 - –108 77 75 75 58 2016 322 0 397 –301 13 431 Note 21 – Deferred acquisition costs Opening balance January 1 Acquired/sold portfolio Capitalization for the year Depreciation/amortization for the year Currency revaluation effect CLOSING BALANCE DECEMBER 31 GROUP PARENT COMPANY 2017 645 –16 461 –535 –39 516 2016 628 0 965 –991 43 645 2017 431 0 327 –325 –30 403 68 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 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 CLOSING BALANCE DECEMBER 31 TOTAL 2017 2016 34 –4 –4 26 10,690 10,690 10,716 Note 23 – Provisions for unearned premiums and unexpired risks PROVISIONS FOR UNEARNED PREMIUMS 2017 GROUP Gross Reinsurers’ share Opening balance Acquired/sold portfolio Change in provision Currency revaluation effect CLOSING BALANCE 3,522 –31 391 –234 3,648 –1,263 0 –431 93 –1,601 PROVISIONS FOR UNEXPIRED RISKS 2017 GROUP Gross Reinsurers’ share Opening balance Change in provision Currency revaluation effect CLOSING BALANCE 79 –1 –8 70 –59 1 6 –52 PROVISIONS FOR UNEARNED PREMIUMS 2017 PARENT COMPANY Gross Reinsurers’ share Opening balance Change in provision Currency revaluation effect CLOSING BALANCE 2,522 418 –224 2,716 –1,067 –245 127 –1,185 PROVISIONS FOR UNEXPIRED RISKS 2017 PARENT COMPANY Gross Reinsurers’ share Opening balance Change in provision Currency revaluation effect CLOSING BALANCE 80 –1 –8 71 –58 1 6 –51 Net 2,259 –31 –40 –141 2,047 Net 20 0 –1 19 Net 1,455 173 –97 1,531 Net 22 0 –2 20 2016 Gross Reinsurers’ share 2,795 185 289 253 3,522 –674 –185 –305 –99 –1,263 2016 Gross Reinsurers’ share 84 –11 6 79 –62 8 –5 –59 2016 Gross Reinsurers’ share 1,718 676 128 2,522 –640 –349 –78 –1,067 2016 Gross Reinsurers’ share 84 –11 7 80 –62 8 –4 –58 29 –4 9 34 10,690 10,690 10,724 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 69 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 Note 24 – Claims reserve GROUP Opening balance, reported claims Opening balance, incurred but not reported claims (IBNR) OPENING BALANCE Sold 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) 2017 Reinsurers’ share –1,775 –1,002 –2,777 0 –2,098 –846 0 –1,958 –80 –3,843 –2,273 –1,570 2017 Reinsurers’ share –1,181 –339 –1,520 –1,725 –255 0 –1,304 45 –2,151 –1,492 –659 Gross 8,191 5,792 13,983 –267 4,632 2,943 188 6,409 –480 14,214 8,249 5,965 Gross 4,375 1,406 5,781 3,402 1,585 118 3,086 –194 7,370 4,904 2,466 Net 6,416 4,790 11,206 –267 2,534 2,097 188 4,451 –560 10,371 5,976 4,395 Net 3,194 1,067 4,261 1,677 1,330 118 1,782 –149 5,219 3,412 1,807 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 Note 25 – Equalization provision Note 26 – Claims handling provision GROUP Opening balance January 1 Provision of the year CLOSING BALANCE DECEMBER 31 PARENT COMPANY Opening balance January 1 Provision of the year CLOSING BALANCE DECEMBER 31 2017 2016 - - - - - - 2017 2016 44 –15 29 89 –45 44 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 2017 2016 2017 2016 289 0 –83 76 3 285 295 8 -87 76 9 301 141 0 –49 45 2 139 150 0 -48 37 2 141 70 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 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 2017 129 132 –3 14 11 2016 135 105 –30 30 30 PARENT COMPANY 2017 2016 - - - 14 14 - - - 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 January 1, 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) 2017 7 3 –3 7 68 75 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 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 2017 135 6 3 4 –5 –1 1 143 2016 8 3 –3 8 64 72 2016 121 8 3 8 –5 –2 2 135 71 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 Note 27 – Cont. CHANGES IN PLAN ASSETS GROUP Opening balance plan assets at fair value Adjustment of previous years assets in Skandia 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 2017 105 18 3 8 1 –3 0 132 2016 94 - 2 9 2 –2 0 105 The plan assets’ fair value, as per December 31, 2017, 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, 2017 a net obligation of MSEK 11 (30). This is mainly due to the Group having administrator for the period up to 65 years of age. During the year, 2 (0) 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 Adjustment of previous years assets in Skandia 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 2017 11 –18 3 –1 1 –4 2017 2.2% 1.0% 2.8% 1.7% 2.0% 3.0% 2016 4 - 8 –2 1 11 2016 2.2 % 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 19 years (16 years). 72 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 Note 28 – Other creditors Amounts due to group companies1) Other creditors TOTAL2) GROUP PARENT COMPANY 2017 524 717 1,241 2016 1 253 254 2017 780 126 906 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 2017 7,196 1,417 8,613 2016 8,387 752 9,139 2017 5,246 1,386 6,632 2016 36 143 179 2016 5,480 624 6,104 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 6,632. 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 2017 3,799 616 4,415 2016 3,882 824 4,706 PARENT COMPANY 2017 3,799 2 3,801 2016 3,882 7 3,889 73 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 Note 30 – Associated parties SUMMARY OF TRANSACTIONS WITH ASSOCIATED COMPANIES WITHIN THE CHINA MINSHENG GROUP GROUP 2017 Sirius Bermuda Insurance Company Ltd- ceded reinsurance Sirius Bermuda Insurance Company Ltd – assumed reinsurance Alstead Reinsurance Ltd. – assumed reinsurance Sirius Bermuda Insurance Company Ltd – financial services Fund American Holdings AB – dividend White Schoals Re Ltd. – administrative services Sirius International Insurance Group, Ltd. – administrative services International Medical Group – financial services Sirius International Holdings Ltd – administrative services Other associated companies – within CMI- group Premium income, net Indemnifications, net Purchased/ sold services Receivables Liabilities 525 –1,075 –2 - - - - - - - –669 1,201 2 - - - - - - - - - - –57 –905 2 39 25 –9 - 144 - - 24 - - 8 532 - 1 709 - 311 4 0 745 - - - - - 1,060 TOTAL –552 534 –905 PARENT COMPANY 2017 Sirius Bermuda Insurance Company Ltd – ceded reinsurance Sirius Bermuda Insurance Company Ltd – assumed reinsurance Sirius America Insurance Company – ceded reinsurance Star Re Ltd. – assumed reinsurance Syndicate 1945 – ceded reinsurance Fund American Holdings AB – dividend Sirius International Holding (NL) B.V. – writedown shares Sirius Rückversicherungs Service GmbH – intra group payable Sirius International Insurance Group Ltd – administrative services S.I. Holdings (Luxembourg) S.à r.l. – dividends/receivable International Medical Group – financial services Syndicate 1945 – intra group receivable Sirius Global Services LLC – administrative services Sirius International Holdings Ltd. – administrative services Sirius International Managing Agency Ltd. - administrative services Sirius Capital Markets Inc – administrative services Sirius International Corporate Member Ltd. – intra group receivable Sirius Investment Advisors LLC – asset management services Sirius Bermuda Insurance Company Ltd – financial services Other associated companies TOTAL Premium income, net Indemnifications, net Purchased/ sold services Receivables Liabilities 525 –1,075 743 –109 7 - - - - - - - - - - - - - - - –669 1,201 –950 - –21 - - - - - - - - - - - - - - - 91 –439 - - - - - –905 –139 –30 –4 110 25 107 19 –9 2 –4 - –2 –135 - –965 144 - 587 - - - - - - 114 532 223 5 - 12 - 524 - 22 - - 311 - - 2 745 - 35 - - - - 2 - - 5 - 1 - 1 2,163 1,102 74 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 Note 30 – Cont. 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 insurance and dividends White Mountains Advisors LLC – Asset management services Other associated companies – within the WTM group Other associated companies – within the CMI group Premium income, net Indemnifications, net Purchased/ sold services Receivables Liabilities –326 1 –2 - - - - - - - - 205 - 1 - - - - - - - - - - - - - - –779 138 - 4 27 13 –10 4 - –741 - - 3 - - - 5 243 - 1 - 7 - - - - - 8 TOTAL –327 206 146 259 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. – dividend Fund American Holdings AB – group contribution Sirius International Holding (NL) B.V. – dividend Sirius International Holding (NL) B.V. – writedown shares Sirius Rückversicherungs Service GmbH – intra group payable Sirius Rückversicherungs Service GmbH – dividend Sirius Belgium Réassurances S.A. – intra group payable Star Re Ltd – intra group payable S.I. Holdings (Luxembourg) S.à r.l. – dividend/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. – dividend Sirius International Corporate Member Ltd – intra group receivable White Mountains Advisors LLC – assets 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 - 1 950 –5 120 –43 –8 1 - - –4 –783 2 2 - - 1,032 4 - 4 - 16 - - - - - - - - 264 - 119 - - 7 - 20 - 20 - 1 243 - - - - - - - 4 7 - - 29 - - - - - - 2 - - - - - - - 1 –77 –102 2,838 1,487 286 75 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 Note 31 – Average number of employees, salaries and other remunerations AVERAGE NUMBER OF EMPLOYEES 2017 Women Total 2016 Women Total GROUP Parent Company Germany USA Canada TOTAL PARENT COMPANY Sweden UK Belgium Switzerland Shanghai Singapore Bermuda Total Men 148 5 93 6 252 147 9 119 2 277 2017 Men Women 73 37 26 6 1 5 - 75 30 23 5 - 14 - 295 14 212 8 529 Total 148 67 49 11 1 19 - 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 10 308 14 118 8 448 Total 147 65 49 10 - 18 19 148 147 295 156 152 308 SENIOR MANAGEMENT GROUP AND PARENT COMPANY Men Women Total Men Women Total 2017 2016 Board and CEO Other senior members of management TOTAL REMUNERATIONS TO EMPLOYEES Salaries including bonuses Of which expensed 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 4 1 5 1 - 1 GROUP PARENT COMPANY 2017 618 96 66 60 8 89 774 2016 832 386 67 64 7 123 1,022 2017 280 36 55 55 - 75 410 5 1 6 2016 493 230 60 60 - 112 665 76 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 Note 31 – Cont. OF WHICH PAID REMUNERATIONS FOR THE YEAR TO: GROUP 2017 2016 2017 2016 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 28 24 1 1 - 29 22 22 - - - 22 33 26 3 3 - 36 27 23 1 1 - 28 33 33 - - - 33 36 30 3 3 - 39 28 24 1 1 - 29 22 22 - - - 22 33 26 3 3 - 36 27 23 1 1 - 28 33 33 - - - 33 36 30 3 3 - 39 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 2016 and 2017. Note 32 – Fees and reimbursements to auditors PwC Audit assignment Other audit services Tax counseling1) Other services1) TOTAL GROUP 2017 14 2 2 20 38 2016 2017 2016 PARENT COMPANY 13 2 1 - 16 5 1 - 1 7 4 1 - - 5 1) PwC Sweden have invoiced MSEK 0 (0) for tax counseling and MSEK 1 (0) for other services to swedish companies. observations made during such an examination or the implementation of such oth- Audit assignment refers to the examination of the annual report and accounting er duties. Other services than those included in the audit agreement are classified records, as well as the administration of the Board of Directors and Managing as audit services in addition to audit agreement, tax counseling and other services. Director, other duties which are the responsibility of the Company’s auditors to execute and the provision of advisory services or other assistance resulting from 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 2017 65 152 39 256 2016 53 148 55 256 PARENT COMPANY 2017 35 65 24 125 2016 31 82 34 147 77 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 Note 34 – Class analysis PROFIT/LOSS PER INSURANCE CLASS GROUP 2017 Premium income, gross Premium earned, gross Incurred claims, gross Operating expenses, gross Result, ceded reinsurance TECHNICAL RESULT1) PARENT COMPANY 2017 Premium income, gross Premium earned, gross Incurred claims, gross Operating expenses, gross Result, ceded reinsurance Equalization provision TECHNICAL RESULT1) GROUP 2016 Premium income, gross Premium earned, gross Incurred claims, gross Operating expenses, gross Result, ceded reinsurance TECHNICAL RESULT1) PARENT COMPANY 2016 Premium income, gross Premium earned, gross Incurred claims, gross Operating expenses, gross Result, ceded reinsurance Equalization provision TECHNICAL RESULT1) Personal accident and health Marine, aviation and transport Fire and other property damage Miscellaneous Total direct insurance Assumed reinsurance 3,327 2,694 –1,670 –970 –108 –54 27 36 –21 –10 –2 3 267 287 –564 –118 58 –337 255 247 –221 –106 3 –77 3,876 3,264 –2,476 –1,204 –49 –465 7,177 7,399 –5,099 –2,111 –353 –164 Personal accident and health Marine, aviation and transport Fire and other property damage Miscellaneous Total direct insurance Assumed reinsurance 1,254 1,225 –563 –593 –53 - 16 27 36 –21 –10 –2 - 3 48 53 –111 –25 35 - –48 25 26 –9 –15 –4 - –2 1,354 1,340 –704 –643 –24 - –31 7,003 6,600 –4,283 –1,787 –530 15 15 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 Total 11,053 10,663 –7,575 –3,315 –402 –629 Total 8,357 7,940 –4,987 –2,430 –554 15 –16 Total 10,806 10,528 –5,817 –3,360 –996 355 Total 6,795 6,130 –2,685 –1,946 –987 45 557 1) Excludes operating expenses that are not related to the non-life insurance business. 78 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 Note 35 – Appropriation of profits PROPOSED APPROPRIATION OF PROFITS For 2017, the Parent Company recorded income before appropriations and taxes of MSEK 118 (MSEK 3,912). Net income for the year amounted to MSEK 122 (MSEK 3,855) As of December 31, 2017 unrestricted retained earnings in the Group amounted to MSEK 3,306 ( 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 Transfer from restricted reserves Dividends paid, as resolved by the 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 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. 3,988,285 –10,073 17,562 –905,000 122,293 3,213,067 0 3,213,067 3,213,067 79 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 STOCKHOLM, APRIL 20, 2018 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 20, 2018 MORGAN SANDSTRÖM PETER SOTT Authorised Public Accountant Authorised Public Accountant Auditor in charge 80 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 Our Auditors’ Report was submitted on April 20, 2018 MARINE & ENERGY 81 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 Audit report For translation purposes only To the general meeting of the shareholders of Sirius International Försäkringsaktiebolag (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 Försäkringsbolag (publ) for the year 2017. In our opinion, the annual accounts have been prepared in accordance with the Annual Accounts Act for Insurance Com- panies and present fairly, in all material respects, the financial position of the parent company as of 31 December 2017 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 2017 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. We therefore recommend that the general meeting of share- holders adopts the income statement and balance sheet for the parent company and the group. Our opinions in this report on the annual accounts and the consolidated accounts are consistent with the content of the additional report that has been presented to the parent company and the group Audit Committee in accordance with the audit regulation (537/2014) Article 11. BASIS FOR OPINIONS We conducted our audit in accordance with International Stan- dards on Auditing (ISA) and generally accepted auditing stan- dards 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. This includes that, based on the best of our knowledge and belief, no prohibited services referred to in the Audit Regulation (537/2014) Article 5.1 have been provided to the audited company or, where applicable, its parent company or its controlled companies within the EU. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinions. Our audit approach AUDIT SCOPE We designed our audit by determining materiality and assessing the risks of material misstatement in the consolidated financial statements. In particular, we considered where management made subjective judgments; for example, in respect of signif- icant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits, we also addressed the risk of management override of internal controls, including among other matters consideration of whether there was evidence of bias that represented a risk of material misstatement due to fraud. We tailored the scope of our audit in order to perform sufficient work to enable us to provide an opinion on the consolidated financial statements as a whole, taking into account the structure of the Group, the accounting processes and controls, and the industry in which the group operates. MATERIALITY The scope of our audit was influenced by our application of materiality. An audit is designed to obtain reasonable assurance whether the financial statements are free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if individually or in aggregate, they could reasonably be expected to influence the economic deci- sions of users taken on the basis of the financial statements. Based on our professional judgment, we determined certain quantitative thresholds for materiality, including the overall materiality for the financial statements as a whole. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements, both individually and in aggregate on the financial statements as a whole. Key audit matters Key audit matters of the audit are those matters that, in our professional judgment, were of most significance in our audit of the annual accounts and consolidated accounts of the current period. These matters were addressed in the context of our audit of, and in forming our opinion thereon, the annual accounts and consolidated accounts as a whole, but we do not provide a separate opinion on these matters. 82 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 Key audit matter How our audit addressed the Key audit matter VALUATION OF LOSS RESERVES Claims outstanding is a material financial statement line item that is based on calculations and judgment of the future outcome of costs in relation to incurred losses. Factors that are taken into account in these estimates, amongst other consist of run-off time and claim patterns. The Company uses recognised actuarial methodologies and methods to calculate the claims outstanding. The Company’s claims outstanding consist of various products whereby the nature of the products impact the calculation models. Refer to the Annual report Note 1 – Accounting principles (Assessments and estimates in the financial statements), Note 2 – Information on risks and Note 24 – Claims reserve RECOGNITION OF PREMIUM ESTIMATES The Company underwrites various classes of business which have different risk patterns. A significant part of the assumed reinsurance premiums are based on assumptions and judgment of expected premium outcome. The application of appropriate earnings patterns is necessary in order to earn revenue in line with the underlying risk. Refer to the Annual report Note 1 – Accounting principles (Assessments and estimates in the financial statements), Note 2 – Information on risks and Note 3 – Premium income Our audit has included, but not exclusively consisted of: • Assessment of the design and testing of operating effectiveness of key controls in the Company’s applications and processes to calculate claims outstanding. These controls amongst other consist of controls of key data, actuarial calculations, reserving, claims adjustments and accounting. • Sample based testing of underlying data utilised in the actuarial calculations. • Sample based testing of supporting documentation to claim files. • Furthermore, our audit has consisted of assessments of actuarial methods and models. We have challenged and assessed management’s assumptions. In addition, we have performed independent calculations of a sample of products to assess whether the claims outstanding are reasonable. PwC’s internal actuarial specialists have assisted in the audit. Our audit has included, but not exclusively consisted of: • Assessment of the design and testing of operating effectiveness of key controls in the Company’s applications and processes for underwriting and accounting. • On a sample basis, testing the completeness and accuracy of key data utilised in the insurance system. • On a sample basis, verifying the existence and validity of insurance contract terms through external confirmations with brokers and cedents. • Sample based testing of earning patterns. • Sample based back-testing of prior year’s premium estimates to 2017 outcome. • Sample based testing of journal entries posted to revenue accounts to identify unusual or irregular items. This test- ing has partly been performed using computer assisted auditing techniques. 83 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 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 and the Annual Accounts Act for Insurance Companies. 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 intends to liquidate the company, to cease operations, or has no realistic alternative but to do so. The Audit Committee shall, without prejudice to the Board of Director’s responsibilities and tasks in general, among other things oversee the company’s financial reporting process. AUDITOR’S RESPONSIBILITY Our objectives are to obtain reasonable assurance about wheth- er 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 Revisorsinspektionen’s website: www.revisorsinspektionen.se/ revisornsansvar. 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 Försäkringsaktiebolag (publ) for the year 2017 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. 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 fulfil the company’s accounting in accordance with law and handle the management of assets in a reassuring manner. 84 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 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: 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. • 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. 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. A further description of our responsibility for the audit of the administration is available on Revisorsinspektionen’s website: www.revisorsinspektionen.se/revisornsansvar. This description is part of the auditor´s report. PricewaterhouseCoopers AB, 113 97 Stockholm, was appointed as the auditor of Sirius International Försäkringsaktiebolag (publ) by the annual general meeting on 16 May 2017, and has been the Company’s auditor since 16 April 2004. Stockholm, April 20, 2018 PricewaterhouseCoopers AB MORGAN SANDSTRÖM PETER SOTT Authorised Public Accountant Authorised Public Accountant Auditor in charge 85 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 CREDIT & BONDS 86 SIRIUS INTERNATIONAL INSURANCE CORPORATION – ANNUAL REPORT 2017 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. 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. IN 2014 Monica Cramér Manhem became the President & CEO of Sirius International. The Managing Agency was set up. ON APRIL 18, 2016 Sirius International Insurance Group, Ltd. was bought by CM International Holding Pte. Ltd. BY 1978 Sirius had become one of the largest reinsurance companies in Scandinavia with premiums of about $40 million. IN 2017 Sirius International received regulatory approval to open their Representative Office in Shanghai. 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, White Mountains aquired Sirius. IN 2011 ON JULY 1 Sirius International established Lloyd's Syndicate 1945. In the autumn Sirius America (former White Mountains Re America) "became part of the Sirius Group" as a 100% owned subsidiary. 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 talk. Management has no volume targets, avoids legacy problems by maintaining a strong balance sheet, and always sticks to what it knows. Since 2004 Sirius has had an average combined ratio of 86 % and over $1 billion in underwriting profits. This long-term track record is perhaps unparalleled. 87 Production: BrandFactory 2018. Photo: Dan Coleman (p. 2), Unsplash; (cover) (p. 67), Getty Images; (p. 27), (p. 32), (p. 86), iStock; (p.43), (p. 81) 88 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 Sweden Sirius International Insurance Corporation, Shanghai Representative Office Unit 1003, 10/F The Bund Square, 100 South Zhongshan St. Shanghai 200010, China Telephone: +86 21 3335 3280 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