2. Accouting Policies

2.1. Basis of preparation

The Company’s financial statements have been prepared under the historical cost convention as modified by the revaluation of financial investments (including financial derivatives) to fair values and by determination of technical reserves (as defined by the Act on Insurance) and are set up in accordance with the Act No. 563/1991 Coll. on Accounting, the decree No. 502/2002 Coll. Of the Ministry of Finance of the Czech Republic and Czech accounting standards for insurance companies.

The amounts disclosed in the financial statements and notes are rounded to thousands of Czech Crowns (CZK thousand) unless otherwise stated and are not consolidated. The Company does not prepare consolidated financial statements, the information from the Company’s standalone financial statements are included in the consolidated financial statements of newly the name is Generali CEE Holding B.V., Diemerhof 42, Diemen, 1112 XN, the Kingdom of the Netherlands and Assicurazioni Generali S.p.A. with its registered address in Piazza Duce degli Abbruzi 2, 34132, Trieste, Italy.

Explanation Added for Translation into English
These financial statements are presented on the basis of accounting principles and standards generally accepted in the Czech Republic. Certain accounting practices applied by the Company that conform with generally accepted accounting principles and standards in the Czech Republic may not conform with generally accepted accounting principles in other countries.

2.2. Investments

2.2.1. Land and buildings

Land and buildings are classified as investments and are initially recognized at acquisition cost, which includes costs incurred in bringing the assets to their present location and condition. As at the balance sheet date, they are measured at initial cost less cumulative depreciation and permanent or temporary impairment. Buildings are depreciated according to depreciation plan evenly for expected lifetime period, which is 50 years on average. Technical appreciation of rented property is depreciated for 10 years on average. Land is measured at purchase cost adjusted by impairment and is not depreciated.

As at each balance sheet date, the Company assesses whether there is any indication that the land and buildings may be impaired. If any such indication exists, the Company estimates the recoverable amount using an updated expert valuation and adjusts the net book value of the land and buildings. Impairment adjustment is recognized in the income statement (note 2.18.1).

2.2.2. Investments in subsidiaries and associates

This includes investments in equity or debt securities issued by and loans or other amounts due from subsidiaries and associates.

A subsidiary is an enterprise that is controlled by the Company, which means that the Company has the power to govern the financial and operating policies so as to obtain benefits from its activities.

An associate is an enterprise where the Company has significant influence, which is the power to participate in the financial and operating policy decisions, but not control.

The shares in subsidiaries or associates are stated at purchase price adjusted by impairment (note 2.18.2).

As at each balance sheet date, the Company assesses whether there is any indication that the investments may be impaired. If any such indication exists, the Company estimates the recoverable amount using an updated expert valuation and adjusts the fair value of the investments in subsidiaries and associates. Impairment adjustment is recognized in the income statement.

2.2.3. Investments in securities (other than investments in subsidiaries and associates)

The Company uses only observable market data in its models used to determine the fair value of securities. The valuation models reflect current market conditions as at the measurement date which may not be representative of market conditions either before or after the measurement date. As at the balance sheet date, management has reviewed its models to ensure that they appropriately reflect current market conditions, including the relative liquidity of the market and credit spreads.

Shares and other variable yield securities
Shares and other variable yield securities, and other interests include mainly shares, mutual fund units and other securities with variable income not included in investments in subsidiaries and associates. Changes in the fair value of shares and other variable income securities are recognized in the income statement.

Debt securities at fair value through profit or loss
Securities are classified as held-for-trading if they are acquired or incurred principally for the purpose of selling or repurchasing in the near term or if they are part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking. Any debt security that is a financial asset can be designated at fair value through profit or loss at inception except for participation interests that are not publicly traded and the fair value of which cannot be reliably measured and securities issued by the Company.

Premium or discount is amortized to profit or loss since acquisition date to maturity date using EIR method.

Securities at fair value through profit or loss are initially recognized at cost, which includes expenses incurred in connection with their acquisition, and they are subsequently measured at fair value. All related gains and losses and interest income are recognized as income and expenses from investments. Spot purchases and sales are recognized on a settlement date basis. Forward trades are treated as derivatives (note 2.2.5).

2.2.4. Deposits with financial institutions

Deposits placed with financial institutions are measured at their nominal value upon acquisition. As of the year-end, these assets are revalued at fair value. The fair value of short-term deposits placed with financial institutions is the nominal value including accrued interest.

Deposits denominated in foreign currencies are translated into Czech crowns at the ruling exchange rate of the Czech National Bank and any foreign exchange rate difference is included in the revaluation. Revaluation is recognized through the profit and loss account.

2.2.5. Derivatives held for trading

Derivative financial instruments including foreign exchange contracts, interest rate futures, forward rate agreements, currency and interest rate swaps, currency and interest rate options and other derivative financial instruments are initially recognized on balance sheet at cost and are subsequently revelued to their fair value.

Fair values are obtained from quoted market mid prices, discounted cash-flow models and options pricing models using only observable market data as appropriate.

The valuation models reflect current market conditions as at the measurement date which may not be representative of market conditions either before or after the measurement date. As at the balance sheet date, management has reviewed its models to ensure that they appropriately reflect current market conditions, including the relative liquidity of the market and credit spreads.

All derivatives are presented within Other investments.

The derivatives embedded in other financial instruments are treated as separate derivatives when their risks and characteristics are not closely related to those of the host contract and the host contract is not carried at fair value.

Changes in the fair value of derivatives held for trading are included within the revaluation gains/losses on investments in the income statement.

Repo operations
A repo is an agreement to transfer financial assets other than cash to another party in exchange for cash or other consideration and a concurrent obligation to reacquire the financial assets at a future date for an amount equal to the cash or other consideration exchanged plus interest. A reverse repo is an agreement to acquire financial assets other than cash from another party in exchange for cash or other consideration and a concurrent obligation to deliver the financial assets at a future date for an amount equal to the cash or other consideration exchanged plus interest.

Collateral which is a financial asset provided as part of a repo transaction continues to be recognized in the entity’s assets and is presented within the same asset line as before it was used for a repo transaction, applying the same measurement method. In addition, a loan is recognized in liabilities within amounts due to financial institutions for a standard repo, sales of securities with a concurrent agreement to repurchase them, and for securities lending secured by the transfer of cash.

In case of standard reverse repo, purchases of securities with a concurrent agreement to resell them, and for securities borrowing secured by the transfer of cash, loan is recognized in assets within financial investments – other loans and borrowings. Collateral which is a financial asset received as part of a reverse repo transaction is measured at fair value at the balance sheet date and disclosed in note 4.4.4.

2.3. Unit-linked investments, where investment risk is borne by policyholder

Investments, where investment risk is borne by policyholders, determine the corresponding value of unit-linked technical reserves. The value of investments is determined by the fair value of the underlying assets in accordance with the insurance contracts (note 2.7.6). Changes in the fair value are recognized in the income statement.

2.4. Debtors

The insurance premium receivable and other receivables are recorded at their nominal value adjusted by allowances to overdue receivables.

The creation/release of allowances to overdue receivables relating to the insurance business is recorded within Other technical expenses/income. Gross written premium is not affected by the creation/release of such allowances, nor in the event receivables are written off.

The creation/release of allowances against overdue receivables not directly relating to the insurance business is recorded within Other expenses/income.

2.5. Tangible and intangible fixed assets

Tangible and intangible fixed assets other than land and buildings are initially recorded at cost, which includes costs incurred in bringing the assets to their present location and condition, less depreciation and amortization in case of depreciable tangible and amortizable intangible fixed assets, respectively.

Fixed assets other than land and buildings are depreciated/amortized by applying the straight-line basis over their estimated useful lives. Tangible fixed assets with a unit cost up to CZK 40,000 and Long-term intangible fixed assets with a unit cost less than CZK 60,000 are expensed upon purchase and are not depreciated.

Tangible and intangible fixed assets are depreciated over their useful life in years as follows:

Where the carrying amount of a tangible or intangible fixed asset exceeds its estimated recoverable amount, an allowance is created.

Repairs and maintenance expenditures are charged to expense as incurred. Improvement expenditures exceeding CZK 40,000 per item incurred within a one-year period are capitalized.

2.6. Foreign currencies

Transactions denominated in a foreign currency are translated and recorded at the rate of exchange ruling as at the transaction date.

Financial assets and liabilities denominated in foreign currencies are translated to Czech Crowns at the exchange rate published by the Czech National Bank (“CNB”) effective as at the balance sheet date.

With the exception of foreign exchange differences related to assets and liabilities stated at their fair values or equity value as at the balance sheet date, all other realized and unrealized foreign exchange gains and losses are recognized in the income statement.

Foreign exchange differences related to assets and liabilities stated at their fair values or equity value as at the balance sheet date are included in fair values and are therefore not recognized separately.

2.7. Technical reserves

The technical reserve accounts comprise amounts of assumed obligations resulting from insurance contracts in force with the aim of providing coverage for obligations resulting from those insurance contracts. Technical reserves are determined in compliance with the Czech legislation for insurance companies and as described below.

Liability adequacy test is calculated in line with methodology and the expert recommendations of the Czech Actuary Society.
For discounting purposes, an interest rate curve is used according to the actual recommendations of the Czech Actuary Society.

2.7.1. Unearned premium reserve

The provision for unearned premiums is created as the aggregate sum of the premiums written that relate to future accounting periods. It is determined as the sum of the provisions calculated according to individual insurance policies using the ‘pro rata temporis’ method.

2.7.2. Life insurance reserve

The size of the life insurance premium provision is the aggregate sum of the provisions calculated for the individual life assurance policies. The life assurance premium provision represents the amount of the Company’s future liabilities calculated by actuarial methods, including the profit shares already allocated and credited and provisions for expenses related to the administration of policies, after deducting the value of future premium. Statistical data and interest rates used in the calculation are the same as those used to calculate the premium rate.

As a result of using the ‘zillmerising’ method, the acquisition costs related to life assurance policies are deferred. These costs are calculated by actuarial methods and included in the life assurance provision. The provision is adjusted for temporarily negative balances, which are capitalized and posted as deferred costs. As for this capitalization, the Company observes the principle of prudence and provides for the risk of premature termination of the insurance policy.

2.7.3. Reserve for claims

The amount of RBNS reserve aggregates the claims received. The residual value of IBNR reserve is an estimate using insurance-mathematical and statistical methods. A reserve is also established for all expected expenses connected with the settlement of claims.

Litigated claims are included in the RBNS reserve in the full litigated amount, including related accrued interest and other fees. The claimed amount may be limited by the insurance amount stated in the insurance contract.

2.7.4. Reserve for bonuses and discounts

A reserve for bonuses and discounts for life and non-life insurance is created in accordance with the term of insurance contracts and it is used to cover bonuses and discounts concluded in the insurance contracts.

2.7.5. Premium deficiency reserve

This reserve is created to cover deficiencies between current or expected income from the assets of the Company and guaranteed return (technical interest rate) on insurance liabilities. The need to create a reserve is being monitored annually; however, in recent times there has been no need to create a reserve. Premium deficiency reserve is included in C.2. Life insurance reserve.

2.7.6. Unit-linked reserve where investment risk is borne by policyholders

The reserve created for investment life insurance is determined as the sum of liabilities towards the insured in the amount of their shares in unit-link following from individual life contracts, based on conditions included with insurance contracts (note 2.3).

2.7.7. Reserve for liabilities of Czech Bureau of Insurer

This reserve represents an additional motor third party liability (“MTPL”) provision created by the Company to cover a proportion of the liabilities of the Czech Bureau of Insurers (“the Bureau”) that is used especially to cover deficiency of assets to cover the liabilities of the Bureau and for contributions to the guarantee fund of the Bureau. The reserve is created based on information known as at the balance sheet date. The provision changes proportionally based upon the Company’s share of the MTPL market and further based on the estimated deficit of the Bureau. This reserve in included in note C.6 Other technical reserves.

2.8. Other provisions

The Company recognizes provisions relating to probable future obligations or expenditures, when the purpose of the obligations or expenditures is known but the precise amount, or the time when the obligation or expenditure will crystallize, is not known. However, provisions are not created for future operating expenditures or for expenditures directly related to future revenue transactions.

2.9. Deferred taxation

Deferred tax is recognized on all temporary differences between the carrying amount of an asset or liability in the balance sheet and its tax base using the liability method.

A deferred tax asset is recognized to the extent that it is probable that future taxable profit will be available against which this asset can be utilized. A deferred tax asset is adjusted in case it is not likely to be realized in the future.

The approved tax rate for the period in which the Company expects to utilize the asset is used for the deferred taxation calculation.

Deferred tax resulting from valuation differences recorded in equity is also taken to equity.

2.10. Allocation of technical and non-technical expenses and revenues

Expenses incurred and revenues generated are shown separately, depending on whether or not they directly relate to the insurance business.

All expenses and revenues directly relating to the insurance business are reflected in the technical account. The non-technical account comprises all other expenses and revenues. The allocation of indirect expenses to administration overheads or other technical expenses is based on an internal allocation scheme.

2.11. Deferred acquisition costs related to insurance contracts

Acquisition costs include all direct and indirect costs arising from the conclusion of insurance contracts or the renewal of existing policies. They also include costs incurred during the financial year in respect of policies that are expected to yield revenues in subsequent periods.

Non-life insurance acquisition costs are recorded as assets and are deferred in the same ratio as written premium. The commissions to intermediaries and other variable costs relating directly to the concluding of insurance contracts are deferred.

The Company regularly assesses the potential decrease in the fair value of deferred acquisition costs. Where the carrying amount of deferred acquisition costs is greater than the estimated recoverable amount, the carrying value is adjusted to the recoverable amount through the income statement.

Acquisition costs for life insurance policies are spread via the zillmerisation of life premium reserves. Any resulting temporary negative balance of the reserve for an individual policy is not netted from the reserve but, to the extent that it is recoverable, is recognized within deferred acquisition costs.

Acquisition costs for risk life insurance policies like Benefit are deferred linearly for two years.

Acquisition costs for unit-linked insurance contracts are not deferred.

2.12. Gross written premium

Gross written premium includes all amounts due during the accounting period as defined by an insurance contract, irrespective of whether these amounts refer entirely or partially to a future accounting period and whether or not the insurance contract relates to the transference of significant insurance risk from the policyholder to the Company by the Company’s agreeing to compensate the policyholder if a specified uncertain future event adversely affects the policyholder. Gross written premium includes also admission fees and similar fees.

2.13. Claims expenses

Gross claims expenses are recognized when an insured loss occurs and after the claim settlement amount is assessed. These costs also include the Company’s costs related to handling claims arising from insured events. Gross claims expenses are reduced by recourse claims and other claims of the Company.

2.14. Staff costs, pensions and social fund

Staff costs are included in Administrative expense and they also include board emoluments.

The Company makes contributions on behalf of its employees to a defined contribution pension plan and capital life insurance scheme. Contributions paid by the Company are accounted for directly as an expense.

Regular contributions are made to the State to fund the national pension plan.

2.15. Inwards and outwards reinsurance

Inwards reinsurance
Inwards reinsurance contracts are treated the same way as insurance contracts.

Outwards reinsurance
Reinsurance assets resulting from the portion of the carrying value of technical reserves covered by existing reinsurance contracts are netted from the gross value of the technical reserves.

Receivables from and payables due to reinsurers are measured at cost and are translated at the relevant foreign exchange rate stated by the Czech National Bank as at the balance sheet date.

Changes in reinsurance assets, reinsurers’ share in claims, reinsurance commissions and premiums ceded to reinsurers are presented separately on the face of the income statement along with the corresponding gross amounts. Reinsurance commissions are deferred in the same way as premiums ceded to reinsurers.

The Company regularly assesses its reinsurance assets representing the reinsurers’ share of technical reserves and reinsurance receivables for impairment. Where the carrying amount of such assets is greater than the estimated recoverable amount, the carrying value is adjusted to the recoverable amount through the income statement.

2.16. Related perties transactions

The company is a subsidiary of ultimate controlling person Assicurazioni Generali S.p.A. and its subsidiaries and associates.

The Company’s related parties are considered to be the members of the Company’s or parent company’s statutory and supervisory bodies and management and parties close to such members, including entities in which they have a controlling or significant influence.

Material transactions, outstanding balances and pricing policies with related parties are disclosed in note 5.

2.17. Subsequent events

The effects of events, which occurred between the balance sheet date and the date of preparation of the financial statements, are reflected in the financial statements in the case that these events provide further evidence of conditions, which existed as at the balance sheet date.

If material events reflecting the facts occurring after the balance sheet date happened between the balance sheet date and the date of the financial statements preparation the consequences of these events are disclosed in the notes to the financial statements but not recognized in the financial statements.

2.18. Method change as a result of the Amendment to Act No. 563/1991 Coll. on Accounting and to Decree No. 502/2002 Coll. implementing certain provisions of the Act on Accounting, as amended

2.18.1. Change of measurement method applicable to fixed assets (land and buildings)

Pursuant to Decree No. 502/2002, effective 1 January 2016, fixed assets are measured at cost less accumulated amortization and depreciation and less impairment losses. However, until 31 December 2015, fixed assets were measured at fair value, with changes in the fair value recognized in equity (net of tax effect) and transferred to profit or loss as at the date of disposal of land and buildings.

Taking into consideration the data available and cost efficiency, net depreciated cost was used for opening balances of buildings since 1 January 2014, i.e. the net carrying amounts the property would have had this method been applied since its acquisition. The differences between the fair value and depreciated cost were recognized in retained earnings. Fair value remeasurements, originally recognized in equity, were also transferred to retained earnings.

2.18.2. Change of measurement method applicable to shares in undertakings

Pursuant to Decree No. 502/2002, effective 1 January 2016, shares in undertakings are measured at cost less impairment losses, if any. However, until 31 December 2015, shares in undertakings were measured at fair value. If the undertaking’s shares were publicly traded, the investment was stated at the market value; if the shares were not publicly traded, the fair value was based on the equity method as at the balance sheet date. Foundation’s equity was adjusted for purposely tied funds received by the foundation. The difference between the fair value or the equity value and original cost was recognized in equity.

Cost was used for opening balances since 1 January 2014. The differences between the fair value and cost were recognized in retained earnings. Fair value remeasurements, originally recognized in equity, were also transferred to retained earnings.

2.18.3. Impact of method change on income statement

Impact of method change on the statement of financial position:

Impact of method change on income statement*:

* Change in valuation method of associates and subsidiaries had no impact on income statement.