VSK Group International Financial Reporting Standards …€¦ · · 2018-05-226 4. Summary of Significant Accounting Policies ... Acquisition of insurance portfolio 563 920 - Income

VSK Group International Financial Reporting Standards Consolidated Financial Statements and Independent Auditor’s Report 31 December 2017 Moscow

CONTENTS Independent Auditor’s Report Consolidated Statement of Financial Position ................................................................................................................. 1 Consolidated Statement of Profit or Loss and Other Comprehensive Income ................................................................. 2 Consolidated Statement of Changes in Equity ................................................................................................................. 3 Consolidated Statement of Cash Flows ........................................................................................................................... 4 Notes to the Consolidated Financial Statements 1. Introduction .......................................................................................................................................................... 5 2. Principal Activity .................................................................................................................................................. 5 3. Operating Environment of the Group ................................................................................................................... 6 4. Summary of Significant Accounting Policies ....................................................................................................... 6 5. Application of Estimates, Assumptions and Judgements ................................................................................... 25 6. Cash and Cash Equivalents ................................................................................................................................. 27 7. Financial Assets .................................................................................................................................................. 28 8. Receivables Arising from Insurance Operations ................................................................................................ 31 9. Prepayments and Other Assets ........................................................................................................................... 32 10. Deferred Acquisition Costs ................................................................................................................................ 32 11. Premises, Equipment and Intangible Assets ....................................................................................................... 33 12. Investment Properties ......................................................................................................................................... 34 13. Equity ................................................................................................................................................................. 34 14. Liabilities Relating to Insurance Contracts ......................................................................................................... 34 15. Segment Analysis ............................................................................................................................................... 40 16. Deferred Tax Assets and Liabilities ................................................................................................................... 46 17. Payables Arising from Insurance Operations ..................................................................................................... 48 18. Debt Securities in Issue ...................................................................................................................................... 48 19. Other Payables and Other Liabilities .................................................................................................................. 48 20. Interest, Dividend and Other Income from Investment Activities ...................................................................... 49 21. Other Operating Income ..................................................................................................................................... 49 22. Acquisition Costs, Net of Reinsurance and Operating Expenses ....................................................................... 50 23. Other Operating Expenses .................................................................................................................................. 50 24. Income Taxes...................................................................................................................................................... 51 25. Risk Management ............................................................................................................................................... 51 26. Management of Capital ...................................................................................................................................... 59 27. Fair Value of Assets and Financial Instruments Valuation Categories ............................................................... 59 28. Contingencies and Commitments ....................................................................................................................... 63 29. Shareholders and Related Party Disclosures ...................................................................................................... 64 30. Subsidiaries and Business Combinations ........................................................................................................... 65 31. Goodwill ............................................................................................................................................................. 67

VSK Group 2 Consolidated Statement of Profit or Loss and Other Comprehensive Income In thousands of Russian Roubles, unless stated otherwise

The notes set out on pages 5 to 68 form an integral part of these consolidated financial statements

Notes

12 months ended 31 December 2017


Insurance activities

Gross premiums written 14.1 73 804 997 53 258 947 Premiums ceded 14.1 (2 274 778) (1 907 195) Premiums, net of reinsurance 14.1 71 530 219 51 351 752 Change in unearned premium provision, gross (5 721 231) (1 487 948) Change in reinsurers’ share of unearned premium provision 391 152 (18 243) Change in unearned premium provision, net of reinsurance

(5 330 079) (1 506 191)

Premiums earned, gross 14.1 68 083 766 51 770 999 Reinsurers’ share of premiums earned 14.1 (1 883 626) (1 925 438) Premiums earned, net of reinsurance 14.1 66 200 140 49 845 561 Claims paid 14.2 (30 343 282) (26 092 721) Claims handling expenses 14.2 (2 860 646) (2 295 275) Reimbursements from subrogation and recourse claims 1 752 570 1 698 789 Insurance claims and related expenses, gross (31 451 358) (26 689 207) Reinsurers’ share in claims paid 14.2 758 920 187 581 Reinsurers’ share in claims handling expenses 14.2 9 177 3 917 Reinsurers’ share in claims paid and related expenses

768 097 191 498

Change in insurance loss provisions, gross 14.2 966 692 (296 738) Change in reinsurers’ share of insurance loss provisions 14.2 (153 492) (599 313) Change in life insurance provisions, gross 14.3 (6 155 049) - Change in reinsurers’ share of life insurance provisions 14.3 3 066 - Insurance claims incurred, net of reinsurance

(36 022 044) (27 393 760)

Acquisition costs, gross 22 (18 292 961) (13 727 685) Reinsurers’ share of acquisition costs 22 122 684 113 676 Administrative expenses 22 (6 839 014) (5 938 316) Change in provision for impairment of receivables on insurance and reinsurance operations 8 (617 465) (18 950) Result from insurance operations 4 551 340 2 880 526 Investment activities

Interest, dividend and other income from investing activities 20 4 385 043 3 689 970 Gains less losses from investments available-for-sale

280 747 457 734

Losses less gains from investments at fair value through profit or loss (85 490) - Interest expenses on debt securities in issue (323 058) - Change in provision for impairment of loans, other receivables, including deposits with banks 7.1 (518 471) 3 424 Other loss from investing activities (42 740) (83 203) Result from investing activities 3 696 031 4 067 925 Other operating activities

Other operating income 21 139 644 51 826 Other operating expenses 23 (505 026) (2 007 955) Result from other operating activities (365 382) (1 956 129) Profit before tax

7 881 989 4 992 322

Income tax expense 24 (1 876 870) (1 205 470) Net profit for the year 6 005 119 3 786 852 Other comprehensive income (loss)

Items that may be reclassified subsequently to profit or loss Available-for-sale investments: - Gains less losses arising during the year 60 543 710 541 - Gains less losses/ (losses less gains) reclassified to profit or loss upon disposal or impairment 280 747 (457 734) Income tax recorded directly in other comprehensive income (68 258) (50 561) Items that will not be reclassified to profit or loss Revaluation of premises and equipment 123 216 (149 274) Income tax recorded directly in other comprehensive income (24 643) 29 855 Total other comprehensive income for the year

371 605 82 827

Total comprehensive income for the year 6 376 724 3 869 679

VSK Group 3 Consolidated Statement of Changes in Equity In thousands of Russian Roubles, unless stated otherwise


Share capital

Share premium

Reserve fund

Revaluation reserve for premises and equipment

Revaluation reserve for available-for-sale investments

Retained earnings Total

At 1 January 2016 3 903 923 405 000 302 702 735 250 (173 557) 5 861 524 11 034 842 Net profit for the year - - - - - 3 786 852 3 786 852 Other comprehensive income for the year - - - (119 419) 202 246 - 82 827 Total comprehensive income for the year - - - (119 419) 202 246 3 786 852 3 869 679 Transfer of depreciation of revaluation of premises and equipment (less tax effect) - - - (5 300) - 5 300 - Increase in provisions, booked according to the charter - - 157 500 - - (157 500) - At 31 December 2016 3 903 923 405 000 460 202 610 531 28 689 9 496 176 14 904 521 At 1 January 2017 3 903 923 405 000 460 202 610 531 28 689 9 496 176 14 904 521 Net profit for the year - - - - - 6 005 119 6 005 119 Other comprehensive income for the year - - - 98 573 273 032 371 605 Total comprehensive income for the year - - - 98 573 273 032 6 005 119 6 376 724 Transfer of depreciation of revaluation for premises and equipment (less tax effect) - - - (13 466) - 13 466 - Dividends to Company’s shareholders - - - (1 000 000) (1 000 000) Increase in provisions, booked according to the charter - - 90 000 - - (90 000) - At 31 December 2017 3 903 923 405 000 550 202 695 638 301 721 14 424 761 20 281 245

VSK Group 4 Consolidated Statement of Cash Flows In thousands of Russian Roubles, unless stated otherwise


Notes

12 months ended 31

December 2017

12 months ended 31

December 2016 Cash flows from operating activities Profit before tax 7 881 989 4 992 322 Total profit before tax 7 881 989 4 992 322 Adjustments for reconciliation of profit before tax with net cash flow from operating activities

Change in unearned premium provision, gross 14.1 5 721 231 1 487 948 Change in reinsurer’ share of unearned premium provision 14.1 (391 152) 18 243 Change in insurance loss provisions, gross 14.2 (966 692) 296 738 Change in reinsurers’ share in insurance loss provisions 14.2 153 492 599 313 Change in life insurance provisions 14.3 6 155 049 - Change in reinsurers’ share of life insurance provision 14.3 (3 066) - Change in deferred acquisition costs 21 (2 712 133) (1 041 997) Depreciation 21 456 290 412 884 Result from disposal of premises and equipment - (9 430) Interest income 19 (3 997 496) (3 668 206) Gains/ (losses) from impairment of premises and equipment 22 (3 264) 35 945 Impairment loss on loans, deposits and receivables 1 263 030 72 781 Loss from translation differences 22, 20 246 600 1 748 066

Total adjustments 5 921 889 (47 715) Changes in loans and other receivables, including deposits with banks and excluding promissory notes of other companies

(3 895 279) (1 210 189)

Changes in receivables arising from insurance operations (1 617 993) (459 349) Changes in prepayments and other assets 154 278 (631 265) Changes in payables arising out of insurance operations 602 140 765 600 Changes in other payables and other liabilities 742 169 98 459 Change in operating assets and liabilities (4 014 685) (1 436 744) Interest paid (211 524) - Interest received 4 394 059 3 772 839 Acquisition of insurance portfolio 563 920 - Income tax paid 62 814 (2 308 925) Total net cash flow from operating activities 14 598 462 4 971 777 Cash flows from investing activities Outflow of cash and cash equivalents on business combination 30 (2 962 505) (1 638 332) Inflow of cash on business combination 30 - 451 007 Cash received from disposal of investments available-for-sale 41 469 105 26 990 087 Cash used for acquisition of investments available-for-sale (57 375 494) (30 825 023) Cash used for acquisition of investments at fair value through profit or loss

(675 877) -

Cash received from loans granted 1 387 488 2 088 685 Cash used to issue loans (505 865) (1 065 829) Cash received from disposal of premises and equipment - 22 178 Cash used for acquisition of premises and equipment and intangible assets

(713 622) (575 836)

Total net cash flow from investing activities (19 376 770) (4 553 063) Cash flows from financing activities - Offering of debt securities 18 4 000 000 - Total net cash flow from financing activities 4 000 000 - Effect of exchange rate changes on cash (32 948) (317 507) Net (decrease)/ increase in cash for the year (811 256) 101 207 Cash at the beginning of the year 6 4 493 989 4 392 782 Cash at the end of the year 6 3 682 733 4 493 989

VSK Group 5 Notes to the Consolidated Financial Statements – 31 December 2017 In thousands of Russian Roubles, unless stated otherwise

1. Introduction

These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards for the year ended 31 December 2017 for Insurance Joint Stock Company VSK (hereinafter, the “Company”) and its subsidiaries (together referred to as the “Group”) (hereinafter, the “consolidated financial statements”). The list of consolidated subsidiaries is disclosed in Note 2.

2. Principal Activity

The Company was incorporated on 11 February 1992 and is domiciled in the Russian Federation. The principal activity of the Group is the provision of insurance services. The entities of the Group operate in the insurance market under insurance licenses issued by the Bank of Russia. Insurance business written by the Group includes property insurance, aviation transport insurance, motor insurance (including obligatory third party liability insurance for the owners of transport vehicles), medical insurance (including obligatory), accident insurance, personal insurance, life insurance, liability insurance (including obligatory insurance of the liability of owners of hazardous production facilities), obligatory insurance of third party liability of carriers to passengers, and reinsurance.

The Group operates in the Russian Federation. At 31 December 2017, the Company has 89 branches and more than 300 representative offices (31 December 2016: the same).

The Company’s Head Office is registered and located at Ostrovnaya st., 4, Moscow, Russian Federation. The average number of the Group’s employees was 5 979 for 2017 (2016: 5 378 employees).

At 31 December 2017 and 31 December 2016 the Company’s shareholders are represented by the following legal entities and individuals:

Shareholder

Percentage of ownership, %

PAO SAFMAR Financial Investments (former “PAO Europlan”) 49.00% AO Azbuka Profit 24.66% AO Strakhovoy Sindicat 21.92% S.A. Tsykaluk 4.42% Total

100.00%

At 31 December 2017, SAFMAR Financial Investments (former “PAO Europlan”) had 29% shares in free float at the Moscow MICEX-RTS Stock Exchange; 71% of shares were owned by SAFMAR Group, a financial and industrial group of companies (31 December 2016: 34.52% and 65.48%, respectively). At 31 December 2017 and 31 December 2016, the ultimate controlling party of the Group is Sergey Alekseyevich Tsikalyuk who owns 100% of shares in AO Azbuka Profit and AO Strakhovoy Sindicat. On 11 April 2017, the Company placed non-convertible interest-bearing bonds through an initial public offering (Note 18).

At 31 December 2017 and 31 December 2016 major consolidated subsidiaries are as follows:

Name Interest at 31.12.2017 Interest at 31.12.2016

Country of registration Principal activity

OOO VSK-Miloserdie 100% 100% Russian Federation OMI OOO BIN strakhovanie 100% 100% Russian Federation Non-life insurance АО Business group SINKHRO 100% 100% Russian Federation Investment activities OOO Insurance company Europlan (Note 30) 100% - Russian Federation Non-life insurance OOO VSK-Linia Zhizni (Note 30) 100% - Russian Federation Life insurance


3. Operating Environment of the Group

The Russian Federation displays certain characteristics of an emerging market. Its economy is particularly sensitive to oil and gas prices. The legal, tax and regulatory frameworks continue to develop and are subject to frequent changes and varying interpretations. The Russian economy was growing in 2017 after overcoming the economic recession of 2015 and 2016. The economy is negatively impacted by low oil prices, ongoing political tension in the region and international sanctions against certain Russian companies and individuals. The financial markets continue to be volatile. This operating environment has a significant impact on the Group’s operations and financial position. Management is taking necessary measures to ensure sustainability of the Group’s operations. However, the future effects of the current economic situation are difficult to predict and management’s current expectations and estimates could differ from actual results.

4. Summary of Significant Accounting Policies

4.1. Basis of preparation

These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) under the historical cost convention, as modified by the initial recognition of financial instruments based on fair value, and by the revaluation of premises and equipment, investment properties, available-for-sale financial assets, and financial instruments categorised at fair value through profit or loss. The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the periods presented, unless otherwise stated. These consolidated financial statements are presented in thousands of Russian Roubles, unless otherwise stated.

The preparation of consolidated financial statements requires certain judgements and estimations from the management of the Group. Critical estimates, and judgements used in preparing these consolidated financial statements are disclosed in Note 5.

The following amended standards became effective for the Group from 1 January 2017, but did not have any material impact on the Group:

• Disclosure Initiative – Amendments to IAS 7 (issued on 29 January 2016 and effective for annual periods beginning on or after 1 January 2017).

• Recognition of Deferred Tax Assets for Unrealised Losses – Amendment to IAS 12 (issued on 19 January 2016 and effective for annual periods beginning on or after 1 January 2017).

• Amendments to IFRS 12, included in Annual Improvements to IFRSs 2014-2016 Cycle (issued on 8 December 2016 and effective for annual periods beginning on or after 1 January 2017).

Certain new standards and interpretations have been issued that are mandatory for the annual periods beginning on or after 1 January 2018 or later, and which the Group has not early adopted.

IFRS 9 “Financial Instruments” (amended in July 2014 and effective for annual periods beginning on or after 1 January 2018). As regards the insurers, IFRS 9 provides for a temporary exemption, which extends the continued application of IFRS 39 “Financial Instruments: Recognition and Measurement” until 1 January 2021.

Key features of the new standard are:

• Financial assets are required to be classified into three measurement categories: those to be measured subsequently at amortised cost, those to be measured subsequently at fair value through other comprehensive income and those to be measured subsequently at fair value through profit or loss.


4. Summary of Significant Accounting Policies (Continued)

4.1. Basis of preparation (continued)

• Classification for debt instruments is driven by the entity’s business model for managing the financial assets and whether the contractual cash flows represent solely payments of principal and interest (SPPI). If a debt instrument is held to collect, it may be carried at amortised cost if it also meets the SPPI requirement. Debt instruments that meet the SPPI requirement that are held in a portfolio where an entity both holds to collect assets’ cash flows and sells assets may be classified as fair value through other comprehensive income. Financial assets that do not contain cash flows that are SPPI must be measured at fair value through profit or loss (for example, derivatives). Embedded derivatives are no longer separated from financial assets but will be included in assessing the SPPI condition.

• Investments in equity instruments are always measured at fair value. However, management can make an irrevocable election to present changes in fair value in other comprehensive income, provided the instrument is not held for trading. If the equity instrument is held for trading, changes in fair value are presented in profit or loss.

• Most of the requirements in IAS 39 for classification and measurement of financial liabilities were carried forward unchanged to IFRS 9. The key change is that an entity will be required to present the effects of changes in own credit risk of financial liabilities designated at fair value through profit or loss in other comprehensive income.

• IFRS 9 introduces a new model for the recognition of impairment losses – the expected credit losses (ECL) model. There is a ‘three stage’ approach which is based on the change in credit quality of financial assets since initial recognition. In practice, the new rules mean that entities will have to record an immediate loss equal to the 12-month ECL on initial recognition of financial assets that are not credit impaired (or lifetime ECL for trade receivables). If there has been a significant increase in credit risk, impairment is measured using lifetime ECL rather than 12-month ECL. The model includes operational simplifications for lease and trade receivables.

• Hedge accounting requirements were amended to align accounting more closely with risk management. The standard provides entities with an accounting policy choice between applying the hedge accounting requirements of IFRS 9 and continuing to apply IAS 39 to all hedges because the standard currently does not address accounting for macro hedging.

The new standard also introduces expanded disclosure requirements and changes in presentation. These are expected to change the nature and extent of the Group’s disclosures about its financial instruments particularly in the year of the adoption of the new standard.

In accordance with the additional explanations and recommendations by the IFRS Committee, the Group decided to apply the extension for the IFRS 9 application until 1 January 2021, as the Group has adopted IFRS 17 “Insurance Contracts”. The Group is currently assessing the impact of the new standard on its consolidated financial statements.




IFRS 15, Revenue from Contracts with Customers (issued on 28 May 2014 and effective for the periods beginning on or after 1 January 2018). The new standard introduces the core principle that revenue must be recognised when the goods or services are transferred to the customer, at the transaction price. Any bundled goods or services that are distinct must be separately recognised, and any discounts or rebates on the contract price must generally be allocated to the separate elements. When the consideration varies for any reason, minimum amounts must be recognised if they are not at significant risk of reversal. Costs incurred to secure contracts with customers have to be capitalised and amortised over the period when the benefits of the contract are consumed. The Group assessed the impact of the new standard on its consolidated financial statements. The amended standards did not have any material impact on the consolidated financial statements.

IFRS 16 "Leases" (issued on 13 January 2016 and effective for annual periods beginning on or after 1 January 2019). The new standard sets out the principles for the recognition, measurement, presentation and disclosure of leases. All leases result in the lessee obtaining the right to use an asset at the start of the lease and, if lease payments are made over time, also obtaining financing. Accordingly, IFRS 16 eliminates the classification of leases as either operating leases or finance leases as is required by IAS 17 and, instead, introduces a single lessee accounting model. Lessees will be required to recognise: (a) assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value; and (b) depreciation of lease assets separately from interest on lease liabilities in the statement of profit and loss. IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17. Accordingly, a lessor continues to classify its leases as operating leases or finance leases, and to account for those two types of leases differently. The Group is currently assessing the impact of the new standard on its consolidated financial statements.

IFRS 17 "Insurance Contracts" (issued on 18 May 2017 and effective for annual periods beginning on or after 1 January 2021). IFRS 17 replaces IFRS 4, which has given companies dispensation to carry on accounting for insurance contracts using existing practices. As a consequence, it was difficult for investors to compare and contrast the financial performance of otherwise similar insurance companies. IFRS 17 is a single principle-based standard to account for all types of insurance contracts, including reinsurance contracts that an insurer holds. The standard requires recognition and measurement of groups of insurance contracts at: (i) a risk-adjusted present value of the future cash flows (the fulfilment cash flows) that incorporates all of the available information about the fulfilment cash flows in a way that is consistent with observable market information; plus (if this value is a liability) or minus (if this value is an asset) (ii) an amount representing the unearned profit in the group of contracts (the contractual service margin). Insurers will be recognising the profit from a group of insurance contracts over the period they provide insurance coverage, and as they are released from risk. If a group of contracts is or becomes loss-making, an entity will be recognising the loss immediately. The Group is currently assessing the impact of the new standard on its consolidated financial statements.

IFRIC 22 “Foreign Currency Transactions and Advance Consideration” (issued on 8 December 2016 and effective for annual periods beginning on or after 1 January 2018). The interpretation addresses how to determine the date of the transaction when IAS 21 is applied to account for foreign currency transactions. The interpretation is applied when an entity pays or receives consideration as prepayment under foreign currency contracts. The interpretation provides that the date of transactions is the date on which an entity initially recognises the non-monetary asset or non-monetary liability arising from the advance consideration. When several transactions are conducted to make or receive an advance consideration, the interpretation requires that an entity should determine the transaction date for each payment or receipt of the advance consideration. The Group is currently assessing the impact of the new standard on its consolidated financial statements.




IFRIC 23 “Uncertainty over Income Tax Treatments” (issued on 7 June 2017 and effective for annual periods beginning on or after 1 January 2019). IAS 12 specifies how to account for current and deferred tax, but not how to reflect the effects of uncertainty. The interpretation clarifies how to apply the recognition and measurement requirements in IAS 12 when there is uncertainty over income tax treatments. An entity should determine whether to consider each uncertain tax treatment separately or together with one or more other uncertain tax treatments based on which approach better predicts the resolution of the uncertainty. An entity should assume that a taxation authority will examine amounts it has a right to examine and have full knowledge of all related information when making those examinations. If an entity concludes it is not probable that the taxation authority will accept an uncertain tax treatment, the effect of uncertainty will be reflected in determining the related taxable profit or loss, tax bases, unused tax losses, unused tax credits or tax rates, by using either the most likely amount or the expected value, depending on which method the entity expects to better predict the resolution of the uncertainty. An entity will reflect the effect of a change in facts and circumstances or of new information that affects the judgements or estimates required by the interpretation as a change in accounting estimate. Examples of changes in facts and circumstances or new information that can result in the reassessment of a judgement or estimate include, but are not limited to, examinations or actions by a taxation authority, changes in rules established by a taxation authority or the expiry of a taxation authority's right to examine or re-examine a tax treatment. The absence of agreement or disagreement by a taxation authority with a tax treatment, in isolation, is unlikely to constitute a change in facts and circumstances or new information that affects the judgements and estimates required by the Interpretation. The Group is currently assessing the impact of the new standard on its consolidated financial statements.

The following other new pronouncements are not expected to have any material impact on the Group when adopted:

• Sale or Contribution of Assets between an Investor and its Associate or Joint Venture – Amendments to IFRS 10 and IAS 28 (issued on 11 September 2014 and effective for annual periods beginning on or after a date to be determined by the IASB).

• Amendments to IFRS 15, Revenue from Contracts with Customers (issued on 12 April 2016 and effective for annual periods beginning on or after 1 January 2018).

• Amendments to IFRS 2, Share-based Payment (issued on 20 June 2016 and effective for annual periods beginning on or after 1 January 2018).

• Amendments to IFRS 4, Insurance Contracts (issued on 12 September 2016 and effective for annual periods beginning on or after 1 January 2018).

• Transfers of Investment Property – Amendments to IAS 40 (issued on 8 December 2016 and effective for annual periods beginning on or after 1 January 2018).

• Annual Improvements to IFRSs 2014-2016 cycle ‒ Amendments to IFRS 1 an IAS 28 (issued on 8 December 2016 and effective for annual periods beginning on or after 1 January 2018).

• Prepayment Features with Negative Compensation – Amendments to IFRS 9 (issued on 12 October 2017 and effective for annual periods beginning on or after 1 January 2019).

• Long-term Interests in Associates and Joint Ventures – Amendments to IAS 28 (issued on 12 October 2017 and effective for annual periods beginning on or after 1 January 2019).

Unless otherwise described above, the new standards and interpretations are not expected to affect significantly the Group’s consolidated financial statements.



4.2. Consolidated Financial Statements

Subsidiaries are those investees that the Group controls because the Group has power to direct relevant activities of the investees that significantly affect their returns, has exposure, or rights, to variable returns from its involvement with the investees, and has the ability to use its power over the investees to affect the amount of investor’s returns. The existence and effect of substantive rights, including substantive potential voting rights, are considered when assessing whether the Group has power over another entity. For a right to be substantive, the holder must have practical ability to exercise that right when decisions about the direction of the relevant activities of the investee need to be made. The Group may have power over an investee even when it holds less than majority of voting power in an investee. In such a case, the Group assesses the size of its voting rights relative to the size and dispersion of holdings of the other vote holders to determine if it has de-facto power over the investee. Protective rights of other investors, such as those that relate to fundamental changes of investee’s activities or apply only in exceptional circumstances, do not prevent the Group from controlling an investee. Subsidiaries are consolidated from the date on which control is transferred to the Group, and are deconsolidated from the date on which control ceases.

The acquisition method of accounting is used to account for the acquisition of subsidiaries other than those acquired from parties under common control. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest.

The Group measures non-controlling interest that represents present ownership interest and entitles the holder to a proportionate share of net assets in the event of liquidation on a transaction by transaction basis, either at: fair value, or the non-controlling interest's proportionate share of net assets of the acquiree. Non-controlling interests that are not present ownership interests are measured at fair value.

Goodwill is measured by deducting the net assets of the acquiree from the aggregate of the consideration transferred for the acquiree, the amount of non-controlling interest in the acquiree and fair value of an interest in the acquiree held immediately before the acquisition date. The amount of goodwill may be updated over 12 months following the acquisition, if assets and liabilities are identified that were not previously determined. On expiration of the above period the recognised carrying amount of goodwill can no longer be revised, unless impaired (Note 4.9).

Any negative amount (“negative goodwill”) is recognised in profit or loss, after management reassesses whether it identified all the assets acquired and all liabilities and contingent liabilities assumed, and reviews appropriateness of their measurement.

The consideration transferred for the acquiree is measured at the fair value of the assets given up, equity instruments issued and liabilities incurred or assumed, including fair value of assets or liabilities from contingent consideration arrangements, but excludes acquisition related costs such as advisory, legal, valuation and similar professional services. Transaction costs incurred for issuing equity instruments are deducted from equity; transaction costs incurred for issuing debt are deducted from its carrying amount and all other transaction costs associated with the acquisition are expensed.

Intercompany transactions, balances and unrealised gains on transactions between group companies are eliminated. Unrealised losses are also eliminated unless the cost cannot be recovered. The Company and all of its subsidiaries use uniform accounting policies consistent with the Group’s policies.

When the Group acquires assets or a group of assets that do not represent business, the Group recognises individually identifiable assets and liabilities directly attributable to the assets.

At the date of acquiring assets or a group of assets that do not represent businesses, the Group:

− measures at fair value the identifiable assets and liabilities directly attributable to the assets;

− calculates the difference between the fair value of acquired assets and fair value of acquired liabilities and recognises the operation result as profit or loss within administrative and other operating expenses.



4.3. Foreign currency transactions

(а) Functional and presentation currency

The functional currency of each of the Group’s consolidated entities is the currency of the primary economic environment in which the entity operates. The functional currency of the Company and its subsidiaries, and the Group’s presentation currency, is the national currency of the Russian Federation, Russian Roubles (“RR”).

(б) Transactions and balances

Monetary assets and liabilities are translated into each entity’s functional currency at the official exchange rate of the CBRF at the end of the respective reporting period. Foreign exchange gains and losses resulting from the settlement of transactions and from the translation of monetary assets and liabilities into each entity’s functional currency at year-end official exchange rates of the CBRF, are recognised in profit or loss for the year (as foreign exchange translation gains less losses). Translation at year-end rates does not apply to non-monetary items that are measured at historical cost.

Non-monetary items measured at fair value in a foreign currency, including equity investments, are translated using the exchange rates at the date when the fair value was determined.

Effects of exchange rate changes on non-monetary items measured at fair value in a foreign currency are recorded as part of the fair value gain or loss.

The results and financial position of each Group entity are translated into the presentation currency as follows:

(i) assets and liabilities for each statement of financial position presented are translated at the closing rate at the end of the respective reporting period;

(ii) income and expenses are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions);

(iii) components of equity are translated at the historic exchange rate and any resulting foreign exchange differences are recorded within other comprehensive income.

At 31 December 2017, the principal rate of exchange used for translating foreign currency balances was USD 1 = RR 57,6002 (31 December 2016: USD 1 = RR 60,6569), EUR 1 = RR 68,8668 (31 December 2016: EUR 1 = RR 63,8111).

4.4. Classification of products

Insurance contracts are defined as those contracts that transfer to the Group (the insurer) significant insurance risk of another party (policy holder) through the insurer's agreement to compensate the policy holder if an uncertain future event (insured event) adversely affects the policy holder. Usually, the Group assesses the materiality of insurance risk by comparing cash to be paid upon occurrence and non-occurrence of the insured event.

If a contract is classified as an insurance contract it will remain in this category up to its expiry even if insurance risk considerably decreases during this period.

4.5. Information on insurance products

The Group’s main lines of business are as follows: motor own damage insurance (MOD), aviation transport insurance, property insurance of individuals and legal entities, voluntary medical insurance, personal insurance, life insurance, general third party liability insurance, obligatory motor third party liability insurance (OMTPL), obligatory insurance of third party liability of hazardous production facilities (OGTPL), and also obligatory insurance of third party liability of carriers (OILC).



4.5. Information on insurance products (continued)

Property insurance (including MOD insurance) ensures that the Group’s customers are paid compensation for the damage caused to their property. Customers may also be indemnified for income losses caused by their inability to use an insured property in their economic activities as a result of the occurrence of an insurance event (i.e., business interruption).

Liability insurance contracts, including OMTPL, OGTPL and OILC, protect the Group's customers against the risk of causing harm to third parties as a result of their legitimate activities. Damages covered include contractual events. The typical protection offered is designed for employers who become legally liable to pay compensation to injured employees (employers’ liability) and for individual (individuals and legal entities) who become liable to pay compensation to a third party for bodily harm or property damage (public liability).

Voluntary medical insurance is designed to provide the Group’s customers with medical services. These services are considered as insurance only if the Group is unsure at the inception of the contract on the probability (i.e. providing of medical services), timing of the insured event and amount of loss connected with the occurred insured event.

As part of life insurance, the Group offers insurance products covering key life insurance risks and accident insurance risks and enters into the following types of contracts:

− Annuity contracts without a discretionary participation feature (DPF) (pension contracts);

− Long-term life insurance contracts without a DPF;

− Long-term life insurance contracts with a DPF.

Investment life insurance contracts without a DPF: the contracts include survival risk, risk of death for any reason, and risk of death resulting from an accident. Investment life insurance contracts are signed for a period of 3-5 years, giving the policyholder the discretionary participation features from the insurer’s income within the investment strategy chosen by the policyholder.

The portfolio of contracts other than investment life insurance without a DPF is represented by classical endowment insurance contracts whose insured persons include children of perished military men, and ritual insurance.

Classic endowment insurance primarily includes long-term contracts for the term of 5 to 20 years, with the key risks being the death of the insured person and survival to the end of the insured period, and it also includes additional insurance coverage in case of an accident.

Discretionary participation feature provides to the Group participants the right to distribute between the policyholders a portion of profit arising from excess of the actual return on assets covering insurance reserves over the guaranteed rate of return used to evaluate insurance reserves (1.5% - 5% depending on the type of contract). Profit distribution may be done in different ways: for some contracts it is based on the calendar year results and is fixed up to the date of the following distribution, for other contracts it is done upon contract anniversary.

Irrespective of the manner of profit distribution the portion of profit to be distributed between the policyholders is recognised as a liability within life insurance provisions.

4.6. Premises and equipment

Premises and equipment, except for land and buildings, are stated at historical cost less accumulated depreciation. The historical cost includes the expenses directly attributable to the acquisition of an item of premises and equipment.

Subsequent costs are included in the asset’s carrying amount or are recorded as a separate item of premises and equipment, as appropriate, only when it is probable that future economic benefits associated with the item of premises and equipment will flow to the Group and the amount of expenses can be measured reliably. Carrying amount of the replaced portion of an item of premises and equipment is written off from the statement of financial position. All other repairs and maintenance costs are recorded in profit or loss as costs incurred.



4.6. Premises and Equipment (continued)

Land and buildings are stated at revalued amounts. Revaluations are made with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the end of the reporting period. Increases in the carrying amount arising on revaluation are credited to other comprehensive income and accumulated in equity within revaluation reserve. Decreases that offset previous increases of the same asset are charged against revaluation reserve for premises and equipment in other comprehensive income; all other decreases are charged to profit or loss. The revaluation reserve for premises and equipment included in equity is transferred directly to retained earnings when the surplus is realised, i.e. either on the retirement or disposal of the asset, or as the asset is used by the Group. In the latter case, the amount of the surplus realised is the difference between depreciation based on the revalued carrying amount of the asset and depreciation based on the asset’s original cost.

Land and items not yet in use (construction in progress) are not depreciated. Depreciation on other categories of premises and equipment is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives:

− Premises (50 years);

− Buildings (10 years);

− Motor vehicles (5 years);

− Computer and office equipment (3–5 years);

− Other fixed assets (3-10 years).

The asset’s residual values, useful lives and depreciation methods are reviewed, and adjusted as appropriate, at each financial year-end.

If the carrying amount of an asset is greater than its estimated recoverable amount, it is written down to its recoverable amount (Note 4.9).

Gains and losses on disposal of premises and equipment are determined by comparing proceeds from disposal with their carrying amount and are recognised in other income or other expenses.

4.7. Intangible assets

(а) Licences

Acquired licences are carried at historical cost less accumulated amortisation. Amortisation is calculated using the straight-line method to allocate the cost of licences over their useful lives of 2–5 years.

(б) Software

Acquired computer software licences are capitalised in the amount of the costs incurred to acquire and bring to use the specific software. These costs are amortised over their expected useful lives.

Software development or support costs are expensed when incurred. Development costs that are directly associated with identifiable and unique software products controlled by the Group and that will probably generate economic benefits exceeding costs beyond one year, are recognised as intangible assets (capitalised). These costs include such development costs as staff costs and an appropriate portion of relevant overheads.

Capitalised computer software development costs are amortised over the expected useful life of respective software of 2-10 years.

4.8. Investment properties

Investment property is property held by the Group to earn rental income or for capital appreciation, or both and which is not occupied by the Group. Investment property includes assets under construction for future use as investment property.



4.8. Investment properties (continued)

Investment property is initially recognised at cost, including transaction costs, and subsequently remeasured at fair value updated to reflect market conditions at the end of the reporting period. Fair value of investment property is the price that would be received from sale of the asset in an orderly transaction, without deduction of any transaction costs. Fair value of the Group’s investment property is determined based on reports of independent appraisers, who hold a recognised and relevant professional qualification and who have recent experience in valuation of property of similar location and category.

Earned rental income is recorded in profit or loss for the year within results from investing activities. Gains and losses resulting from changes in the fair value of investment property are recorded in profit or loss for the year.

4.9. Impairment of non-financial assets

The assets that do not have definite useful life are not depreciated and are annually tested for impairment. Depreciation of amortised assets is considered if there is an indication of the possibility of such impairment. An impairment loss is recognised to the extent the carrying amount of an asset under testing exceeds its recoverable amount. The recoverable amount represents the higher of an asset’s fair value less cost to sell and its value in use. For the purposes of testing for impairment, assets are combined into the smallest groups for which there is cash flow independent from other assets or groups of assets (cash-generating units). Impaired non-financial assets (other than goodwill) are annually tested for the purpose of reversal of previously recognised impairment loss in case of change in estimates used to determine the recoverable amount of the asset.

Goodwill is subject to testing for impairment each reporting period, and during the reporting period in the event there are indicators of potential impairment. Indicators of potential impairment of goodwill are as follows:

External sources of information:

− market value of the asset declined significantly greater than would be expected as a result of the passage of time or normal use;

− significant changes have occurred or will occur during the period that have an adverse impact on technological, market, economic or legal environment in which the asset is expected to be used.

− market rates of interest or other rates of return on investment effective in the market have increased during the period, and such increase is most likely to have an impact on the discount rate used to calculate the asset’s value in use, which will result in significant reduction in the asset’s recoverable amount;

− the carrying amount of the reporting company’s net assets exceeds its market capitalisation.

Internal sources of information:

− Significant changes that will have an adverse impact on the business area where the asset is used at present or is expected to be used in the future have occurred during the period or are expected in the nearest future. These changes include the plans to discontinue or restructure the operation to which an asset belongs, plans to dispose of an asset before the previously expected date;

− There is significant evidence that current or future economic benefits of the asset’s use will be lower than expected.

If one or more of the above indicators are identified as well as at the end of each reporting period, the recoverable amount of goodwill needs to be assessed.

If the recoverable amount of goodwill becomes lower than its carrying amount, the asset’s carrying amount is reduced to the level of the recoverable amount. Such impairment represents a loss as a result of goodwill impairment and is recorded as a separate line within profit or loss for the year. The impaired goodwill is not subject to reversal in the subsequent periods.



4.10. Financial instruments

Depending on their classification financial instruments are carried at fair value, cost, or amortised cost, as described below.

Fair value is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The best evidence of fair value is price in an active market. An active market is one in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis.

Fair value of financial instruments traded in an active market is measured as the product of the quoted price for the individual asset or liability and the quantity held by the Group. This is the case even if a market’s normal daily trading volume is not sufficient to absorb the quantity held and placing orders to sell the position in a single transaction might affect the quoted price. The price within the bid-ask spread that is most representative of fair value in the circumstances was used by the Group to measure fair value, which the Group considers is the last trading price on the reporting date.

Valuation techniques such as discounted cash flow models or models based on recent arm’s length transactions or consideration of financial data of the investees, are used to measure fair value of certain financial instruments for which external market pricing information is not available. Fair value measurements are analysed by level in the fair value hierarchy as follows: (i) level one are measurements at quoted prices (unadjusted) in active markets for identical assets or liabilities, (ii) level two measurements are valuations techniques with all material inputs observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices), and (iii) level three measurements are valuations not based on solely observable market data (that is, the measurement requires significant unobservable inputs). Transfers between levels of the fair value hierarchy are deemed to have occurred at the end of the reporting period.

Cost is the amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire an asset at the time of its acquisition and includes transaction costs. Measurement at cost is only applicable to investments in equity instruments that do not have a quoted market price and whose fair value cannot be reliably measured and derivatives that are linked to and must be settled by delivery of such equity instruments.

Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial instrument. An incremental cost is one that would not have been incurred if the transaction had not taken place. Transaction costs include fees and commissions paid to agents (including employees acting as selling agents), advisors, brokers and dealers, levies by regulatory agencies and securities exchanges, and transfer taxes and duties. Transaction costs do not include debt premiums or discounts, financing costs or internal administrative or holding costs.

Amortised cost is the amount at which the financial instrument was recognised at initial recognition less any principal repayments, plus accrued interest, and for financial assets less any write-down for incurred impairment losses. Accrued interest includes amortisation of transaction costs deferred at initial recognition and of any premium or discount to maturity amount using the effective interest method. Accrued interest income and accrued interest expense, including both accrued coupon and amortised discount or premium (including fees deferred at origination, if any), are not presented separately and are included in the carrying values of related items in the statement of financial position.

The effective interest method is a method of allocating interest income or interest expense over the relevant period, so as to achieve a constant periodic rate of interest (effective interest rate) on the carrying amount.

The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts (excluding future credit losses) through the expected life of the financial instrument or a shorter period, if appropriate, to the net carrying amount of the financial instrument. The effective interest rate discounts cash flows of variable interest instruments to the next interest repricing date, except for the premium or discount which reflects the credit spread over the floating rate specified in the instrument, or other variables that are not reset to market rates. Such premiums or discounts are amortised over the whole expected life of the instrument. The present value calculation includes all fees paid or received between parties to the contract that are an integral part of the effective interest rate.



4.10. Financial instruments (continued)

The Group classifies its financial assets into the following categories: (a) loans and receivables, (b) investment securities available-for-sale. Classification is determined by the purpose of acquisition of a financial asset The Group's management determines the appropriate classification of assets at initial recognition. All financial liabilities are classified as carried at amortised cost.

Trading securities, derivatives and other financial instruments at fair value through profit or loss are initially recorded at fair value. All other financial instruments are initially recorded at fair value plus transaction costs. Fair value at initial recognition is best evidenced by the transaction price. A gain or loss on initial recognition is only recorded if there is a difference between fair value and transaction price which can be evidenced by other observable current market transactions in the same instrument or by a valuation technique whose inputs include only data from observable markets.

All purchases and sales of financial assets that require delivery within the time frame established by regulation or market convention (“regular way” purchases and sales) are recorded at trade date, which is the date on which the Group commits to deliver a financial asset. All other purchases are recognised when the entity becomes a party to the contractual provisions of the instrument.

The Group uses discounted cash flow valuation technique to determine the fair value of swaps that are not traded in an active market. Differences may arise between the fair value at initial recognition, which is considered to be the transaction price, and the amount determined at initial recognition using the valuation technique. Any such differences are initially recognised within other assets or other liabilities and are subsequently amortised on a straight line basis over the term of the swaps.

The Group derecognises financial assets when the assets are redeemed or the rights to cash flows from the assets otherwise expired or the Group has transferred the rights to the cash flows from the financial assets or entered into a qualifying pass-through arrangement while also transferring substantially all risks and rewards of ownership of the assets or neither transferring nor retaining substantially all risks and rewards of ownership, but not retaining control. Control is retained if the counterparty does not have the practical ability to sell the asset in its entirety to an unrelated third party without needing to impose restrictions on the sale.

The Group derecognises its financial liabilities when the obligation under the liability is discharged or transferred or cancelled or expired. If an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, the original liability is derecognised and the new liability is recognised, and the difference in the respective carrying amounts is recognised in the consolidated statement of profit or loss and other comprehensive income.

(а) Loans and receivables

Assets categorised as loans and other receivables, including placements with banks, are non-derivative financial assets with fixed or determinable payments which are not quoted in an active market. At initial recognition these investment are measured at original cost being the fair value of the purchase consideration plus costs incurred to acquire them. Subsequently, loans and receivables are carried at amortised cost using the effective interest method less provision for impairment. Income and expenses are recognised in profit or loss when loans and receivables are written off from the statement of financial position or impaired and also as premium or discount is amortised. This classification includes deposits placed with banks, loans issued, purchased promissory notes, bonds which are not quoted in an active market and receivables from counterparties.

This classification also includes receivables arising out of insurance operations and cash and cash equivalents (Notes 4.13 and 4.16).




(b) Investment securities available-for-sale

This classification includes investment securities which the Group intends to hold for an indefinite period of time and which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices.

Investment securities available-for-sale are carried at fair value. Interest income on available-for-sale debt securities is calculated using the effective interest method, and recognised in profit or loss for the year.

Dividends on available-for-sale equity instruments are recognised in profit or loss for the year when the Group’s right to receive payment is established and it is probable that the dividends will be collected. All other elements of changes in the fair value are recognised in other comprehensive income until the investment is derecognised or impaired, at which time the cumulative gain or loss is reclassified from other comprehensive income to profit or loss for the year. Impairment losses are recognised in profit or loss for the year when incurred as a result of one or more events (“loss events”) that occurred after the initial recognition of investment securities available-for-sale. A significant or prolonged decline in the fair value of an equity security below its cost is an indicator that it is impaired.

The cumulative impairment loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that asset previously recognised in profit or loss – is reclassified from other comprehensive income to profit or loss for the year. Impairment losses on equity instruments are not reversed and any subsequent gains are recognised in other comprehensive income. If, in a subsequent period, the fair value of a debt instrument classified as available-for-sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit or loss, the impairment loss is reversed through profit or loss for the year.

(c) Securities at fair value through profit or loss.

Securities at fair value through profit or loss are financial assets designated irrevocably, at initial recognition, into this category. Management designates securities into this category only if (a) such classification eliminates or significantly reduces an accounting mismatch that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different bases; or (b) a group of financial assets, financial liabilities or both is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, and information on that basis is regularly provided to and reviewed by the Group’s key management personnel. Securities at fair value through profit or loss are recorded at fair value. Interest earned on trading securities calculated using the effective interest method is presented in profit or loss for the year as interest income. Dividends are included in dividend income within interest, dividends and other income from investing activities when the Group’s right to receive the dividend payment is established, and it is probable that the dividends will be collected. All other elements of the changes in the fair value and gains or losses on derecognition are recorded in profit or loss for the year as gains less losses on transactions with securities at fair value through profit or loss in the period in which they arise.

Derivative financial instruments

Derivative financial instruments, including foreign exchange contracts, interest rate futures, forward rate agreements, currency and interest rate swaps, and currency and interest rate options are carried at their fair value.

The Group also enters into offsetting loans with its counterparty banks to exchange currencies. Such loans, while legally separate, are aggregated and accounted for as a single derivative financial instrument (currency swap) on a net basis where (i) the loans are entered into at the same time and in contemplation of one another, (ii) they have the same counterparty, (iii) they relate to the same risk and (iv) there is no apparent business purpose for structuring the transactions separately that could not also have been accomplished in a single transaction.

All derivative instruments are carried as assets when fair value is positive, and as liabilities when fair value is negative. Changes in the fair value of derivative instruments are included in profit or loss for the year (gains less losses on derivatives). The Group does not apply hedge accounting.

Certain derivative instruments embedded in other financial instruments are treated as separate derivative instruments when their risks and characteristics are not closely related to those of the host contract.




(d) Debt securities in issue

Debt securities in issue include bonds issued by the Group. Debt securities are stated at amortised cost. If the Group purchases its own debt securities in issue, they are removed from the consolidated statement of financial position and the difference between the carrying amount of the liability and the consideration paid is included in gains arising from early retirement of debt.

(e) Loans received

Loans received are the borrower’s contractual obligations to return the borrowings received from the creditor. Borrowings are carried at amortised cost.

Sale and repurchase agreements and lending of securities. Sale and repurchase agreements (“repo agreements”), which effectively provide a lender’s return to the counterparty, are treated as secured financing transactions. Securities sold under such sale and repurchase agreements are not derecognised. The securities are reclassified as “Repurchase receivables” in the statement of financial position if the transferee has the right by contract or custom to sell or repledge the securities. The corresponding liability is presented within “Other borrowed funds”.

Securities lent to counterparties for a fixed fee are retained in the financial statements in their original category in the statement of financial position unless the counterparty has the right by contract or custom to sell or repledge the securities, in which case they are reclassified and presented separately. Securities borrowed for a fixed fee are not recorded in the financial statements, unless these are sold to third parties, in which case the purchase and sale are recorded in profit or loss for the year in “Gains less losses from investments available-for-sale”. The obligation to return the securities is recorded at fair value in “Other borrowed funds”.

4.11. Impairment of financial assets

Impairment losses are recognised in profit or loss for the year when incurred as a result of one or more events (“loss events”) that occurred after the initial recognition of the financial asset and which have an impact on the amount or timing of the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. If the Group determines that no objective evidence exists that impairment was incurred for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics, and collectively assesses them for impairment.

The primary factors that the Group considers in determining whether a financial asset is impaired are its overdue status and realisability of related collateral, if any. The following other principal criteria are also used to determine whether there is objective evidence that an impairment loss has occurred:

− any instalment is overdue and the late payment cannot be attributed to a delay caused by the settlement systems;

− the debtor experiences a significant financial difficulty as evidenced by the debtor’s financial information that the Group obtains;

− the borrower considers bankruptcy or a financial reorganisation;

− there is an adverse change in the payment status of the debtor as a result of changes in the national or local economic conditions that impact the debtor; or

− the value of collateral significantly decreases as a result of deteriorating market conditions.

For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics. Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors’ ability to pay all amounts due according to the contractual terms of the assets being evaluated.



4.11. Impairment of financial assets (continued)

Future cash flows in a group of financial assets that are collectively evaluated for impairment, are estimated on the basis of the contractual cash flows of the assets and the experience of management in respect of the extent to which amounts will become overdue as a result of past loss events and the success of recovery of overdue amounts. Past experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect past periods, and to remove the effects of past conditions that do not exist currently.

If the terms of an impaired financial asset held at amortised cost are renegotiated or otherwise modified because of financial difficulties of the debtor or issuer, impairment is measured using the original effective interest rate before the modification of terms. The renegotiated asset is then derecognized and a new asset is recognized at its fair value only if the risks and rewards of the asset substantially changed. This is normally evidenced by a substantial difference between the present values of the original cash flows and the new expected cash flows.

Impairment losses are always recognised through an allowance account to write down the asset’s carrying amount to the present value of expected cash flows (which exclude future credit losses that have not been incurred) discounted at the original effective interest rate of the asset.

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor’s credit rating), the previously recognised impairment loss is reversed by adjusting the allowance account through profit or loss for the year.

Uncollectible assets are written off against the related impairment loss provision after all the necessary procedures to recover the asset have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off are credited to impairment loss account in profit or loss for the year.

4.12. Reinsurance assets and liabilities

The Group cedes risks as part of operating activities. Assets arising from outward reinsurance operations represent claims due from reinsurers in respect of ceded insurance liabilities. Reimbursements due to the Group are estimated in accordance with the terms of reinsurance contracts on the basis of methods complying with those used for estimating liabilities under insurance contracts.

Impairment tests are performed at each reporting date or more frequently, if there is any indication of such impairment. Impairment arises if there is objective evidence that the Group will not be able to collect all amounts due in accordance with the terms of the contract. Impairment loss is recognised in profit or loss.

Reinsurance contracts do not relieve the Group from obligations to policy holders.

The Group assumes reinsurance in the course of its operating activities. Inward premiums are recognised as income similarly to recognition of direct insurance premiums based on the classification of products used in reinsurance operations.

Amounts due to reinsurers are estimated in accordance with applicable reinsurance policies and reinsurance contracts. Reinsurance payables are obligations of the Group for the transfer of reinsurance premiums to reinsurers, payment of inward claims and commission expenses on inward reinsurance.

Premiums and claims for both inward and outward reinsurance are shown on a gross basis.

Reinsurance assets and liabilities are derecognised after the corresponding contractual rights are fulfilled, expired or transferred to other parties.

4.13. Receivables arising from insurance operations

Receivables arising out of insurance operations are accounted for on the accrual basis and are carried at amortised cost. Provision for impairment of receivables is established if any indication exists that the Group may not be able to collect the total amount of the receivable due in accordance with the initial terms of the contract. Provision for impairment of receivables is formed similar to provision for impairment of financial assets (Note 4.11).



4.14. Deferred acquisition costs

All direct and variable costs incurred during the financial period and related to execution of new insurance contracts or to renewal of current contracts related to subsequent financial periods are capitalised in the amount to be reimbursed out of future income. All other acquisition costs are recognised as costs when incurred.

Deferred acquisition costs are amortised on a straight line basis over the term of the contract. Amortisation is recognised as an expense in profit or loss. Impairment testing is performed at each reporting date and based upon its results the carrying value of deferred acquisition costs is written down to the recoverable amount. Deferred acquisition costs are also recognised when liability adequacy test is performed at each reporting date (Note 4.17(b)).

Deferred acquisition costs are derecognised after the respective insurance contract is fulfilled or terminated.

4.15. Prepayments

Prepayments are recognised on the payment date. Prepayments to service providers are recognised as an expense in profit or loss when the services are provided. Prepayments also include prepayments to the suppliers of materials, goods and premises and equipment.

4.16. Cash and cash equivalents

Cash and cash equivalents are items which are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Cash and cash equivalents include cash on hand and on settlement accounts with banks, and also all short-term placements with banks with original maturities of less than three months. Cash and cash equivalents are carried at amortised cost.

4.17. Liabilities relating to insurance contracts

(a) Unearned premium provision

Written premiums relating to subsequent periods are recognised as unearned premiums. Changes in unearned premiums provision are recognised in profit or loss in such a manner that income is recognised proportionally to the expired risk period.

(b) Insurance loss provisions

Non-life contractual liabilities are formed on the basis of the estimated ultimate losses incurred, but not yet settled as at the reporting date, irrespective of whether reported or not, and claims handling expenses. There can be a significant interval between the date of insured event notification and the date of settlement, and, therefore, the ultimate loss amount cannot be reliably determined at the reporting date. Liabilities are estimated at the reporting date on the basis of standard actuarial methods using empirical data and current assumptions that can include premium for negative deviations. Liabilities are not discounted due to their short-term nature. A liability is derecognised after the respective insurance contract is fulfilled or terminated.

(b) Life insurance provisions

Insurance provisions on life insurance contracts are recognised if such contracts were signed and premiums accrued. Life insurance provisions reflect current present value of expected future claims paid less future insurance premiums. Life insurance provisions are calculated on the basis of assumptions on mortality and disability levels, investment income and handling expenses. Investment income assumptions are set and fixed at contract conclusion and may be different depending upon the year of contract commencement. Insurance reserves adjustments are recorded at each reporting date in profit or loss. Recognition of life insurance provisions is discontinued when the contract expires or is fully paid for or terminated.



4.17. Liabilities relating to insurance contracts (continued)

(c) Liability adequacy test

At each reporting date, liability adequacy tests are performed to ensure the adequacy of the liabilities under insurance contracts net of deferred acquisition costs. While performing these tests, current best estimates of future contractual cash flows and claims handling and administration expenses, as well as investment income from the assets backing such liabilities, are applied. Any inconsistency is immediately recorded in the consolidated statement of profit and loss as follows:

− for non-life insurance – through impairment of deferred acquisition costs, and if those are insufficient – through accruing an unexpired risk provision;

− for life insurance – through increasing insurance provisions.

4.18. Current and deferred taxes

Income taxes have been provided for in the consolidated financial statements in accordance with legislation enacted or substantively enacted by the end of the reporting period. The income tax charge/ credit comprises current tax and deferred tax and is recognised in profit or loss for the year, except if it is recognised in other comprehensive income or directly in equity because it relates to transactions that are also recognised, in the same or a different period, in other comprehensive income or directly in equity.

Current tax is the amount expected to be paid to, or recovered from, the taxation authorities in respect of taxable profits or losses for the current and prior periods. Taxable profits or losses are based on estimates if the consolidated financial statements are authorised prior to filing relevant tax returns. Taxes other than on income are recorded within administrative and other operating expenses.

Deferred income tax is provided using the balance sheet liability method for tax loss carry forwards and temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in financial statements. In accordance with the initial recognition exemption, deferred taxes are not recorded for temporary differences on initial recognition of an asset or a liability in a transaction other than a business combination if the transaction, when initially recorded, affects neither accounting nor taxable profit. Deferred tax liabilities are not recorded for temporary differences on initial recognition of goodwill, and subsequently for goodwill which is not deductible for tax purposes. Deferred tax balances are measured at tax rates enacted or substantively enacted at the end of the reporting period, which are expected to apply to the period when the temporary differences will reverse or the tax loss carry forwards will be utilised. Deferred tax assets and liabilities are netted only within the individual companies of the Group.

Deferred tax assets for deductible temporary differences and tax loss carry forwards are recorded only to the extent that it is probable that future taxable profit will be available against which the deductions can be utilised.

Deferred income tax is not recognised on post-acquisition retained earnings and other post acquisition movements in reserves of subsidiaries where the Group controls the subsidiary’s dividend policy, and it is probable that the difference will not reverse through dividends or otherwise in the foreseeable future.

The Group's uncertain tax positions are reassessed by management at each reporting date. Liabilities are recorded for tax positions that are determined by management as more likely than not to result in additional taxes being levied if the positions were to be challenged by the tax authorities. The assessment is based on the interpretation of tax laws that have been enacted or substantively enacted by the end of the reporting period, and any known court or other rulings on such issues. Liabilities for fines, penalties and taxes other than on income tax are recognised based on management’s best estimate of the expenditure required to settle the obligations at the reporting date.

Other taxes are recorded within the Group's operating expenses.



4.19. Accounts payables

Payables are accounted for on the accrual basis and are carried at amortised cost. The Group classifies accounts payable as follows: a) accounts payable on insurance operations; b) other payables not related to insurance and reinsurance operations and other liabilities.

Reinsurance receivables and payables are offset only if the legal right for this offset exists.

4.20. Provisions for liabilities and charges

Provisions for liabilities and charges are non-financial liabilities of uncertain timing or amount. They are accrued when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made.

4.21. Equity

(а) Share capital

Ordinary shares are classified as share capital. External costs directly attributable to the issue of new shares, other than on a business combination, are recognised in equity as a deduction from the proceeds.

If the Company or its subsidiaries purchase the Company’s equity instruments, the consideration paid, including any directly attributable incremental external costs, net of income taxes, is deducted from equity attributable to the owners of the Company until the equity instruments are reissued, disposed of or cancelled. If such shares are subsequently disposed of or reissued, any consideration received is included in equity.

(b) Share premium

Share premium represents the excess of contributions to the share capital over the nominal value of shares issued.

(c) Reserve fund

Reserve fund is a reserve that the companies of the Group establish out of retained earnings in accordance with the Russian legislation on joint stock companies and their Charters.

(d) Revaluation reserve for premises and equipment

Revaluation reserve for premises and equipment comprises accumulated unrealised gains and losses on revaluation of property, included in premises and equipment, less tax effect.

(e) Revaluation reserve for available-for-sale investments

Revaluation reserve for available-for-sale investments comprises accumulated unrealised gains/losses on revaluation of investments less tax effect.

(f) Dividends

Dividends are recorded in equity in the period in which they are declared. Any dividends declared after the end of the reporting period and before the consolidated financial statements are authorised for issue, are disclosed in the subsequent events note. The statutory accounting reports of the Company are the basis for profit distribution and other appropriations.



4.22. Income and expense recognition

(а) Premiums

Upon inception of a contract, premiums are recorded as written when due and are earned on a pro-rata basis over the term of the related policy coverage. Premiums that do not have significant insurance risk are not recognised as premiums written. Reduction of premiums written in subsequent periods (under amendments to the signed original policies, for example) is accounted by debiting of premiums written in the current period.

Life insurance premiums are recognised as income when the liability arises based on the insurance contracts conditions in the amount of payments due from the policyholder in accordance with regularity of such insurance payments (insurance premiums) specified in the insurance contract. For investment life insurance contracts and for non-life insurance contracts the premiums are recognised as income at the date when the liability arises. Premiums that are not associated with significant insurance risk are not recognised as premiums written.

(b) Acquisition costs

Acquisition costs represent commissions, obligatory payments to the Russian Association of Motor Insurers (“RAMI”), policy print costs and staff costs directly attributable to insurance contract execution, which vary with and largely depend upon the premium from acquired or renewed insurance contracts. Acquisition costs are deferred and amortised over the period in which the related premiums are earned. Deferred acquisition costs are calculated separately for each line of business. At the end of each reporting period, deferred acquisition costs are reviewed based on activities carried out to ensure they are recoverable based on future estimates.

(c) Realised gains and losses recognised in the consolidated statement of profit and loss

Realised gains and losses on disposal of premises and equipment recorded at carrying value are calculated as the difference between proceeds from disposal and their carrying value. Realised gains and losses on disposal of financial assets carried at amortised cost are calculated as the difference between proceeds from disposal and their amortised cost. Realised gains and losses are recognised in profit or loss at the date of sale and purchase transaction.

(d) Claims incurred under insurance contracts

Claims incurred under insurance contracts include losses incurred during the year, irrespective of whether reported or not, including respective claims handling expenses, net of proceeds from disposal of usable remains of insured property (abandons) and other reimbursements, and adjustments of unpaid prior year losses.

Claims handling expenses include internal and external expenses incurred in connection with claim settlement. Internal expenses include direct expenses of the claims handling department and a portion of administrative expenses directly related to claim settlement.

(e) Reimbursements from subrogation

Subrogation income is charged on the basis of the estimate of future proceeds from an identified subrogation right and realisation of salvage material (abandons) with respect to the losses incurred at the reporting date. Provision for future proceeds on subrogation and abandon is recorded within insurance loss provisions.

(f) Interest expense and other income and expense recognition

Interest expense is recorded in the consolidated statement of profit or loss and other comprehensive income on an accruals basis using the effective interest method. This method includes, as part of interest income or expense, all fees paid or received between the parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts.

(g) Staff costs and related contributions

Wages, salaries, contributions to the Russian Federation state pension and social insurance funds, paid annual leave and sick leave, bonuses, and non-monetary benefits are accrued in the year in which the associated services are rendered by the employees of the Group. The Group has no legal or constructive obligation to make pension or similar benefit payments beyond the payments to the statutory defined contribution scheme.



4.22. Income and expense recognition (continued)

(g) Staff costs and related contributions (continued)

Other administrative, operating and other expenses are generally recorded on an accrual basis when the product is received or the service is provided.

4.23. Presentation of cash flows

The Group classifies cash flows from acquisition and disposal of financial assets, cash flows from placement and settlement of deposits with banks and acquisition and disposal of bank instruments as cash flows from operating activities since acquisitions of such assets are financed from cash flows related to execution of insurance contracts (net of cash flows related to insurance claims), which are treated as those associated with operating activities.

4.24. Operating leases

Where the Group is a lessee in a lease which does not transfer substantially all the risks and rewards incidental to ownership from the lessor to the Group, the total lease payments are charged to the consolidated statement of profit or loss on a straight-line basis over the period of the lease.

4.25. Obligatory medical insurance

The Federal Fund for Obligatory Medical Insurance (“FFOMI”) carries out an obligatory medical insurance program to provide Russian Federation citizens with free of charge medical services via certain appointed insurers, which have signed contracts on financial support with the Territorial Funds for Obligatory Medical Insurance (“TFOMI”) to administer a portion of this program.

The Group does not assume any insurance risk under the obligatory medical Insurance programme. The Group receives commission for these services. Such commission is recorded in the consolidated statement of profit and loss and other comprehensive income within “Other operating income”.

The Group receives advances from TFOMI and makes payments to medical institutions for services provided by them within the obligatory medical insurance program. Funds intended for payment of medical services and received by the Group from TFOMI are treated as special purpose funding and recognised as payables on obligatory medical insurance.

Receipt of such funds is recorded as an increase of liabilities to TFOMI. The allocation of the above earmarked funds to medical organisations as advance payments is recorded as an increase of accounts receivable for mandatory medical insurance, and the accounts payable to TFOMI for mandatory medical insurance do not decrease. The fact of using the special purpose funds is recorded as a decrease of liabilities to TFOMI and decrease of accounts receivable for mandatory medical insurance. The balance of the special purpose funds after settlements for medical services provided to the insured is returned to the source of funding (TFOMI). Liabilities to TFOMI at the reporting date are classified as financial liabilities.

Payables to medical institutions under the invoices for medical services provided to the insured under OMI are classified as non-financial liabilities as they are repaid through an off-set of advances that were earlier made to medical institutions.

The Group receives income from penalties under mandatory medical insurance claimed from medical organisations for violations identified during the control of volumes, timeframe, quality and conditions for the provision of medical aid. Such income is recorded in the consolidated statement of profit or loss and other comprehensive income within “Other income”.

The Group receives remuneration for fulfilment of the terms set by the OMI funding contract and income from saving of annual funds originally estimated for a medical institution.



4.26. Expenses related to direct settlements of OMTPL claims

The Group carries out settlements on direct settlement of OMTPL claims in accordance with the Russian Federation legislation under which the affected person can address his/her claims not only to the insurance company that issued the policy to the guilty party but to his/her own insurance company. Within the scope of direct settlement of claims the Group pays the claims to the holders of OMTPL insurance policies issued by the Group and upon claim settlement invoices the offender's insurance company for reimbursement of the expenses via the centralised system of direct settlement of claims. Settlements between insurance companies are conducted within fixed amounts for one settled claim that are established by instructive documents of the Russian Association of Motor Insurers (“RAMI”) and depend upon the characteristics of motor vehicles. The fixed amounts are subject to regular revision. In accordance with the Russian Federation legislation the Group recognises the differences between actually incurred expenses on claim settlement and the reimbursement received within the scope of direct settlement of claims in profit or loss. Receivables less payables under direct settlement of claims are recorded within receivables arising from insurance operations (Note 8).

4.27. Offsetting

Assets and liabilities are offset and the net amount reported in the consolidated financial statements only when there is a legally enforceable right to offset the recognised amounts, and there is an intention to either settle on a net basis, or to realise the asset and settle the liability simultaneously. Such a right of set off (a) must not be contingent on a future event and (b) must be legally enforceable in all of the following circumstances: (i) in the normal course of business, (ii) the event of default and (iii) the event of insolvency or bankruptcy.

4.28. Segment reporting

Segments are reported in a manner consistent with the internal reporting provided to the Group’s chief operating decision maker. Segments whose revenue, result or assets are ten percent or more of all the segments are reported separately.

4.29. Presentation of consolidated statement of financial position in order of liquidity.

In the Group's consolidated statement of financial position, assets and liabilities are presented in order of their liquidity, as the Group does not have a clearly identifiable operating cycle and therefore does not present current and non-current assets and liabilities separately. Expected maturities of assets and liabilities are disclosed in Note 25.

4.30. Amendments of the consolidated financial statements after issue

The Company’s shareholders and management have the power to amend the consolidated financial statements after its issue.

5. Application of Estimates, Assumptions and Judgements

The Group makes estimates and assumptions that affect the amounts recognised in the consolidated financial statements, and the carrying amounts of assets and liabilities within the next financial year. Estimates and judgements are continually evaluated and are based on management’s experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Management also makes certain judgements, apart from those involving estimations, in the process of applying the accounting policies. Judgements that have the most significant effect on the amounts recognised in the consolidated financial statements and estimates that can cause a significant adjustment to the carrying amount of assets and liabilities within the next financial year include:

5.1. Liabilities relating to insurance contracts

Evaluation of ultimate liabilities on insurance claims relating to insurance contracts is the most critical accounting estimate of the Group. There are several sources of uncertainty to be considered by the Group for evaluation of liabilities which the Group will ultimately incur on insurance claims (Note 14.2).


5. Application of Estimates, Assumptions and Judgements (Continued)

5.1. Liabilities relating to insurance contracts (continued)

Acquisition of assets or a group of assets that are not businesses.

On 1 April 2017, in accordance with Article 26.1 of Russian Law No. 4015-1 of 27 November 1992 “On Organising Insurance Business”, the insurance portfolio of obligatory motor third party liability insurance of Limited Liability Company SK VTB Strakhovanie was transferred to the Company, including liabilities under insurance contracts in effect at 1 April 2017 and the expired insurance contracts under which the insurer did not fully perform its obligations (Note 14.2). The Company’s management believes that the operation falls under the definition of acquiring an asset or a group of assets, which do not represent business, as the assumed portfolio is similar to the existing one, and the Company is provided with necessary resources to service the portfolio before the expiration of the transferred contracts.

5.2. Goodwill

In the third quarter 2017, the Group acquired OOO VSK-Linia Zhizni (Note 30), a company specialising in the sale of life insurance products, in particular, investment life insurance (the “ILI”). When the Group’s management determined the fair value of the acquiree’s assets, it used a dividend discount model, whose key assertions included the profitability of the new business and access to new markets, namely, the sale of ILI products via PAO BINBANK channel. As of the reporting date, the expected cash flows over the expired period of 2017 were supported by the volumes of the ILI products effectively sold during the stated period. The analysis did not result in the identification of impairment indicators.

5.3. Provision for impairment of receivables

The Group regularly reviews its receivables to assess impairment. In determining whether an impairment loss should be recorded in the consolidated statement of profit or loss and other comprehensive income, the Group makes judgements as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows from receivables before the decrease can be identified with an individual asset in the portfolio. This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers in a group, or national or local economic conditions that correlate with defaults on assets in the Group.

The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. A 10% increase or decrease in actual loss experience compared to the loss estimates used would result in an increase or decrease in impairment losses of RR 199 559 thousand (31 December 2016: RR 82 152 thousand).

5.4. Premises and equipment and investment properties

At 31 December 2017, the Group revalued its premises and investment properties by engaging an independent appraiser. The key judgements and assumptions used to measure the fair value of premises and investment properties are detailed in Note 27.

5.5. Investment securities available-for-sale

In the first quarter 2017, the Group prepared the analysis of criteria for the market activity related to corporate rouble bonds of four issuers that were purchased by the Group in 2013-2016. In conducting the analysis, the Group considered the number of trade days, number and volume of transactions. Based on the analysis results, the Group’s management decided to transfer the corporate rouble bonds of indicated issuers to level 2 of fair value hierarchy, and to change the fair value valuation technique for these securities (Note 27). The situation was also supported by the results of an additional analysis performed by the Group during 2017. If the Group measured the fair value at a price equal to the recent transaction price at the reporting date (under its accounting policies), then the fair value of the above securities at 31 December 2017 would be RR 116 997 thousand lower.


5. Application of Estimates, Assumptions and Judgements (Continued)

5.6. Financial assets

In the second semester 2017, the Bank of Russia applied a rehabilitation mechanism for major private banks through the Fund of the Banking Sector Consolidation. In this regard, the banking sector was under pressure, which was demonstrated by a drop in security quotation and limited liquidity for the securities of some private banks.

As of 31 December 2017, the Group had investments in PAO BINBANK deposits for a total of RR 559 940 thousand maturing in October 2018.

Investments in PAO Promsvyazbank at 31 December 2017 are represented by deposits for a total of RR 1 548 260 thousand maturing between January 2018 and August 2018, and corporate bonds of RR 495 651 thousand maturing in March 2021.

The Group’s management prepared the analysis of the Group’s financial investments in financial instruments of indicated credit organisations for objective impairment indicators. During the analysis, the management considered publicly available information, including financial indicators of credit organisations at 1 January 2018, informational messages from the Bank of Russia, quotations and details on trade activity related to PAO Promsvyazbank bonds.

The test did not identify any impairment indicators, the amount to be recovered upon repayment of the financial investments exceeds their carrying amount. The Group’s management continuously monitors the current situation.

The Group’s investments in the shares and bonds of various issuers are reported in these consolidated financial statements at stock exchange quotations, except for the instances described in Note 5.5. The price within the bid-ask spread that is most representative of fair value in the circumstances was used by the Group to measure fair value, which the Group considers is the last trading price on the reporting date.

6. Cash and Cash Equivalents

31 December 2017

31 December 2016

Settlement accounts 2 003 657 844 429 Rouble-denominated short-term deposits 1 612 948 3 543 449 Currency accounts 63 309 103 053 Other cash 1 759 1 588 Cash on hand 1 060 1 470 Total 3 682 733 4 493 989

At 31 December 2017, the Group deposited 91% of total cash and cash equivalents owned by the Group with four major Russian and foreign banks (31 December 2016: 96%). These banks are not related to the Group.

Short-term deposits represent deposits with banks with maturity less than 90 days. The effective interest rate on rouble-denominated short-term deposits at 31 December 2017 was 6.4% (31 December 2016: 10%).

The carrying value of each class of cash and cash equivalents is approximately equal to their fair value. Credit quality analysis of cash and cash equivalents is presented in Note 25.

At 31 December 2017 and 31 December 2016, cash and cash equivalents were neither past due nor impaired and were not pledged.


7. Financial Assets

7.1. Loans and other receivables, including deposits with banks

31 December 2017

31 December 2016

Deposits with banks 26 597 972 19 936 154 Promissory notes and loans of other organisations 1 571 048 1 910 747 Other receivables 1 130 879 2 155 958 Less provision for impairment of promissory notes and deposits (746 916) (228 445) Less provision for impairment of other receivables (405 571) (521 147) Total 28 147 412 23 253 267

At 31 December 2017, included in other accounts receivable were settlements on derivative transactions of RR 344 697 thousand (31 December 2016: RR 39 191 thousand), settlements through payment systems of RR 198 622 thousand (31 December 2016: RR 182 556 thousand), settlements through broker accounts of RR 94 603 thousand (31 December 2016: RR 1 206 876 thousand), settlements with personnel of RR 16 225 thousand (31 December 2016: RR 37 399 thousand) and other receivables of RR 71 161 thousand (31 December 2016: RR 168 789 thousand). At 31 December 2017 and 2016, other receivables were not pledged.

Maturity analysis of debt instruments:

31 December 2017

31 December 2016

Deposits with banks less provision for impairment 0-3 months 7 396 190 4 644 550 3-6 months 2 977 061 2 786 420 From 6 to 12 months 7 338 448 9 481 207 More than 1 year 8 768 743 2 889 185 Total deposits with banks 26 480 442 19 801 362 Promissory notes and loans of other organisations less provision for impairment 0-3 months 6 988 713 688 3-6 months 132 092 325 112 From 6 to 12 months 436 008 - More than 1 year 366 574 778 294 Total promissory notes and loans of other companies 941 662 1 817 094

Other receivables less provision for impairment Due within 1 year 725 308 1 634 811 Total other receivables 725 308 1 634 811 Total 28 147 412 23 253 267

Deposits

31 December 2017

31 December 2016

Deposits in roubles, RR thousand

23 305 868 16 665 457 Deposits in foreign currencies, RR thousand

3 174 574 3 135 905

including:

Deposits with two banks*

46.6% 39%

Maturity, days

362-551 366-1096 Interest rate in RR, in %

7.1-10.15 9-11.40

Interest rate in foreign currencies, in % 2.1-2.4 2.7 Remaining part**

Maturity, days

126-1100 92-1371 Interest rate in RR, in %

7.1-12,01 5.5-12

Interest rate in foreign currencies, in %

- 2-2.25

At 31 December 2017, the Group booked provision for impairment in relation to deposits with banks with revoked licenses in the amount of RR 117 530 thousand (31 December 2016: RR 134 792 thousand). No interest income is accrued with respect to impaired financial assets. At 31 December 2017 and 2016, deposits were not pledged.


7. Financial Assets (Continued)

7.1. Loans and other receivables, including deposits with banks (continued)

Deposits (continued)

* These banks rank among the largest Russian state-owned banks and are not related to the Group.

** Deposits placed with other large and medium-sized banks.

Promissory notes and loans

31 December 2017

31 December 2016

Promissory notes and loans of other companies, RR thousand

941 662 1 817 094 including:

Promissory notes acquired from companies related to the Group

39.6% 43% Maturity, days

739-4392 165-3254

Yield to maturity, in %

6-7 6-12.47 remaining part

Maturity, days

93-14561 94-14561 Yield to maturity, in %

3-11 11

At 31 December 2017 and 31 December 2016, promissory notes and loans of other companies were not pledged. At 31 December 2017, the Group booked a provision for the impairment of promissory notes and bonds of RR 629 386 thousand due to the issuer's default (31 December 2016: RR 93 653 thousand).

Related party transactions are disclosed in Note 29.

Under requirements of the Russian Association of Motor Insurers (RAMI), the National Union of Liability Insurers (NULI) and the Insurance Payment System (IPS) and in accordance with contracts signed with these organisations, the Group placed cash on accounts of the guarantee fund in two Russian banks (31 December 2016: on deposits and accounts of the guarantee fund in two Russian banks).

On accounts of the guarantee fund of the Insurance Payment System:

For the NULI – RR 149 200 thousand. (31 December 2016: RR 186 200 thousand). Interest is accrued on the opening cash balance for each day the funds are held on the account at 7% p.a. at 31 December 2017 (31 December 2016: 5.5% to 7% p.a.).

For RAMI, cash is placed on the account of the guarantee fund of the payment system in the amount of RR 1 435 000 thousand (31 December 2016: RR 932 200 thousand). Interest is accrued on the opening cash balance at 7% p.a. (31 December 2016: 5.5% to 7% p.a.) for each day the funds are held on the account.

Under the agreements on the account of the guarantee fund of the payment system, IPS has the right to apply foreclosure of these funds if the Group fails to meet its obligations within mutual settlement contracts signed with RSA, NULI and IPS. Under these agreements the Group has the right to terminate the agreements and get deposit amounts after 30 days from the date of its exit from the Russian Association of Motor Insurers or the National Union of Liability Insurers and termination of corresponding contracts with the Insurance Payment System. During 2017 and 2016, the Group met its obligations in full and no foreclosure was imposed on the above funds.

At 31 December 2016, a currency deposit of EUR 1 286 thousand, an equivalent of RR 82 061 thousand was placed as part of Green Card programme. Interest on this deposit is accrued and paid at a fixed rate which as at 31 December 2016 amounted to 2% p.a. In January 2017, the deposit expired and was replaced by surety issued by the Group, without placing cash. On 24 October 2017, the surety agreement was terminated and at 31 December 2017, the Group did not have encumbrances within the Green Card programme activity.

Provision for impairment of other receivables at 31 December 2017 and 31 December 2016 was set up for unrecoverable amounts not written down by the Group, as legal procedures have not been completed and there is a probability of their partial recovery.



7.1. Loans and other receivables, including deposits with banks (continued)

Promissory notes and loans (continued)

Credit quality analysis of loans and other receivables including deposits with banks is presented in Note 25.

Movements in provision for impairment

Provision for impairment of

promissory notes and deposits

Provision for impairment of other receivables Total

At 1 January 2016 (228 445) (501 405) (729 850) Write-off against provision - 34 089 34 089 Recovery of provision - - - Charge in provision for impairment - (53 831) (53 831) At 31 December 2016 (228 445) (521 147) (749 592) At 1 January 2017 (228 445) (521 147) (749 592) Write-off against provision - 242 670 242 670 Recovery of provision - - - Charge in provision for impairment (518 471) (127 094) (645 565) At 31 December 2017 (746 916) (405 571) (1 152 487)

7.2. Investment securities available-for-sale

By types of investments:

31 December 2017

31 December 2016

Rouble-denominated corporate bonds 18 290 991 8 496 169 Corporate currency bonds 6 955 853 6 359 993 Rouble-denominated government bonds 7 177 580 352 111 Total debt securities 32 424 424 15 208 273 Shares and interest in other companies 3 402 057 122 878 Total 35 826 481 15 331 151

Maturity analysis of debt instruments:

31 December 2017

31 December 2016

Due within 1 year

1 087 608 51 525 Due between 1 and 5 years

15 944 410 9 608 258

Due after 5 years

15 392 406 5 548 490 Total bonds

32 424 424 15 208 273

Portfolio of debt instruments includes bonds issued by various issuers and traded on stock exchanges:

31 December 2017

31 December 2016

Maturity

2018-2033 2017-2046 Effective yield to maturity (for rouble-denominated bonds), % 5.98-17.96 8.43-17.17 Effective yield to maturity (for currency bonds), % 3.37-9.04 3.92-7.63



7.2. Investment securities available-for-sale (continued)

No impairment indicators were identified in 2016 and 2017 for investments available-for-sale. At 31 December 2017 and 31 December 2016, all the debt securities are neither past due nor impaired.

The available-for-sale securities include equity securities with a carrying amount of RR 3 398 899 thousand (31 December 2016: RR 122 878 thousand) that are freely traded at the Moscow exchange.

Investments available-for-sale are carried at fair value which takes into account credit risk related to these investments. Credit quality analysis of investments available-for-sale is presented in Note 25.

7.3. Financial instruments at fair value through profit or loss

By types of investments:

31 December 2017

31 December 2016

Derivative financial instruments 584 228 - Total 584 228 -

The portfolio of assets at fair value through profit or loss includes derivative financial instruments traded at stock exchanges, purchased by the Group in line with its strategy of investment life insurance products. The maturity dates of the instruments at 31 December 2017 correspond to the expiration dates of life insurance contracts and fall between 2020 and 2022.

The financial instruments at fair value through profits or loss are reported at fair value, which includes the credit risk related to the investments. The credit quality analyses of investments at fair value through profit or loss is disclosed in Note 25.

8. Receivables Arising from Insurance Operations

31 December 2017

31 December 2016

Receivables arising from insurance operations 6 601 317 4 120 869 Receivables arising from direct settlement of claims 826 481 694 909 Receivables arising from reinsurance operations 159 648 55 282 Less provision for impairment (843 107) (162 807) Total 6 744 339 4 708 253

Movements in provision for impairment were as follows:


receivables arising from

insurance operations


receivables arising from reinsurance

operations Total At 1 January 2016 (168 565) (10 465) (179 030) Past due receivables write-off against provisions 27 066 8 107 35 173 Charge in provision for impairment (2 192) (16 758) (18 950) At 31 December 2016 (143 691) (19 116) (162 807) At 1 January 2017 (143 691) (19 116) (162 807) Past due receivables write-off against provisions (53 678) (9 157) (62 835) Charge in provision for impairment (605 670) (11 795) (617 465) At 31 December 2017 (803 039) (40 068) (843 107)


8. Receivables Arising from Insurance Operations (Continued)

At 31 December 2017 and 31 December 2016, the Group had no significant concentrations of receivables arising from insurance operations. Receivables at the reporting date are not collateralised. Credit quality analysis of receivables arising out of insurance operations is presented in Note 25.

9. Prepayments and Other Assets

31 December 2017

31 December 2016

Tender participation settlements 294 163 247 054 Income tax prepayments 175 467 405 388 Equipment not brought into operation 155 655 145 642 Advances to medical institutions 131 330 133 921 Prepayment of acquisition of software and licenses 117 415 78 331 Advances to car service centres 111 689 399 549 Prepaid other taxes 77 910 48 031 Prepayments on OMI operations 40 037 52 788 Settlements on legal services 22 518 48 603 Settlements on rent of premises 19 059 15 854 Other prepayments 139 951 139 164 Total other assets 1 285 194 1 714 325

10. Deferred Acquisition Costs

Deferred acquisition costs Reinsurers’ share

Net of reinsurance

At 1 January 2016 7 606 655 (28 376) 7 578 279 Capitalised costs 14 812 904 (156 898) 14 656 006 Depreciation (13 395 563) 111 560 (13 284 003) At 31 December 2016 9 023 996 (73 714) 8 950 282 At 1 January 2017 9 023 996 (73 714) 8 950 282 Capitalised costs 21 095 783 (146 657) 20 949 126 Depreciation (18 197 841) 122 684 (18 075 157) At 31 December 2017 11 921 938 (97 687) 11 824 251


11. Premises, Equipment and Intangible Assets

Movements in premises and equipment and intangible assets were as follows:

Premises Motor

vehicles Computers Office

equipment

Other premises and

equipment

Assets not brought into

operation Total Intangible

assets Cost At 1 January 2016 4 369 359 124 840 1 081 322 201 837 234 759 9 415 6 021 532 656 097 Additions 627 536 43 717 114 207 1 930 10 739 - 798 129 393 659 Revaluation (225 441) - - - - - (225 441) - Disposals (13 790) (29 952) (6 797) (2 954) (9 136) - (62 629) (204 493) Transfers - - - 3 681 134 (3 815) - - At 31 December 2016 4 757 664 138 605 1 188 732 204 494 236 496 5 600 6 531 591 845 263

Additions 266 10 405 149 074 11 317 12 038 4 734 187 834 575 790 Revaluation 180 577 - - - - - 180 577 - Disposals (51 638) (17 498) (6 223) (3 598) (6 936) - (85 893) - Transfers - - - - 107 (107) - - At 31 December 2017 4 886 869 131 512 1 331 583 212 213 241 705 10 227 6 814 109 1 421 053

Accumulated depreciation At 1 January 2016 (722 158) (78 933) (740 566) (193 414) (205 909) - (1 940 980) (250 172) Accruals (85 078) (19 786) (117 562) (3 655) (10 468) - (236 549) (176 335) Revaluation 40 221 - - - - - 40 221 - Disposals 5 427 27 510 6 786 2 954 8 962 - 51 639 203 497 At 31 December 2016 (761 588) (71 209) (851 342) (194 115) (207 415) - (2 085 669) (223 010)

Accruals (99 973) (19 378) (116 414) (3 284) (10 728) - (249 777) (206 514) Revaluation (41 054) - - - - - (41 054) - Disposals 20 160 16 443 6 223 3 598 6 824 - 53 248 - At 31 December 2017 (882 455) (74 144) (961 533) (193 801) (211 319) - (2 323 252) (429 524)

Carrying amount At 31 December 2017 4 004 414 57 368 370 050 18 412 30 386 10 227 4 490 857 991 529 At 31 December 2016 3 996 076 67 396 337 390 10 379 29 081 5 600 4 445 922 622 253

At 1 January 2016 3 647 201 45 907 340 756 8 423 28 850 9 415 4 080 552 405 925

The assets not brought into operation mainly include construction, renovation of premises and equipment and investments in IT systems development. Upon completion, assets are transferred to relevant premises and equipment and intangible assets.

Premises have been revalued to market value at 31 December 2017 and 31 December 2016. The valuation was carried out by an independent appraiser, OOO Centre of Independent Expertise, holding a recognised and relevant professional qualification and recent experience in valuation of assets of similar location and category. The basis used for the appraisal was market value of comparable assets.

At 31 December 2017, the carrying amount of buildings would have been RR 3 408 773 thousand (31 December 2016: RR 3 512 735 thousand), had the assets been carried at cost less depreciation.


12. Investment Properties

Notes 31 December 2017

31 December 2016

Investment properties at fair value at 1 January 657 233 - Additions through business combinations - 657 233 Revaluation (10 769) - Investment properties at fair value at 31 December 646 464 657 233

Investment properties include Premier Building, an office centre located in Volgograd. The investment property was received by the Group in December 2016 as a result of acquiring 100% shares in AO Business Group SINKHRO.

The investment properties are valued annually at fair value, by an independent, professionally qualified appraiser who has experience in valuing similar properties in the Russian Federation. Valuation methods and inputs used are disclosed in Note 27.

At 31 December 2017, the carrying value of the investment property is approximately equal to its acquisition cost. Investment properties were not pledged to third parties as collateral.

At 31 December 2017, the Group had no non-cancellable lease contracts.

13. Equity

Measuring unit

31 December 2017

31 December 2016

Number of registered ordinary shares pcs. 36 500 000 36 500 000 Nominal value RR 3 650 000 000 3 650 000 000 Amount of paid share capital adjusted subject to IAS 29* RR 3 903 923 000 3 903 923 000

In accordance with Russian legislation, the Company distributes profits as dividends or transfers them to reserves on the basis of the financial statements prepared in accordance with Russian Accounting Rules. At 31 December 2017, the Company’s retained earnings under Russian Accounting Standards totalled RR 12 589 554 thousand (31 December 2016: RR 11 331 077 thousand).

On 26 December 2017, the Group’s management decided to pay dividends to the Company’s shareholders of RR 1 billion for its performance over 9 months 2017.

* The amount of paid share capital was adjusted subject to IAS 29 "Financial Reporting in Hyperinflationary Economies” since the Group operated in a hyperinflationary economy prior to 1 January 2003.

14. Liabilities Relating to Insurance Contracts

14.1. Unearned premium provision



Total

Reinsu-rers’

share

Net reinsu-

rance Total

Reinsu-rers’

share

Net reinsu-

rance At the beginning of the period 30 039 442 (741 675) 29 297 767 27 076 286 (654 690) 26 421 596 Premiums written in the reporting period 73 804 997 (2 274 778) 71 530 219 53 258 947 (1 907 195) 51 351 752 Premiums earned for the reporting period (68 083 766) 1 883 626 (66 200 140) (51 770 999) 1 925 438 (49 845 561) Acquisition of insurance portfolio (Note 14.2) 134 394 - 134 394 - - - Acquisition of subsidiary (Note 30) 1 396 060 (3 367) 1 392 693 1 475 208 (105 228) 1 369 980 Total at the end of the period 37 291 127 (1 136 194) 36 154 933 30 039 442 (741 675) 29 297 767


14. Liabilities Relating to Insurance Contracts (Continued)

14.2. Insurance loss provisions



Total

Reinsurers' share

Net reinsurance Total

Reinsurers' share

Net reinsurance

Outstanding claims provision 9 238 153 (1 150 096) 8 088 057 9 986 508 (1 641 081) 8 345 427 Provision for incurred but not yet reported claims 6 693 488 (24 192) 6 669 296 5 906 266 (66 675) 5 839 591 Provision for future proceeds on subrogation and abandon (1 167 350) - (1 167 350) (1 278 700) - (1 278 700) Provision for claims handling expenses 2 475 989 - 2 475 989 1 455 254 - 1 455 254 Total at the beginning of the period 17 240 280 (1 174 288) 16 065 992 16 069 328 (1 707 756) 14 361 572 Insurance claims and claims handling expenses in the reporting period (31 400 375) 766 495 (30 633 880) (26 689 207) 191 498 (26 497 709) Losses incurred in the reporting period, including claim handling expenses 32 083 667 (823 335) 31 260 332 29 043 277 (209 685) 28 833 592 Adjustment of historical claims assessment (1 649 984) 213 003 (1 436 981) (2 057 332) 617 500 (1 439 832) Acquisition of insurance portfolio (Note 14.2) 429 526 - 429 526 - - - Acquisition of subsidiary (Note 30) 885 919 (5 334) 880 585 874 214 (65 845) 808 369 Total insurance loss provisions 17 589 033 (1 023 459) 16 565 574 17 240 280 (1 174 288) 16 065 992 Outstanding claims provision 9 190 704 (987 039) 8 203 665 9 238 153 (1 150 096) 8 088 057 Provision for incurred but not yet reported claims 8 006 210 (36 993) 7 969 217 6 693 488 (24 192) 6 669 296 Provision for future proceeds on subrogation and abandon (1 457 776) 573 (1 457 203) (1 167 350) - (1 167 350) Provision for claims handling expenses 1 849 895 - 1 849 895 2 475 989 - 2 475 989 Total at the end of the period 17 589 033 (1 023 459) 16 565 574 17 240 280 (1 174 288) 16 065 992

On 1 April 2017, the Company received an insurance portfolio of obligatory motor third party liability insurance contracts from Limited Liability Company SK VTB Strakhovanie.

Details of the assets and liabilities transferred are as follows:

Fair value of assets and liabilities Cash and cash equivalents 563 920 Unearned premium provision (134 394) Outstanding claims provision (240 859) Provision for incurred but not yet reported claims (108 719) Provision for claims handling expenses (79 948) Profit or loss from portfolio transfer -



14.2. Insurance loss provisions (continued)

Historic information on development of claims incurred (not including reinsurers' share) is as follows:

Claim occurrence year Total Previously 2013 2014 2015 2016 2017

Claims incurred 1st year of development 26 672 673 29 176 497 30 803 198 33 353 099 35 004 307

2nd year of development 25 922 094 29 244 176 29 378 233 32 988 890 - 3rd year of development 26 053 321 28 748 054 29 021 578 - - 4th year of development 25 871 157 28 617 737 - - - 5th year of development 25 704 909 - - - - Current assessment of

ultimate cost of claims 25 704 909 28 617 737 29 021 578 32 988 890 35 004 307 Claims paid 1st year of development 14 904 818 17 208 303 16 892 911 20 052 577 21 690 596 2nd year of development 23 158 189 26 614 996 25 719 611 29 935 744 - 3rd year of development 24 547 959 27 772 433 27 537 445 - - 4th year of development 25 171 280 28 097 075 - - - 5th year of development 25 437 690 - - - - Total amount of claims

paid 25 437 690 28 097 075 27 537 445 29 935 744 21 690 596 Insurance loss provisions

at 31 December 2016 595 343 691 419 932 918 3 561 781 12 626 169 - 18 407 630 Insurance loss provisions at 31 December 2017 407 939 267 219 520 662 1 484 133 3 053 146 13 313 711 19 046 810

Historic information on development of claims incurred less reinsurers' share is given in the table below:

Claim occurrence year Total Previously 2013 2014 2015 2016 2017

Claims incurred 1st year of development 24 945 537 28 581 102 29 310 775 33 155 245 34 190 541

2nd year of development 24 253 629 28 544 760 28 138 885 32 786 457 - 3rd year of development 24 432 362 28 206 097 28 003 377 - - 4th year of development 24 289 990 28 073 623 - - - 5th year of development 24 120 830 - - - - Current assessment of

ultimate cost of claims 24 120 830 28 073 623 28 003 377 32 786 457 34 190 541 Claims paid 1st year of development 13 880 447 17 090 179 16 446 114 20 024 804 21 618 172 2nd year of development 22 122 866 26 076 661 25 233 335 29 764 030 - 3rd year of development 23 229 210 27 233 255 26 650 152 - - 4th year of development 23 728 941 27 557 688 - - - 5th year of development 23 858 391 - - - - Total amount of claims

paid 23 858 391 27 557 688 26 650 152 29 764 030 21 618 172 Insurance loss provisions

at 31 December 2016 484 476 552 591 930 140 2 808 767 12 457 368 - 17 233 342 Insurance loss provisions at 31 December 2017 296 384 262 439 515 935 1 353 225 3 022 427 12 572 369 18 022 779

Disclosure on development of claims and provisions at 31 December 2017 includes historic data on acquired subsidiaries and does not include the provision for future proceeds on subrogation and abandon.




(a) Provisioning estimates and assumptions

The amount of insurance loss provisions is determined by estimating future unpaid obligations necessary to cover all insurance claims (whether reported or not) that are outstanding at the reporting date. The actuary selects the amount of claims provisions from a reasonable range of estimates received using various statistical methods. Variability in provision reasonable estimates stems from uncertain nature of the future claims settlement process. Several lines of business which the Group underwrites carry greater reserve uncertainty than other lines of business due to the nature of risks covered and time taken to report and settle the claims.

At 31 December 2017 and 31 December 2016, the Group has no established unexpired risk provision as the Group has no loss making lines of business with UPP other than zero.

Actuarial methodology

The Group primarily uses the Chain Ladder method to estimate ultimate claim costs.

The Chain-Ladder method can be applied to claims paid or to the amount of claims reported but not yet settled. The main approach implies analysis of claims development coefficients (factors) for past periods and selection of estimated development coefficients based on the previous experience. After that, the selected development coefficients are applied to aggregate insurance portfolio data for each period within which an insured event occurs for the purpose of estimation of ultimate claims for each period.

The outstanding claims provision (OCP) is established by experts. A provision for claims incurred prior to the end of the period not reported until after the end of the period (IBNR) is calculated for each occurrence period as the difference between a projected ultimate cost of claims incurred within this period and the sum of claims paid and claims reported, but not settled within the same period. All claims development triangles are formed for each line of business for gross and net reinsurance.

Insurance loss provisions also include an estimate of future claims handling and litigation expenses. Provision for claims handling expenses is determined based on the average level of the Group's loss settlement experience (both direct and indirect).

The Group estimates future court expenses based on the triangle development for court expenses paid, using the chain ladder method and expected loss settlement to losses incurred ratio for each occurrence period. The court expenses development also includes expenses within direct settlement of OMTPL (direct settlement of claims).

In its estimation of OMTPL provision at these consolidated financial statements approval date, the Group considers two components of the provision: related to damage to property and related to damage to life and health.

For damage to property, there is a risk that the future growth of average loss on events before the reporting date, will exceed the average growth embedded in the insurance loss provision estimation. The risk is related to potential changes in RAMI reference books and court practice. In addition, there is a risk that the price reference books might be challenged through court. If the reference books are treated as non-complaint with Law, additional claims can be brought against the Group by those affected persons who have already received insurance payments.

As regards damage to life and health, future compensations are based on the frequency of road traffic accidents and average payments per RAMI research, as the Group has not acquired sufficient statistics on such events. As of these consolidated financial statements approval date, there is a high uncertainty as to the future development of losses related to damage to life and health under OMTPL.

(b) Estimation of the subrogation and abandon income

Accrued subrogation income is determined by estimation of future proceeds from an identified subrogation right and realisation of salvage material (abandons). The actuary selects the amount of income provisions from a variety of estimates obtained by various statistical methods. Variability in provision estimates stems from uncertain nature of the future process of exercising subrogation rights.




(b) Estimation of the subrogation and abandon income (continued)

Actuarial methodology

The Group uses a number of statistical methods to estimate ultimate income. The Chain Ladder and Bornhuetter-Ferguson methods are most frequently used for this purpose.

The Chain Ladder method can be applied to income received on subrogation and abandons. The main approach implies analysis of income development coefficients (factors) for past periods and selection of estimated development factors based on the previous experience. After that, the selected development coefficients are applied to aggregate insurance portfolio data for each period within which an insured event occurs for the purpose of estimation of ultimate income for each period. The Chain Ladder method mostly fits developed lines of business with a relatively stable development model and experience in exercising subrogation rights and obtaining income on abandons. It is less applicable when an insurer does not have a developed experience of subrogation and abandon in a specific line of business.

The Bornhuetter-Ferguson method uses estimates based on the comparative analysis of market data and estimates based on the experience of income development in past periods. The former considers positions such as ultimate losses; and the latter is based on the income received at the reporting date. The results of both estimates are consolidated in such a way that the estimate based on the past experience becomes weightier with time. This method is used to make projections when there is no income development experience (when data are only available for recent years of income generated).

As stated above, each of the above methods fits specific lines of insurance business with an established income development model and for certain quarters of income development. Upon using these methods and upon analysis of results from all the methods applied, the actuary selects an ultimate provisioning estimate received by the method that best fits specific business environment.

From 2015, the amount of income provision is computed for each occurrence period as an estimated ultimate subrogation and abandon income in relation to insured events in this period less received income. The amount of provision for each occurrence period is selected for non-negative values only.

The Group has been booking a provision for subrogation and abandon income using the methods described above for MOD and OMTPL insurance only. For other lines of business subrogation payments data in triangles are not sufficient to compute the amount of income provision using these methods. For this reason the Group has been booking an income provision using the ratio of subrogation payments over paid claims for the calendar year and applying this ratio to an insurance loss provision for each of these lines of business.

(c) Sensitivity analysis

The sensitivity analysis was performed for lines of business for which IBNR was computed using loss triangles by quarters of occurrence. The Group did not perform the sensitivity analysis for marine and aviation transport insurance and OGTPL due to immateriality of IBNR. The sensitivity analysis was performed based on claims development triangles for net reinsurance.

To analyse the sensitivity of insurance loss provisions the Group uses a stochastic modelling method. For each claims development triangle 10 000 modelling iterations are completed. Within each iteration unknown coefficients of triangle development are completed based on historically observed coefficients; IBNR is retained. The coefficient selection method involves selection of predominantly recent observable coefficients based on coefficient development trends. Based on modelling results, mathematical expectation and mean square deviation of IBNR is estimated for each line of business. The difference between 90% quantile, multiplied by the best estimate to mathematical expectation ratio, and the best estimate is the sensitivity estimate of IBNR for MOD, VMI and OMTPL. The mean square deviation, multiplied by the best estimate to mathematical expectation ratio, is the sensitivity estimate of IBNR for other lines of business.




(c) Sensitivity analysis (continued)

The insurance loss provisions sensitivity analysis is as follows:

31 December 2017 31 December 2016

Line of business IBNR Sensitivity

Effect on equity and

earnings IBNR Sensitivity

Effect on equity and

earnings OMTPL 5 148 005 679 220 543 376 4 347 999 577 155 461 724 MOD 938 308 184 803 147 842 635 941 179 791 143 833 Personal insurance 849 148 243 429 194 743 268 240 153 600 122 880 Liability insurance 694 443 423 987 339 190 745 997 487 710 390 168 VMI 278 318 225 063 180 050 260 361 191 308 153 046 Property of individuals 50 788 48 812 39 050 80 617 75 645 60 516 Property 421 471 377 15 960 16 492 13 194 Total 7 959 431 1 805 785 1 444 628 6 355 115 1 681 701 1 345 361

Appreciation of foreign currencies against the Russian rouble (USD/RR, EUR/RR) results in additional liabilities within MOD, OMTPL and personal insurance (with regard to travel insurance). For MOD and OMTPL only IBNR is subject to currency inflation, for travel insurance (as settlements with service companies are made in foreign currency) OCP and IBNR are subject to currency inflation. For MOD 60% of IBNR is subject to currency inflation – with regard to the average share in losses on parts cost; for OMTPL – 45% of IBNR.

The sensitivity analysis of provisions to fluctuation of currency exchange rates against the Russian rouble (USD/RR, EUR/RR) is as follows:

Gross provisions Net provisions

+ 20% + 30% + 20% + 30%

OMTPL 316 496 474 744 318 578 477 868 MOD 90 358 135 537 90 358 135 537 Personal insurance (with regard to travel insurance) 31 283 46 924 31 281 46 921 Total 438 137 657 205 440 217 660 326

14.3. Life insurance provisions

Life insurance provisions and reinsurers share in life insurance provision at 31 December 2017 are detailed in the table below.

Total Reinsurers’ share Net reinsurance Acquisition of subsidiary (Note 30) 4 121 270 (2 671) 4 118 599 Change in provisions under life insurance contracts

6 155 049 (3 066) 6 151 983

Total life insurance provisions 10 276 319 (5 737) 10 270 582

The life insurance provisions is actuarially determined by the Group. The Group uses the prospective gross premium valuation method.

While performing the test, the Group considers the present estimated value of all cash flows stipulated by insurance contracts as well as accompanying cash flows at the reporting date. The evaluation of liability adequacy is most sensitive to the following assumptions:

Expense. Operating expenses include current policy maintenance expenses and related out-of-pocket expenses. The Company evaluates expenses at 1% of annual premiums upon the expiration of the premium payment period.



14.3. Life insurance provisions (continued)

Discount rate. The discount rates are based on the current industry risk including the Group’s own risk. To review the adequacy of liabilities, the Group applies a discount rate in the range between 3.0% and 8.15% p.a. depending on the type of insurance contract, currency of the contract and date of issue.

Tables of mortality and other events covered by life insurance contracts. The tables of insurance event probability are based on historical data from the Russian Federal Statistics Service (Goscomstat), data from western statistical agencies adjusted for Russian specifics, and data provided by major western reinsurance companies with which the Group cooperated or which supplied the Group with quotation tables for the purpose of potential cooperation. The probability tables include risk specifics based on the types of life insurance contracts.

At 31 December 2017, the review of liability adequacy did not identify any need for the Group’s additional liabilities.

Sensitivity analysis of life insurance provisions

For the purpose of estimating the life insurance provisions the Group uses assumptions that have an impact on the amounts presented in the financial statements. Such assumptions include future mortality rates, investment return and insurer's costs. Estimates and assumptions are analysed based on past experience, assumptions related to future events that are believed to be reasonable under the circumstance. The sensitivity analysis was performed for gross provisions, except for losses claimed.

The sensitivity analysis of life insurance provisions is provided below:

31 December 2017 Evaluation liabilities Change in evaluation

Best estimate 10 276 319 Mortality rate +10% 10 283 429 7 110 0.07% Mortality rate -10% 10 263 779 (12 540) -0.12% Level of expenses +10% 10 278 772 2 453 0.02% Discount rate +1% 9 974 322 (301 997) -2.94% Discount rate -1% 10 563 611 287 292 2.80%

15. Segment Analysis

Operating segments are components that are engaged in business activities that may earn revenues or incur expenses, whose operating results are regularly reviewed by the chief operating decision maker (“CODM”), and for which discrete financial information is available. The CODM is the person – or group of persons – who allocates resources and assesses the performance for the entity. The functions of the CODM are performed by the management board of the Company.

(a) Description of products and services from which each reportable segment derives its revenue

The Group is organised on the basis of the following main business segments:

− Motor insurance. This segment includes all types of motor vehicles insurance, obligatory and voluntary insurance of third party liability of motor vehicle owners and insurance under Green Card system;

− Property and liability insurance. This segment includes corporate property insurance, cargo insurance, insurance of individuals’ property, including mortgage insurance; air and sea insurance; obligatory and voluntary insurance of third party liability;

− Accident insurance. This segment includes all types of accident insurance and travel insurance;

− Medical insurance. This segment includes voluntary medical insurance and medical insurance for migrant workers.

− Life insurance – the segment includes saving and investment life insurance (Note 30).


15. Segment Analysis (Continued)

(b) Factors that management used to identify the reportable segments

The above business segments offer a wide range of products and services for various clients, and are managed separately because they require different technology, marketing strategies and service level. The Group operates in the Russian Federation. The Group does not have customers with the revenues exceeding 10% of the total revenue of the Group.

Management considered the extent of economic integration between entities controlled by the Russian government, and concluded that entities under the control of the government are not in general a single customer for the purposes of the below disclosure.

(c) Measurement of operating segment profit or loss, assets and liabilities

The CODM reviews financial information prepared based on IFRS.

Performance of each segment is measured by the result of insurance activities before subsequent allocation of operating expenses. The Group has no inter-segmental operations. There is no inter-segmental re-allocation of profits and losses.

The results of operations, assets and liabilities of each segment are disclosed below.



(c) Measurement of operating segment profit or loss, assets and liabilities (continued)

Segment information for the reportable segments for the year ended 31 December 2017 is set out below:

Motor

insurance Property and

liability Accident

insurance VMI Life

insurance Total Gross premiums written 41 004 012 13 254 030 7 074 257 5 343 216 7 129 482 73 804 997 Premiums ceded (60 499) (2 185 123) (23 331) - (5 825) (2 274 778) Insurance premiums, net of reinsurance 40 943 513 11 068 907 7 050 926 5 343 216 7 123 657 71 530 219

Change in unearned premium provision, gross (3 519 286) (1 724 745) 17 181 (494 381) - (5 721 231)

Change in reinsurers’ share of unearned premium provision 6 643 417 705 (798) (32 398) - 391 152

Insurance premiums earned, net of reinsurance 37 430 870 9 761 867 7 067 309 4 816 437 7 123 657 66 200 140

Claims paid (22 666 054) (3 230 934) (1 939 868) (2 456 690) (49 736) (30 343 282) Claims handling expenses (2 205 538) (455 349) (91 892) (106 620) (1 247) (2 860 646) Reimbursements from subrogation and recourse claims 1 641 324 95 627 15 644 (25) - 1 752 570

Insurance claims and related expenses, gross (23 230 268) (3 590 656) (2 016 116) (2 563 335) (50 983) (31 451 358)

Reinsurers’ share in claims paid 138 811 617 662 845 - 1 602 758 920

Reinsurers’ share in claims handling expenses - 9 177 - - - 9 177

Reinsurers’ share in claims paid and related expenses 138 811 626 839 845 - 1 602 768 097

Change in insurance loss provisions, gross (191 510) 1 116 638 82 980 (41 416) - 966 692

Change in reinsurers’ share of insurance loss provisions (92 147) (58 695) (2 650) - - (153 492)

Change in life insurance provisions, gross - - - - (6 155 049) (6 155 049)

Change in reinsurers’ share in life insurance provisions - - - - 3 066 3 066

Insurance claims incurred, net of reinsurance (23 375 114) (1 905 874) (1 934 941) (2 604 751) (6 201 364) (36 022 044)

Acquisition costs, gross (9 206 111) (3 746 029) (2 781 453) (1 638 622) (920 746) (18 292 961) Reinsurers’ share of acquisition costs (1 575) 123 741 (2 606) 3 124 - 122 684

Insurance activity result before operating expenses 4 848 070 4 233 705 2 348 309 576 188 1 547 12 007 819




Segment information for the reportable segments for the year ended 31 December 2016 is set out below:

Motor

insurance Property and

liability Accident

insurance VMI Total Gross premiums written 34 353 953 9 983 670 4 710 283 4 211 041 53 258 947 Premiums ceded (52 612) (1 745 385) (27 283) (81 915) (1 907 195) Insurance premiums, net of reinsurance 34 301 341 8 238 285 4 683 000 4 129 126 51 351 752 Change in unearned premium provision, gross (879 005) (371 204) 270 650 (508 389) (1 487 948) Change in reinsurers’ share of unearned premium provision (557) (50 323) 33 32 604 (18 243) Insurance premiums earned, net of reinsurance 33 421 779 7 816 758 4 953 683 3 653 341 49 845 561 Claims paid (19 703 115) (2 960 007) (1 220 698) (2 208 901) (26 092 721) Claims handling expenses (1 796 844) (349 401) (63 793) (85 237) (2 295 275) Reimbursements from subrogation and recourse claims 1 685 812 10 761 2 217 (1) 1 698 789 Insurance claims and related expenses, gross (19 814 147) (3 298 647) (1 282 274) (2 294 139) (26 689 207) Reinsurers’ share in claims paid - 187 066 515 - 187 581 Reinsurers’ share in claims handling expenses - 3 917 - - 3 917 Reinsurers’ share in claims paid and related expenses - 190 983 515 - 191 498 Change in insurance loss provisions, gross (1 858 193) 1 550 634 211 921 (201 100) (296 738) Change in reinsurers’ share of insurance loss provisions (39 321) (561 203) 1 211 - (599 313) Insurance claims incurred, net of reinsurance (21 711 661) (2 118 233) (1 068 627) (2 495 239) (27 393 760) Acquisition costs, gross (7 814 540) (2 936 011) (2 013 564) (963 570) (13 727 685) Reinsurers’ share of acquisition costs 14 113 662 - - 113 676 Insurance activity result before operating expenses 3 895 592 2 876 176 1 871 492 194 532 8 837 792




Segment information for assets and liabilities at 31 December 2017 is set out below:

Motor

insurance

Property and

liability Accident

insurance VMI Life

insurance

Corporate assets and liabilities

Assets Cash and cash equivalents 1 280 208 1 149 514 1 077 643 142 756 - 32 612 Financial assets 36 203 636 8 735 702 3 997 117 2 232 731 11 391 310 1 997 625 Receivables arising from insurance operations 3 979 755 1 501 358 299 342 956 939 6 945 - Reinsurers’ share of unearned premium provision 19 047 1 117 147 - - - -

Reinsurers’ share of insurance loss provisions 42 176 979 415 1 868 - - - Reinsurers’ share in life insurance provisions - - - - 5 737 - Deferred acquisition costs 4 952 702 2 577 047 3 601 896 790 293 - - Other assets - - - - - 9 910 554 Total assets 46 477 524 16 060 183 8 977 866 4 122 719 11 403 992 11 940 791 Liabilities Unearned premium provision 22 138 850 7 560 314 5 380 038 2 211 925 - - Insurance loss provisions 11 115 290 4 403 461 1 730 585 339 697 - - Life insurance provisions - - - - 10 276 319 - Reinsurers’ share of deferred acquisition costs - 97 687 - - - - Payables arising from insurance operations 2 451 396 944 295 220 990 601 700 326 300 - Debt securities in issue and loans received - - - - - 4 226 823 Other liabilities and payables - - - - - 4 676 160 Total liabilities 35 705 536 13 005 757 7 331 613 3 153 322 10 602 619 8 902 983

Segment information for assets and liabilities at 31 December 2016 is set out below:

Motor

insurance Property

and liability Accident

insurance VMI

Corporate assets and liabilities

Assets Cash and cash equivalents 2 957 773 961 038 399 523 175 655 - Financial assets 25 194 292 7 989 154 3 321 255 1 460 231 619 486 Receivables arising from insurance operations 2 307 277 894 355 203 740 471 331 831 550 Reinsurers’ share of unearned premium provision 8 648 699 442 798 32 787 - Reinsurers’ share of insurance loss provisions 131 659 1 038 111 4 518 - - Deferred acquisition costs 4 214 655 1 853 640 2 410 355 545 346 - Other assets - - - - 8 963 567 Total assets 34 814 304 13 435 740 6 340 189 2 685 350 10 414 603 Liabilities Unearned premium provision 17 947 313 5 842 228 4 549 646 1 700 255 - Insurance loss provisions 10 325 094 5 520 214 1 096 691 298 281 - Reinsurers’ share of deferred acquisition costs - 73 714 - - - Payables arising from insurance operations 1 804 779 699 575 159 368 368 681 650 448 Other liabilities and payables - - - - 1 749 378 Total liabilities 30 077 186 12 135 731 5 805 705 2 367 217 2 399 826



(d) Reconciliation of reportable segment revenues, profit or loss, assets and liabilities

The reporting segments’ revenue for 2017 and 2016 is equal to the consolidated revenue of the Group and is represented by insurance premiums under life and non-life insurance contracts.

12 months ended 31 December

2017


2016 Total reportable segment result 12 007 819 8 837 792 Administrative and other expenses related to insurance operations (6 839 014) (5 938 316) Change in provision for impairment of receivables on insurance and reinsurance operations (617 465) (18 950) Interest, dividend and other income from investing activities 4 385 043 3 689 970 Change in provision for impairment of loans, other receivables, including deposits with banks (518 471) 3 424 Other loss from investing activities (42 740) (83 203) Other operating income 139 644 51 826 Other operating expenses (505 026) (2 007 955) Losses less gains from investments available-for-sale 280 747 457 734 Gains less gains from investments at fair value through profit or loss (85 490) - Interest expenses on debt securities in issue (323 058) - Profit or loss before tax 7 881 989 4 992 322

31 December

2017 31 December

2016 Total reportable segment assets 87 042 284 57 275 583 Financial assets and cash 2 030 237 619 486 Receivables arising from insurance operations - 831 550 Investment properties 646 464 657 233 Prepayments and other assets 1 285 194 1 714 325 Deferred income tax assets 276 312 821 860 Goodwill 2 220 198 701 974 Premises, equipment and intangible assets 5 482 386 5 068 175 Total consolidated assets 98 983 075 67 690 186

31 December

2017 31 December

2016 Total reportable segment liabilities 69 798 847 50 385 839 Payables arising from insurance operations - 650 448 Debt securities in issue 4 099 301 - Loans received 127 522 115 289 Deferred income tax liabilities 1 106 668 - Other payables and other liabilities 3 569 492 1 634 089 Total consolidated liabilities 78 701 830 52 785 665


16. Deferred Tax Assets and Liabilities

Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when deferred tax assets and deferred tax liabilities relate to income taxes collected by one and the same tax body.

The tax rate on income other than from state and municipal securities was 20% in 2017 and 2016. The tax rate on interest income from state securities was 15% in 2017 and 2016. The tax rate on interest income from municipal securities was 9% in 2017 and 2016.

Change in deferred tax assets and liabilities

Deferred tax (liability)/asset

Deferred tax assets at 1 January 2016 (4) Deferred income tax expense charged to profit and loss 613 469 Deferred income tax benefit credited to other comprehensive income (20 706) Acquisitions of subsidiaries 229 101 Deferred tax assets at 31 December 2016 821 860 Deferred income tax expense charged to profit and loss (1 571 871) Deferred income tax expense credited to other comprehensive income (89 395) Acquisition of subsidiary (Note 30) 9 050 Deferred tax liabilities (net) at 31 December 2017 (830 356)


16. Deferred Tax Assets and Liabilities (Continued)

Changes in deferred taxes Changes in deferred taxes

At 1 January

2016

on accounts of other

comprehensive income

acquisition of

subsidiary

on accounts of profit

or loss

31 December

2016

on accounts of other

comprehen-sive income

acquisition of

subsidiary

on accounts of profit

or loss

31 December

2017 Tax effect of deductible temporary differences

Tax loss carried forward 251 - 194 065 (251) 194 065 - - 600 417 794 482 Reinsurers’ share in insurance provisions 189 333 - - (120 797) 68 536 - - (68 536) - Insurance provisions 1 455 630 - - 219 549 1 675 179 - - (1 650 104) 25 075 Receivables and prepayments (75 220) - 35 036 287 686 247 502 - 12 457 134 360 394 319 Trade payables 304 880 - - 108 774 413 654 - 15 514 783 173 1 212 341 Gross deferred tax assets 1 874 874 - 229 101 494 961 2 598 936 - 27 971 (200 690) 2 426 217

Tax effect of taxable temporary differences Investments (256 831) (50 561) - 392 781 85 389 (89 395) - (43 790) (47 796) Reinsurers’ share in insurance provisions - - (21 480) (21 480) Insurance provisions - (18 921) (702 249) (721 170) Premises and equipment (102 392) 29 855 - 128 (72 409) - - (28 868) (101 277) Deferred acquisition costs (1 515 655) - - (274 401) (1 790 056) - - (574 794) (2 364 850) Gross deferred tax liabilities (1 874 878) (20 706) - 118 508 (1 777 076) (89 395) (18 921) (1 371 181) (3 256 573)

Total net deferred tax liabilities (4) (20 706) 229 101 613 469 821 860 (89 395) 9 050 (1 571 871) (830 356)

Recognised deferred tax asset

- (20 706) 229 101 613 469 821 860 (10 561) 15 514 (550 500) 276 312

Recognised deferred tax liability

(4) - 4 - - (78 834) (6 464) (1 021 370) (1 106 668)

The recognised deferred tax asset represents income taxes recoverable through future deductions from taxable profits, and is recorded in the consolidated statement of financial position. Deferred income tax assets are recorded to the extent that realisation of the related tax benefit is probable. The Group believes that the above deferred tax asset will be accepted for deductibility in the future periods.


17. Payables Arising from Insurance Operations

31 December 2017 31 December 2016 Insurance premiums prepaid 650 257 1 439 254 Payable to insurance agents 2 964 599 1 317 584 Payables arising from reinsurance operations 929 825 926 013 Total 4 544 681 3 682 851

18. Debt Securities in Issue


Bonds issued on domestic market 4 099 301 - Total debt securities in issue 4 099 301 -

At 31 December 2017, debt securities issued by the Group included promissory bonds issued in the domestic Russian market of RR 4 000 000 thousand denominated in Russian Roubles.

On 11 April 2017, the Company placed non-convertible interest-bearing bonds through an initial public offering for the total of RR 4 billion with maturity of 5 years. Initial indicative coupon yield was determined at 11.05% p.a. 2nd and 3rd coupon yields are equal to the 1st coupon yield. The issue provides for semi-annual coupon payments, with an offer after 18 months of the placement date. VSK 01Р-01 bonds are available for secondary market trades on MICEX (stock section) starting from 11 April 2017. The issue meets admission criteria for the Bank of Russia's Lombard List and meets the requirements for placement of pension savings; the second level of the listing is expected.

The yield to maturity calculated based on market quotations at the reporting date was 11.35%. The effective interest rate based on the issue price less transaction costs at the issue date was 11.51%.

Refer to Note 27 for the disclosure of the fair value of debt securities in issue.

19. Other Payables and Other Liabilities

31 December 2017

31 December 2016

Other financial payables Settlements with shareholders on dividends payments 1 000 000 - Settlements with RAMI 175 902 203 665 Payables to suppliers of goods and services 71 204 101 574 Payables arising from OMI operations 28 564 24 867 Other payables 330 874 249 780 Total other financial payables 1 606 544 579 886 Other non-financial liabilities Payables to employees 1 820 943 1 032 477 Taxes, levies and contributions payable 142 005 21 726 Total other non-financial liabilities 1 962 948 1 054 203 Total 3 569 492 1 634 089

Other payables represent a financial liability and the carrying amount of such payables is approximately equal to their fair value as they are expected to mature within a year from the reporting date.

Related party transactions are disclosed in Note 29.


20. Interest, Dividend and Other Income from Investment Activities



2016 Interest income

Income from bank deposits 1 734 468 1 767 551 Income from corporate bonds 1 754 047 1 259 369 Income from issued loans and promissory notes 165 279 178 056 Interest on cash balances on settlement accounts 149 801 96 141 Total interest income 3 803 595 3 301 117 Gains from derivative financial instruments 516 959 367 089 Income from operating lease 64 489 21 764 Total 4 385 043 3 689 970

No interest income was accrued on impaired financial assets of the Group during 2017 and 2016.

21. Other Operating Income



2016 Income from provision of services to other insurance companies 53 940 8 720 Income from agency fees 28 605 5 317 Proceeds for recovery of the company's loss 25 927 19 266 Income from OMI operations 7 547 6 532 Gain on revaluation of premises and equipment 3 264 - Other income 20 361 11 991 Total 139 644 51 826


22. Acquisition Costs, Net of Reinsurance and Operating Expenses


2017


2016 Acquisition costs Commissions and brokerage fee (17 263 795) (11 621 236) Staff costs related to employees from sales units (1 651 909) (1 409 484) Expenses on social tax and contributions to the Pension Fund (1 099 959) (900 487) Contributions to RAMI and provisions for guarantees and compensation payments under OMTPL

(878 352) (779 707)

Brokerage fee for reinsurance (101 911) (65 438) Other acquisition costs (33 141) (36 552) Total acquisition costs incurred (21 029 067) (14 812 904) Change in deferred acquisition costs 2 736 106 1 085 219 Total acquisition costs (18 292 961) (13 727 685) Reinsurers’ share of acquisition costs 146 657 156 898 Change in reinsurers’ share of deferred acquisition costs (23 973) (43 222) Total acquisition costs, net (18 170 277) (13 614 009) Other costs of insurance operations Staff costs (489 124) (497 296) Expenses on social tax and contributions to the Pension Fund (88 176) (90 542) Professional services (12 503) (11 680) Other expenses (38 538) (37 347) Total other insurance expenses (628 341) (636 865) Administrative expenses Staff costs and other similar expenses (2 696 039) (2 365 245) Expenses on social tax and contributions to the Pension Fund (635 908) (579 937) Advertising (577 823) (502 503) Depreciation and amortisation of premises, equipment and intangible assets (Note 11)

(456 290) (412 884)

Consulting and information services (422 998) (294 015) Banking services (324 526) (251 482) Lease of premises (287 088) (250 212) Premises maintenance expenses (270 002) (252 885) Telecommunications expenses (159 390) (141 397) Material expenses (156 659) (59 807) Travel and representative expenses (44 422) (21 243) Other expenses (179 528) (169 841) Total administrative expenses (6 210 673) (5 301 451) Total other costs of insurance operations (6 839 014) (5 938 316) Total (25 009 291) (19 552 325)

Contributions to the Pension Fund in 2017 amounted to RR 1 330 424 thousand (2016: RR 1 083 209 thousand).

23. Other Operating Expenses



2016 Exchange differences, net result (246 600) (1 748 066) Impairment of other receivables (127 094) (53 831) Taxes other than income tax (82 845) (83 892) Legal costs, compensation of damage caused and contracted penalties - (9 056) Membership fees to organisations and associations (5 189) (23 367) Loss from revaluation of premises and equipment (15 502) (35 945) Other operating expenses (27 796) (53 798) Total (505 026) (2 007 955)


24. Income Taxes

By elements of tax expenses:



2016 Current income tax expense (305 001) (1 818 939) Deferred income tax credit/(expense) (1 571 869) 613 469 Income tax expense (1 876 870) (1 205 470)

Tax expense is calculated based on the basic tax rate as follows:



2016 Profit before tax 7 881 989 4 992 322 Tax rate 20% 20% Theoretic tax expense at the tax rate (1 576 398) (998 464) Non-deductible expenses net of non-taxable income Losses less gains on financial assets and derivative financial instruments - (114 779) Other expenses (300 472) (92 227) Income tax expense (1 876 870) (1 205 470)

25. Risk Management

Financial and insurance risk management is an integral part of the Group's operations. The principal risks the Group is exposed to insurance, credit, liquidity, interest rate, equity and currency risks.

The Group's current operations are managed by the Company's Management Board, the Board of Directors approves quantitative and personal composition of the Company's Management Board. Decisions on approval of major deals connected with insurance, reinsurance, acquisition of real estate, provision of services and approval of the largest claims fall under competence of the Management Board. Monetary limits for various types of deals were established.

25.1. Insurance risk

The Group takes on exposure to insurance risk which is the risk that the final amount of claims under insurance agreements or time before their realisation may considerably differ from the estimates made by the Group due to the effect of various factors: frequency, size and development of claims with a longer period. The very nature of an insurance contract implies that such a risk is random and therefore unpredictable.

Possible accumulation of large claims in such lines as property insurance, other liability insurance and other types of insurance is the major factor that could have a significant impact on the Group’s financial flows and performance indicators. The principal objective of the Group is to ensure an adequate level of insurance provisions in the amounts sufficient to meet obligations under insurance contracts.

Subject to the above, the Group develops its insurance risk management policy covering all stages, starting with development of insurance rates methodology and up to actual settlement of claims. The Group controls insurance risk through diversification of various types of insurance and geographical segments, application of underwriting procedures aimed to control insurance portfolio losses by lines of business and application of reinsurance to mitigate the risk of losses in the amount exceeding the set level of self-retained risk.


25. Risk Management (Continued)

25.2. Credit risk

The Group takes on exposure to credit risk which is the risk that the Group's borrower will be unable to pay amounts in full when due. The key risk of the Group is associated with bank deposits and investments available-for-sale representing the principal part of the Group's investment portfolio.

The Asset Management Department deals with credit risk. The credit risk management policy is primarily implemented through the limits set for counterparties in financial assets and monitoring compliance with these limits.

The maximum exposure to credit risk is usually reflected in the carrying amounts of debt financial assets and reinsurer's share of insurance loss provisions on the Group's statement of financial position and guarantees issued:

31 December 2017

31 December 2016

Cash and cash equivalents 3 682 733 4 493 989 Financial assets

Loans and other receivables, including deposits with banks 28 147 412 23 253 267 Investment securities available-for-sale 35 826 481 15 208 273 Financial instruments at fair value through profit or loss 584 228 -

Reinsurers’ share of insurance loss provisions 1 023 459 1 174 288 Reinsurers’ share in life insurance provisions 5 737 - Receivables arising from insurance operations 6 744 339 4 708 253 Guarantees issued (Note 28.6) - (71 787) Total 76 014 389 48 766 283

The credit quality of financial and insurance assets which are not impaired could be determined through ratings (if any) assigned by independent rating agencies. Fitch ratings were applied to assess the quality of financial and reinsurance assets. For financial and reinsurance assets not rated by Fitch and rated by other rating agencies (Standard & Poor’s, Moody’s and A.M. Best financial strength rating). The credit quality is determined based on the following rating scales:

Fitch

Ratings S&P

Ratings Moody's Ratings

A.M. Best Ratings

Investment grade Highest creditworthiness AAA AAA Aaa A++ Very high creditworthiness AA AA Aa A+ High creditworthiness A A A A Good creditworthiness BBB BBB Baa A-, B++ Speculative grade Speculative rating BB BB Ba B+ Highly speculative B B B B, B- Probability of default ССС ССС Caa C High probability of default СС СС Ca D, E Bankruptcy initiated С С C F Default D D D -



25.2. Credit risk (continued)

The credit quality of neither past due nor impaired financial and insurance assets as at 31 December 2017 is presented below:

ААA and АА A BBB BB B Unrated Total Cash and cash equivalents - - 2 163 755 1 116 576 394 671 7 731 3 682 733 Deposits with banks - - 11 899 940 11 253 479 3 327 023 - 26 480 442 Promissory notes and loans of other companies - - - - - 941 662 941 662 Other receivables - - 364 088 115 959 106 958 138 303 725 308 Investment securities available- for-sale - 166 572 9 330 925 21 184 141 3 899 128 1 245 715 35 826 481 Financial instruments at fair value through profit or loss - 584 228 - - - - 584 228 Reinsurers’ share of insurance loss provisions 210 676 316 757 408 731 3 977 3 168 80 150 1 023 459 Reinsurers’ share in life insurance provisions - - - - - 5 737 5 737 Receivables arising from insurance operations - 2 430 201 952 688 790 111 408 4 822 242 5 826 822 Receivables arising from direct settlement of claims - - 127 972 214 188 183 967 271 810 797 937 Receivables arising from reinsurance operations 27 502 14 199 19 583 6 757 6 187 45 352 119 580 Total 238 178 1 084 186 24 516 946 34 583 867 8 032 510 7 558 702 76 014 389

At 31 December 2017, financial assets included in the “Unrated” category, excluding receivables, are represented by issuers that have no international ratings but have ratings from A to AA+ from national rating agencies or related party transactions described in Note 29.

Analysis of credit quality of receivables is performed by types of operations, segments of counterparties and maturity dates.

At 31 December 2017, other receivables included in the “Unrated” category mainly represent settlements on loans issued to the Group's employees.

At 31 December 2017, the structure of insurance receivables included in the “Unrated” category is as follows:

− Settlements with policy holders represented by legal entities with no credit quality ratings assigned by rating agencies and individual entrepreneurs – RR 1 508 608 thousand.

− Settlements with policy holders represented by individuals are RR 530 584 thousand.

− Settlements with insurance agents and brokers, including car dealers, are RR 1 542 360 thousand.

− Guarantee payments to insurance agents – RR 1 212 146 thousand.

At 31 December 2017, the Group had no pledged assets.




At 31 December 2016:

ААA and АА A BBB BB B Unrated Total Cash and cash equivalents - - 499 668 3 950 473 26 456 17 392 4 493 989 Deposits with banks - - 6 398 099 10 249 666 3 153 597 - 19 801 362 Promissory notes and loans of other companies - - - - - 1 817 094 1 817 094 Other receivables - 7 842 112 609 1 304 495 88 054 121 811 1 634 811 Investment securities available-for-sale - - 2 902 096 10 069 784 2 236 393 122 878 15 331 151 Reinsurers’ share of insurance loss provisions 514 898 539 532 6 460 2 838 1 081 109 479 1 174 288 Receivables arising from insurance operations - 37 759 70 931 169 641 9 976 3 688 871 3 977 178 Receivables arising from direct settlement of claims - - 32 744 202 055 180 448 279 662 694 909 Receivables arising from reinsurance operations 3 322 4 982 2 677 3 704 1 643 19 838 36 166 Total assets 518 220 590 115 10 025 284 25 952 656 5 697 648 6 177 025 48 960 948 Guarantees issued (Note 28.6) - - (71 787) - - - (71 787) Total 518 220 590 115 9 953 497 25 952 656 5 697 648 6 177 025 48 889 161

At 31 December 2016, financial assets included in the “Unrated” category, excluding receivables, are represented by issuers that have no international ratings but have ratings from A to AA+ from national rating agencies or related party transactions described in Note 29.

Analysis of credit quality of receivables is performed by types of operations, segments of counterparties and maturity dates.

At 31 December 2016, other receivables included in the “Unrated” category mainly represent settlements on loans issued to the Group's employees.

At 31 December 2016, the structure of insurance receivables included in the “Unrated” category is as follows:

− Settlements with policy holders represented by legal entities with no credit quality ratings assigned by rating agencies and individual entrepreneurs – RR 2 266 103 thousand.

− Settlements with policy holders represented by individuals are RR 601 595 thousand.

− Settlements with insurance agents and brokers, including car dealers, are RR 768 373 thousand.

− Subrogation settlements are RR 52 800 thousand.




The Group reviews financial assets in terms of impairment based on contractual terms and conditions of placing cash or validity of insurance contracts and the period effectively paid by the premium.


Overdue less than

90 days

Overdue 90-180

days

Overdue 180-365

days

Overdue more than

1 year Expired

contracts

Total assets with

impair-ment

indicators

Provision for

impair-ment

Non-impaired

assets Total Cash and cash equivalents - - - - - - - 3 682 733 3 682 733 Deposits with banks - - - - 117 530 117 530 (117 530) 26 480 442 26 597 972 Promissory notes and loans of other companies - - - - 629 386 629 386 (629 386) 941 662 1 571 048 Other receivables - - - - - - - 725 308 725 308 Investment securities available-for-sale - - - - - - - 35 826 481 35 826 481 Financial instruments at fair value through profit or loss - - - - - - - 584 228 584 228 Receivables arising from insurance operations 631 800 264 769 179 966 21 442 276 655 1 374 632 (774 495) 5 226 685 6 601 317 Receivables arising from direct settlement of claims - - - - 28 544 28 544 (28 544) 797 937 826 481 Receivables arising from reinsurance operations - - - - 40 068 40 068 (40 068) 119 580 159 648


Overdue less than

90 days

Overdue 90-180

days

Overdue 180-365

days

Overdue more

than 1 year

Expired contracts

Total assets

with impair-

ment indicators

Provision for

impair-ment

Non-impaired

assets Total Cash and cash equivalents - - - - - - - 4 493 989 4 493 989 Deposits with banks - - - - 134 792 134 792 (134 792) 19 801 362 19 936 154 Promissory notes and loans of other companies - - - - 93 653 93 653 (93 653) 1 817 094 1 910 747 Other receivables - - - - - - - 1 634 811 1 634 811 Investment securities available-for-sale - - - - - - - 15 208 273 15 208 273 Receivables arising from insurance operations 612 820 74 121 20 084 3 480 20 517 731 022 (143 691) 3 389 847 3 977 178 Receivables arising from direct settlement of claims - - - - - - - 694 909 694 909 Receivables arising from reinsurance operations - - - - 19 116 19 116 (19 116) 36 166 36 166

25.3. Currency risk

The Group takes on exposure to the effects of fluctuations in the market exchange rates, as it has assets and liabilities denominated in foreign currency. The Group manages its currency risk through matching its assets and liabilities denominated in foreign currency. At 31 December 2017, the Group's statement of financial position includes cash in US dollars and Euro and Eurobonds by Russian issuers. Liabilities are fixed in currency equivalent for a number of insurance contracts and for claims and premiums ceded under obligatory agreements. Therefore, the Group is exposed to risk in relation to such liabilities in the event of significant fluctuations in exchange rates. The Group management mitigates the risk through investing in securities denominated in US dollars and maintaining a certain level of foreign currency denominated cash.

The table below summarises the Group’s exposure to currency risk. The table shows the Group’s assets and liabilities by their denomination currencies.



25.3. Currency risk (continued)


Russian Roubles US Dollars Euro Other Total

Assets Cash and cash equivalents 3 619 423 26 580 18 638 18 092 3 682 733 Loans and other receivables, including deposits with banks 24 811 752 3 218 093 117 567 - 28 147 412 Investment securities available-for-sale 28 870 628 6 955 853 - - 35 826 481 Financial instruments at fair value through profit or loss 8 888 575 340 584 228 Reinsurers’ share of insurance loss provisions 439 196 99 002 485 261 - 1 023 459 Reinsurers’ share in life insurance provisions 5 593 144 - - 5 737 Receivables arising from insurance operations 6 743 896 424 19 - 6 744 339 Total assets 64 499 376 10 875 436 621 485 18 092 76 014 389 Liabilities Insurance loss provisions (16 391 299) (465 379) (718 816) (13 539) (17 589 033) Life insurance provisions (9 905 270) (363 197) (7 852) (10 276 319) Debt securities in issue (4 099 301) (4 099 301) Loans received (127 522) (127 522) Payables arising from insurance operations (4 537 936) (6 745) - - (4 544 681) Other financial payables (1 606 544) (1 606 544) Total liabilities (36 667 872) (835 321) (726 668) (13 539) (38 243 400) Net position 27 831 504 10 040 115 (105 183) 4 553 37 770 989


Russian Roubles US Dollars Euro Other Total

Assets Cash and cash equivalents 4 390 936 81 580 21 473 - 4 493 989 Loans and other receivables, including deposits with banks 20 117 362 3 034 635 83 517 17 753 23 253 267 Investment securities available-for-sale 8 971 158 6 359 993 - - 15 331 151 Reinsurers’ share of insurance loss provisions 939 559 104 256 130 473 - 1 174 288 Receivables arising from insurance operations 4 541 559 73 062 22 189 71 443 4 708 253 Total assets 38 960 574 9 653 526 257 652 89 196 48 960 948 Liabilities Insurance loss provisions (16 241 485) (705 497) (290 905) (2 393) (17 240 280) Loans received (115 289) - - - (115 289) Payables arising from insurance operations (2 189 232) (22 210) (14 148) (18 007) (2 243 597) Other financial payables (579 886) - - - (579 886) Guarantees issued (Note 28.6) - - (71 787) - (71 787) Total liabilities (19 125 892) (727 707) (376 840) (20 400) (20 250 839) Net position 19 834 682 8 925 819 (119 188) 68 796 28 710 109



25.3. Currency risk (continued)

The table below presents sensitivities of net profit and equity of the Group to reasonably possible changes in exchange rates of US dollar and euro. When performing sensitivity analysis, the Group measures currency SWAP instruments on a gross basis. The range of possible changes is 30% and it is determined based on expert valuation of the Group's management, subject to historic trends and the current market situation.


USD/RUB +30% USD/RUB -30% USD/RUB +30% USD/RUB -30% Effect on net profit 1 148 725 (1 148 725) 1 066 839 (1 066 839) Effect on equity 1 148 725 (1 148 725) 1 066 839 (1 066 839)


EUR/RUB +30% EUR/RUB -30% EUR/RUB +30% EUR/RUB -30% Effect on net profit (110 527) 110 527 (28 224) 28 224 Effect on equity (110 527) 110 527 (28 224) 28 224

25.4. Liquidity risk

Liquidity risk is the risk of mismatch of maturities of assets and liabilities and related possible deficit of funds of the Group to repay its liabilities. The policy of the Group is aimed to ensure sufficient liquidity to meet its obligations when due without risking damage to the reputation or incurring unacceptable losses. The Group maintains the required liquidity ratio to ensure permanent availability of cash necessary to discharge all obligations as they fall due.

The amounts disclosed in these tables are equal to the amounts reported in the consolidated financial statements, because balance sheet insurance, reinsurance liabilities and financial transactions are not discounted due to a short period during which the Group discharges its obligations. When the amount of liabilities is not fixed, the amount disclosed is determined by reference to the conditions existing at the reporting date. Foreign currency liabilities are translated using the Russian Rouble exchange rate to respective foreign currency as at the reporting date. The Group uses the maturity analysis presented below to manage liquidity.

Assets and liabilities classified into relevant groups by expected or contractual maturity at 31 December 2017 are as follows:

Not later

than 1 year One to five

years Due after 5

years Total Assets

Cash and cash equivalents 3 682 733 - - 3 682 733 Loans and other receivables, including deposits with banks 19 012 096 7 217 543 1 917 773 28 147 412 Investment securities available-for-sale 4 489 665 15 944 410 15 392 406 35 826 481 Financial instruments at fair value through profit or loss - 584 228 - 584 228 Reinsurers’ share of insurance loss provisions 726 435 226 231 70 793 1 023 459 Reinsurers’ share in life insurance provisions 243 4 104 1 390 5 737 Receivables arising from insurance operations 6 744 339 - - 6 744 339 Total assets 34 655 511 23 976 516 17 382 362 76 014 389 Liabilities Insurance loss provisions (11 863 825) (5 304 401) (420 807) (17 589 033) Life insurance provisions (32 872) (9 995 900) (247 547) (10 276 319) Debt securities in issue - (4 099 301) - (4 099 301) Loans received - - (127 522) (127 522) Payables arising from insurance operations (4 544 681) - - (4 544 681) Other financial payables (1 606 544) - - (1 606 544) Total liabilities (18 047 922) (19 399 602) (795 876) (38 243 400) Net position 16 607 589 4 576 914 16 586 486 37 770 989



25.4 Liquidity risk (continued)

Maturities of insurance contract liabilities and reinsurance assets are determined based on estimated cash outflows related to recognised insurance liabilities.

Assets and liabilities classified into relevant groups by expected or contractual maturity at 31 December 2016 are as follows:

Not later

than 1 year One to five

years Due after 5

years Total Assets

Cash and cash equivalents 4 493 989 - - 4 493 989 Loans and other receivables, including deposits with banks 19 586 957 2 889 185 777 125 23 253 267 Investment securities available-for-sale 174 403 9 608 258 5 548 490 15 331 151 Reinsurers’ share of insurance loss provisions 741 890 405 970 26 428 1 174 288 Receivables arising from insurance operations 4 457 573 250 680 - 4 708 253 Total assets 29 454 812 13 154 093 6 352 043 48 960 948 Liabilities

Insurance loss provisions (10 861 393) (5 971 483) (407 404) (17 240 280) Loans received - - (115 289) (115 289) Payables arising from insurance operations (2 243 597) - - (2 243 597) Other financial payables (579 886) - - (579 886) Guarantees issued (Note 28.6) (71 787) - - (71 787) Total liabilities (13 756 663) (5 971 483) (522 693) (20 250 839) Net position 15 698 149 7 182 610 5 829 350 28 710 109

Maturities of insurance contract liabilities and reinsurance assets are determined based on estimated cash outflows related to recognised insurance liabilities.

25.5. Interest rate risk

The Group takes on exposure to fluctuations in the prevailing levels of market interest rates due to its debt assets and liabilities. Fluctuations in interest rates may have both positive and negative effect on the Group's financial position and cash flows. The Group is exposed to interest rate risk in relation to interest bearing assets. Within its interest rate risk management policy, the Group reviews fluctuations of interest rates for individual instruments, which subsequently determines the Company's investment policy.

The analysis of sensitivity of the Group's equity to the most probable fluctuations in interest rates on bonds is set out below. The range of possible changes is 50 basis points and it is determined based on expert valuation of the Group's management, subject to historic trends and the current market situation.


+50 basis points -50 basis points +50 basis points -50 basis points

Effect on equity

(466 389) 466 389 (165 918) 165 918

Rates of other financial assets of the Group are fixed and not sensitive to market fluctuations


26. Management of Capital

The Group’s objectives when managing capital are:

− to comply with capital requirements set by Russian law and the insurance regulator; and

− safeguard the Group’s ability to continue as a going concern.

The Company and its subsidiaries are subject to the following capital regulatory requirements (calculated on the basis of separate financial statements prepared in accordance with the Russian statutory accounting rules):

− compliance with or excess of the actual solvency margin over the regulatory solvency margin (set by Instruction of CBRF No. 3743-U of 28 July 2015 “On Calculation by Insurance Organisation of the Regulatory Ratio of Equity (Capital) and Assumed Liabilities”;

− excess of net assets over the amount of charter capital set by Federal Law No. 208-FZ dated 26 December 1995 “On Joint Stock Companies”;

− compliance with the requirements for the composition and structure of assets accepted as a coverage of insurer’s equity (set by Instruction of the Central Bank of Russia No. 4298-U of 22 February 2017 “On Investing Insurer’s Equity (Capital) and List of Assets Qualifying for Investment”);

− compliance with the requirements for the minimal charter capital set by Law No. 4015-1 “On Organization of Insurance Business in the Russian Federation” of 27 November 1992.

Compliance with capital adequacy ratios is monitored on a regular basis by generating reports outlining their calculation reviewed and signed by entities’ executives.

At the reporting date, the capital managed by the Company and calculated in accordance with IFRS is RR 20 281 245 thousand (31 December 2016: RR 14 904 521 thousand).

At 31 December 2017 and for the year then ended the Group complied with all externally imposed capital/solvency margin requirements (31 December 2016 and for the year then ended: the same).

27. Fair Value of Assets and Financial Instruments Valuation Categories

Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. The best evidence of fair value is price in an active market. The estimated fair values of financial instruments have been determined by the Group using available market information, where it exists, and appropriate valuation methodologies.

Fair value measurements are analysed by level in the fair value hierarchy as follows: (i) level one are measurements at quoted prices (unadjusted) in active markets for identical assets or liabilities, (ii) level two measurements are valuations techniques with all material inputs observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices), and (iii) level three measurements are valuations not based on observable market data (that is, unobservable inputs). Management applies judgement in categorising financial instruments using the fair value hierarchy. If a fair value measurement uses observable inputs that require significant adjustment, that measurement is a Level 3 measurement. The significance of a valuation input is assessed against the fair value measurement in its entirety.


27. Fair Value of Assets and Financial Instruments Valuation Categories (Continued)

Investment securities available-for-sale are carried at fair value. Fair value of the instruments that are quoted in an active market is determined based on market bid prices (Level 1 of the fair value hierarchy). The fair value of unquoted fixed interest rate instruments (Level 2) was estimated based on estimated future cash flows expected to be received discounted at current interest rates for new instruments with similar credit risk and remaining maturity.

(a) Recurring fair value measurements

Recurring fair value measurements are those that the accounting standards require or permit in the statement of financial position at the end of each reporting period. The level in the fair value hierarchy into which the recurring fair value measurements are categorised are as follows:

31 December 2017 31 December 2016 Level 1 Level 2 Level 3 Balance Level 1 Level 2 Level 3 Balance Assets at fair value FINANCIAL ASSETS Rouble-denominated corporate bonds 16 511 649 1 779 342 - 18 290 991 7 724 032 772 137 - 8 496 169

Corporate currency bonds 6 955 853 - - 6 955 853 6 359 993 - - 6 359 993 Rouble-denominated government bonds 7 177 580 - - 7 177 580 352 111 - - 352 111

Derivative financial instruments - 584 228 - 584 228 - - - -

Corporate shares 3 402 057 - - 3 402 057 122 878 - - 122 878 Investment properties - - 646 464 646 464 - - 657 233 657 233 Premises and equipment (real estate) - - 4 004 414 4 004 414 - - 3 996 076 3 996 076

Total assets recurring fair value measurements 34 047 139 2 363 570 4 650 878 41 061 587 14 559 014 772 137 4 653 309 19 984 460

The Group’s investments in corporate Rouble bonds issued by four Russian issuers in the amount of RR 1 779 342 thousand that were included in the category of investment securities available-for-sale based on the analysis performed by the Group’s management (Note 5.5) were recorded at 31 December 2017 as financial instruments of level 2 fair value hierarchy (31 December 2016: recorded as financial instrument of level 1 hierarchy in the amount of RR 772 137 thousand).

As at 31 December 2017 and 31 December 2016, the Group had no liabilities recurring fair value measurements.



(a) Recurring fair value measurements (continued)

The description of valuation technique and inputs used in the fair value measurement for level 2 measurements at 31 December 2017:

Fair value Valuation model Inputs used Assets at fair value

Rouble-denominated corporate bonds 1 779 342 Discounted cash flows Incremental borrowing rate

The description of valuation technique and inputs used in the fair value measurement for level 2 measurements at 31 December 2016:

Fair value Valuation model Inputs used Assets at fair value

Rouble-denominated corporate bonds 772 137 Discounted cash flows Incremental borrowing rate

There were no changes in valuation techniques for level 2 recurring fair value measurements during 2017 (2016: none).

The valuation technique, inputs used in the fair value measurement for level 3 measurements and related sensitivity to reasonably possible changes in those inputs are as follows at 31 December 2017:

Fair value

Valuation technique Inputs used

Range of inputs

(weighted average)

Reasonable changes

Sensitivity of fair value

measu-rement

Assets at fair value

Investment properties 646 464

Market comparison

approach/ income

approach

Selling price/ market rental

rates

Market selling price

RR 40 000/ m2 Annual rental

rate RR 8 000/ m2,

underutilisation 20% CC 13 % +-10%

+/- RR 65

million

Premises and equipment (real estate) 4 004 414

Market comparison

approach Selling price

Market selling price RR 19 100

to 191 900/ m2 +-10%

+/- RR 400

million



(a) Recurring fair value measurements (continued)

The valuation technique, inputs used in the fair value measurement for level 3 measurements and related sensitivity to reasonably possible changes in those inputs are as follows at 31 December 2016:

Fair value

Valuation technique Inputs used

Range of inputs

(weighted average)

Reasonable changes

Sensitivity of fair value

measu-rement

Assets at fair value

Investment properties 657 233

Market comparison

approach/ income

approach

Selling price/ market rental

rates

Market selling price

RR 40 000/ m2 Annual rental

rate RR 8 000/ m2,

underutilisation 20% CC 13 % +-10%

+/- RR 65

million.

Premises and equipment (real estate) 3 996 076

Market comparison

approach Selling price

Market selling price RR 19 100

to 191 900/ m2 +-10%

+/- RR 400

million

(b) Non-recurring fair value measurements

As at 31 December 2017 and 31 December 2016, the Group had no financial instruments non-recurring fair value measurements.

(c) Valuation processes for recurring level 3 fair value measurements

Due to absence of an active market for the Group’s buildings, the measurement of their fair value includes assumptions not directly supportable by observed market prices or rates. Assessment by independent appraisers of the Group of fair value of the Group’s premises and equipment has been performed by using the sales comparison method, which involves a review of available market data on sales offers of comparable premises and making adjustments in the prices to reflect the differences between the premises offered and the premises owned by the Group. The principal assumptions applied in valuation models of fair value include adjustments to price of similar premises, the area of specific properties of the Group.

As at 31 December 2017 and 31 December 2016, the Group had no other financial instruments with estimated fair value measurement falling into level 3 of fair value hierarchy.

(d) Assets and liabilities not measured at fair value but for which fair value is disclosed

Fair values analysed by level in the fair value hierarchy and carrying value of assets not measured at fair value are as follows:



(d) Assets and liabilities not measured at fair value but for which fair value is disclosed (continued)

31 December 2017 31 December 2016 Level 1 Level 2 Level 3 Balance Level 1 Level 2 Level 3 Balance Assets and liabilities, other than assets and liabilities at fair value

Cash and cash equivalents - 3 682 733 - 3 682 733 - 4 493 989 - 4 493 989

Deposits with banks - 26 632 233 - 26 480 442 - 19 750 600 - 19 801 362 Promissory notes and loans of other companies - - 941 662 941 662 - - 1 817 094 1 817 094

Other financial receivables - - 725 308 725 308 - - 1 634 811 1 634 811

Debt securities in issue 4 099 301 - - 4 099 301 - - - - Loans received - - 127 522 127 522 - - 115 289 115 289 Other financial payables - - 1 577 980 1 577 980 - - 555 018 555 018

Total assets and liabilities, other than assets and liabilities at fair value 4 099 301 30 314 966 3 372 472 37 634 948 - 24 244 589 4 122 212 28 417 563

The fair values of instruments in level 2 and level 3 of fair value hierarchy were estimated using the discounted cash flows valuation technique. The fair value of fixed interest rate instruments is based on estimated future cash flows expected to be received discounted at current interest rates for new instruments with similar credit risk and remaining maturity.

The Group does not discount other financial receivables and other financial payables due to their short-term nature.

All financial assets of the Group, except for those classified as at fair value through profit or loss are valued at amortised cost. All the Group’s financial liabilities are valued at amortised cost.

28. Contingencies and Commitments

28.1. Legal risks

From time to time and in the normal course of business, claims against the Group may be received. For all legal claims related to insurance operations where the Group acts as a defendant, an outstanding claims provision was booked, except for some cases where at the time of these consolidated financial statements, court judgements were obtained.

For other legal claims, on the basis of its own estimates and internal professional advice management is of the opinion that no material losses will be incurred in respect of claims and accordingly no provision has been made in these consolidated financial statements.

28.2. Tax legislation

Russian tax legislation which was enacted or substantively enacted at the end of the reporting period, is subject to varying interpretations when being applied to the transactions and activities of the Group. Consequently, tax positions taken by management and the formal documentation supporting the tax positions may be challenged by competent authorities. Russian tax administration is gradually strengthening, including the fact that there is a higher risk of review of tax transactions without a clear business purpose or with tax incompliant counterparties. Fiscal periods remain open to review by the authorities in respect of taxes for three calendar years, preceding the year of review. Under certain circumstances reviews may cover longer periods.


28. Contingencies and Commitments (Continued)

28.2. Tax legislation (continued)

The Russian transfer pricing legislation is generally aligned with the international transfer pricing principles developed by the Organisation for Economic Cooperation and Development (OECD) but has specific characteristics. This legislation provides for the possibility of additional tax assessment for controlled transactions (transactions between related parties and certain transactions between unrelated parties) if such transactions are not on an arm’s-length basis.

Management of the Group believes that the Group's pricing policy is arm's length and it has implemented internal controls to be in compliance with the transfer pricing legislation.

Given that the practice of implementation of the new Russian transfer pricing rules has not yet developed, the impact of any challenge of the Group’s transfer prices cannot be reliably estimated; however, it may be significant to the financial conditions and/or the overall operations of the Group.

As Russian tax legislation does not provide definitive guidance in certain areas, the Group adopts, from time to time, interpretations of such uncertain areas that reduce the overall tax rate of the Group. While management currently estimates that the tax positions and interpretations that it has taken can probably be sustained, there is a possible risk that outflow of resources will be required should such tax positions and interpretations be challenged by the tax authorities. The impact of any such challenge cannot be reliably estimated; however, it may be significant to the financial position and/or the overall operations of the Group.

The Group’s Management believes that its interpretation of the relevant legislation is appropriate and the Group’s tax, currency and customs positions will be sustained. Therefore, as at 31 December 2017 the Management did not make any provision for potential tax liabilities (31 December 2016: no provision was made).

28.3. Assets pledged

The Group had no pledged assets at 31 December 2017 and at 31 December 2016.

28.4. Capital expenditure commitments

At 31 December 2017 and 31 December 2016, the Group has no capital expenditure commitments in respect of premises and equipment.

28.5. Operating lease commitments

At 31 December 2017 and 31 December 2016, the Group had no non-cancellable operating leases where the Group is a lessee, which therefore, create obligations for the Group.

28.6. Guarantees issued

At 31 December 2017, the Group did not have issued guarantees (31 December 2016: for the amount not exceeding EUR 1 125 thousand, which is equivalent to RR 71 787 thousand).

Information on restricted deposits securing obligations is provided in Note 7.1.

29. Related Party Disclosures

For the purposes of these consolidated financial statements, parties are considered to be related if one party has the ability to control the other party or can exercise significant influence over the other party in making financial or operational decisions. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form. The related parties are represented by shareholders exercising significant influence on the Group (Note 2), other parties that are related to the Group via shareholders (including their subsidiaries) and key management personnel.

Related parties may enter into transactions which unrelated parties might not enter. In the normal course of business the Group enters into transactions with these related parties on arm’s length basis.


29. Related Party Disclosures (Continued)

The volumes of related party transactions, outstanding balances at 31 December 2017 and 31 December 2016 and related expenses and income for 2017 and 2016 comprise the following:

2017 2016

Shareholders Other related

parties Shareholders Other related

parties Statement of financial position Cash and cash equivalents - - - 21 983 Loans from and deposits with banks, including accrued interest income, interest rate range

6%-12% - 460 532 - 3 163 680 Investment securities available-for-sale 1 406 533 953 409 155 187 - Receivables arising from insurance operations - 872 485 - 122 Other receivables - 44 629 - 21 983 Written insurance premiums 263 006 1 226 415 640 375 - Claims paid 176 050 394 168 405 744 - Acquisition costs 45 152 324 093 172 901 171 303 Interest income 48 51 659 5 394 88 978 Administrative and other expenses - 16 872 - 23 756 Other income - 422 - 814

Key management personnel

Key management personnel includes members of the Company's Board of Directors and Management Board. Remuneration paid to key management personnel of the Company for 2017 accounted for RR 1 088 368 thousand (for 2016: RR 553 390 thousand). Contributions to social funds for key management personnel for the year 2017 totalled RR 169 517 thousand (2016: RR 94 838 thousand). Contributions to social funds include contributions made to state pension fund in the amount of RR 111 284 thousand (for 2016: RR 66 594 thousand). Any remuneration paid to key management personnel is of a short-term nature. Short-term remuneration fall due within twelve months after the end of the period in which related services were provided.

30. Subsidiaries and Business Combinations

On 9 June 2017, the Group acquired 100% shares in AO Pomestie and obtained control over OOO Insurance company Europlan. The principal activity of OOO Insurance company Europlan is the insurance of land vehicles (except for railroad vehicles) and additional insurance of third party liability of motor vehicle owners purchased by individual entrepreneurs and legal entities registered in Russia as part of lease financing.

The purchase consideration was RR 2 000 000 thousand. This amount was fully paid in cash and is final. No agreements on contingent consideration were in available. The Company had no investments in the asset before it was purchased.

The consideration paid by the Company was based on the results of an external appraiser of the acquiree’s business taken as a whole. However, in accordance with IFRS 3 “Business Combinations”, the Group must account for acquisitions based on fair values of the identifiable assets acquired, and liabilities and contingent liabilities assumed. These two different approaches can lead to accounting differences; and, as set out in the table below, recognition of goodwill.


30. Subsidiaries and Business Combinations (Continued)

Details of the assets and liabilities acquired and goodwill arising are as follows:

Fair value at the

acquisition date Cash and cash equivalents 423 575 Deposits with banks 1 041 897 Financial instruments at fair value through profit or loss 131 990 Receivables arising from insurance operations 159 041 Prepayments and other assets 21 959 Reinsurers’ share of unearned premium provision 3 367 Reinsurers’ share of insurance loss provisions 2 663 Deferred acquisition costs 161 836 Premises, equipment and intangible assets 11 Unearned premium provision (544 616) Insurance loss provisions (177 031) Payables arising from insurance operations (47 598) Deferred income tax liabilities (6 464) Other payables and liabilities (31 352) Fair value of identifiable net assets of subsidiary 1 139 278 Goodwill arising from the acquisition 860 722 Total purchase consideration 2 000 000 Less cash and cash equivalents of subsidiary acquired (423 575) Outflow of cash and cash equivalents on acquisition 1 576 425

The fair values of assets acquired are based on the discounted dividends model. The fair value of liabilities was assessed using the best estimate.

Fair value of assets and liabilities of the acquired company equals their carrying value under IFRS at the acquisition date. There are no identifiable intangible assets attributable to the acquirees.

The goodwill is primarily attributable to the profitability of the acquired business, access to new distribution channels and the significant synergies and combined cost savings expected to arise. The goodwill will not be deductible for tax purposes in future periods.

On 17 July 2017, the Group acquired 100% interest in the share capital of Limited Liability Company Azbuka+ and obtained control over OOO VSK-Linia Zhizni, a company specialising in the provision of life insurance services.

The principal activity of OOO VSK-Linia Zhizni is life insurance and accident insurance, including military men insurance.

The purchase consideration was RR 1 600 000 thousand. This amount was fully paid in cash and is final. No agreements on contingent consideration were available. The Company had no investments in the asset before it was purchased.

The consideration paid by the Company was based on the results of an external appraiser of the acquiree’s business taken as a whole. However, in accordance with IFRS 3 “Business Combinations”, the Group must account for acquisitions based on fair values of the identifiable assets acquired, and liabilities and contingent liabilities assumed. These two different approaches can lead to accounting differences; and, as set out in the table below, recognition of goodwill.


30. Subsidiaries and Business Combinations (Continued)

Details of the assets and liabilities acquired and goodwill arising are as follows:

Fair value at the acquisition date

Cash and cash equivalents 213 920 Deposits with banks 1 628 552 Financial instruments at fair value through profit or loss 39 961 Investment securities available-for-sale 4 143 327 Receivables arising from insurance operations 866 006 Prepayments and other assets 11 167 Reinsurers’ share in life insurance provisions 2 671 Deferred income tax assets 15 514 Premises, equipment and intangible assets 19 651 Unearned premium provision (851 444) Insurance loss provisions (716 874) Life insurance provisions (4 121 270) Payables arising from insurance operations (212 092) Other payables and liabilities (96 591) Fair value of identifiable net assets of subsidiary 942 498 Goodwill arising from the acquisition 657 502 Total purchase consideration 1 600 000 Less cash and cash equivalents of subsidiary acquired (213 920) Outflow of cash and cash equivalents on acquisition 1 386 080

The fair values of assets acquired are based on the discounted dividends model. The fair value of liabilities was assessed using the best estimate.

Fair value of assets and liabilities of the acquired company equals their carrying value under IFRS at the acquisition date. There are no identifiable intangible assets attributable to the acquirees.

The goodwill is primarily attributable to the profitability of the acquired business, access to new insurance types and markets and the significant synergies and combined cost savings expected to arise. The goodwill will not be deductible for tax purposes in future periods.

At 31 December 2017, no indication of goodwill impairment was identified as a result of the impairment test performed.

31. Goodwill

Movements in goodwill arising on the acquisition of subsidiaries are:

Notes 31 December

2017 31 December

2016 Gross book value at 1 January 701 974 - Accumulated impairment losses at 1 January - - Carrying amount at 1 January 701 974 Acquisitions of subsidiaries of the organisation 30 1 518 224 701 974 Carrying amount at 31 December 2 220 198 701 974 Gross book value at 31 December 2 220 198 701 974 Accumulated impairment losses at 31 December - - Carrying amount at 31 December 2 220 198 701 974


31. Goodwill (Continued)

In 2017, the Group acquired control over OOO Insurance company Europlan and OOO VSK-Linia Zhizni (Note 30).

Goodwill Impairment Test

Goodwill is allocated to cash-generating units CGUs, which represent the lowest level within the Group at which goodwill is monitored by management and which are not larger than a segment.

Goodwill is allocated as follows:

2017 2016 Assets in accident insurance segment 235 676 235 676 Assets in motor insurance segment 1 099 532 238 810 Assets in property and liability insurance segment 191 931 191 931 Assets in the insurance life segment 657 502 - Other segments 35 557 35 557 Total carrying amount of goodwill 2 220 198 701 974

The recoverable amount of each CGU was determined based on value-in-use calculations. These calculations use cash flow projections based on financial budgets approved by management covering a five-year period. At 31 December 2017, no goodwill impairment indicators were identified.

Assumptions used for value-in-use calculations to which the recoverable amount is most sensitive were:

2017 2016 Segment penetration rate 40-85% p.a. 40-85% p.a. Pre-tax discount rate 16.2 %-18% p. a. 17.1 % p.a. Profitability rate for financial assets 9% p.a. - Loss ratio by segments 10-87% p.a. 15-80% p.a.

The discount rates used are pre-tax, and reflect specific risks relating to the relevant CGUs. If the revised estimated pre-tax discount rate applied to the discounted cash flows of CGU had been 1% higher than management’s estimates, the Group would need to reduce the carrying value of goodwill by RR 401 908 thousand. Had this impairment been recognised, the Group would not be able to reverse any impairment losses that arose on goodwill in subsequent periods, even if circumstances improve.

Documents

VSK Group International Financial Reporting Standards …€¦ · · 2018-05-226 4. Summary of Significant Accounting Policies ... Acquisition of insurance portfolio 563 920 - Income