NOTES TO BOSNA RE Co. Ltd. ANNUAL REPORT FOR 2007

bosnare.ba

NOTES TO BOSNA RE Co. Ltd. ANNUAL REPORT FOR 2007

Annual report 2007 | Godi{nji izvje{taj 2007


ANNUAL REPORT 2007INFORMATION ON BOSNA RE Co. Ltd.a) Full Name, Seat of the Company and Phone No.Bosna Reinsurance Co. Ltd.Sarajevo, Despi}eva No. 4Phone: +387 33 72 55 00b) Court of Authority and Number of Court Register Decision:Decision of Cantonal Court in Sarajevo, No. UF/I 2282/00c) Business Banks and Bank AccountsUPI banka d.d. Sarajevo, No. 1540011100374760Raiffeisen bank d.d. Sarajevo, No. 1610000004490044UniCredit Zagreba~ka banka d.d. Mostar, No. 1650011000018104d) Registration - Identification Number: 4200066680006e) The Members of Supervisory Board, Management, Auditing Board and AuditorSupervisory Board:Mirsad Leti}, ChairmanMembers of Supervisory Board in alphabetical order:Fejsal Hrustanovi}Husnija Kurtovi}Jasmina Spahi}Midhat Terzi}Management of Bosna RE Co. Ltd.:Damir La~evi}, DirectorHasan Deli}, Executive Director FinanceZlatan Filipovi}, Executive Director ReinsuranceAuditing Board:Prof. dr. Izudin Kešetovi}, ChairmanMembers of the Board in alphabetical order:Esad Bekteševi}f) Auditor:Deloitte d.o.o. Sarajevo2


[EHER-}EHAJA’S BRIDGE | SARAJEVO[EHER-}EHAJIN MOST | SARAJEVO


ANNUAL REPORT 2007A Word By DirectorThe year in which Bosna RE celebrates 30th anniversary of its business was finalised with good results. Theachieved business results can be, with good reasons, considered satisfying. The Company continues to developfinancially. The 4 th Meeting of Shareholders Assembly brought a decision on allocation of 20,50% of realisedprofit to a dividend payment in the amount of 10% per share nominal value and remaining 79,50% to Company’sreserves. Such a dividend is twice higher from the interest obtainable from BiH banks. The shareholderswho, in 1996, invested in Bosna RE capital, realised completely the return on investment. Bosna RE is the rare,if not the only company in insurance industry that regularly, starting from 1996, pays off a dividend of 8% to10% which is the highest percentage of dividend in BiH insurance industry.The previous year, 2007 was a very important for Bosna RE. The full implementation of set of bylaws startedin that year, which necessitated time and effort. Furthermore, a new system of income and expenses accountingwas introduced in that year. Precisely, the old system 3+1 (three quarters of current year plus IV quarterof previous year) was abandoned, and a new system of recording IV quarter to the year it belongs is adopted.That was a precondition for full confirmation with international standards on financial reporting. The processdemanded complete revision and introduction of new techniques and methodologies in information technologysystem, database keeping, actuary calculations, etc. The IV quarter of 2007 is, due to unadjusted systemof financial reporting in insurance industry, based on the prognoses. The prognoses are grounded in actuarialcalculation, the methodology of which is approved by foreign actuary company.The greatest burden of these changes was undoubtedly borne by Bosna RE employees, particularly Reinsuranceand IT Departments and Company’s Actuary. Therefore, I would like to honour them special gratitudefor the efforts they made.In 2007 we have made a decision to solve an issue of great importance for Bosna RE - new business premises.At the end of the year, we have bought a building which will, after reconstruction, contain an area of some2000 m 2 which will more than satisfy Bosna RE needs.The issue we could not be satisfied with is the situation in the region and in the insurance industry. Unfortunately,the key problems of BiH economy still remain unsolved. Unfavourable political climate does not bringto improvement of economic conditions in the country. A development of the insurance industry requires anenvironment of stability and prosperity. An argument in favour of this assertion is the growth of insurancepremium in the first half of 2007 of over 16%. The political crisis which culminated in resignation of Primeminister slowed down the growth which resulted in total growth of insurance premium of 11%. Of course,lack of unity of insurance market, still divided by entity and national borders, hinders faster development ofinsurance industry. The volume of premium income might be sufficient for simple reproduction, but it is insufficientfor investments in modern knowledge and products. Therefore it is no wonder that BiH insuranceindustry, since 1996, has not offered almost any of new products. The insurance industry, exhausting itselfin a market competition with no winners in a long term perspective, contributes greatly to this situation. Aloss of premium income due to cut of premium rates is huge, therefore combined results of great number ofinsurance companies are negative.It is very difficult to be a reinsurer in such an ambient. Some of the markets are inaccessible for Bosna REregardless the fact that no one could offer better reinsurance service. The problem is, unfortunately ratherpolitical than economical. It is also difficult to support clients who compete in offering lower prices withoutany reasonable technical ground and at the same time meet the conditions of international market whereBosna RE places it’s excess of risks.Anyhow, we have managed, with great efforts and enthusiasm, to achieve good results. Gradually but persistentlywe are improving our position at domestic insurance market. The position of Bosna RE at internationalmarket is traditionally respectable and we do our best to strengthen it and improve it further. Apparently, itwill be difficult to survive at the market in which globalisation process aggravates conditions for small companiesbusiness. Still, there is enough space for smaller, financially stable companies focused on clients and6


ANNUAL REPORT 2007acquainted well with the market and the market participants. Bosna RE is one of such companies, maybe theone of the two in the region, free from a burden of majority ownership of any insurance company, independent,with qualified staff having also knowledge of a direct business. A great dose of optimism and wish forsuccess give us a hope that we can fulfil our targets. We enjoy our clients’ confidence and I would like to usethis opportunity to express our gratitude for their support and loyalty. We also do not miss the confidencefrom our foreign partners. Without the support of our shareholders we could not operate successfully. Andfinally, the most important to mention - the trust and commitment of employees and their deep faith thatthey work in the best interest of the company, of their colleagues and their own interest for which I am endlesslygrateful to them.The 2007 Report is illustrated with the photographs of bridges. The bridges as a symbol of connection, expressour desire to have the bridges that will join two i.e. three separated insurance markets in BiH built, the bridgesof cooperation between insurance companies in BiH, cooperation and understanding between state, its entitiesand insurance industry and what is the most important, between insurance industry and its clients.8


ANNUAL REPORT 2007NOTES TO BOSNA RE Co. Ltd. ANNUAL REPORT FOR 2007a) This Report is based on true and credible bookkeeping data and accounting standards in force inFederation of BH. The Report is prepared in accordance with obligations arising out of Article 53. ofArticles of Association of Bosna Reinsurance Co. Ltd. in force. The Report was prepared by the Managementof Bosna RE Co. Ltd.b) The audit of financial operations was made by the world renowned company DELOITTE. The reportby this auditing company is published separately.c) In order to clarify 2007 Annual Report the following must be emphasised:In 2007 Bosna RE applied a new accounting method which implies that all quarters belonging to one financialyear are recorded in that year. This assumes that IV quarter is based on prognosis i.e. actuarial calculation.The accounting method to date that includes one quarter from the previous year plus three quarters of a currentyear is now abandoned. Considering this change, 2007, and only this year, shall comprise 5 quarters (IVQuarter from 2006, three Quarters and IV Quarter estimate for 2007), therefore the Report for 2007 shall berepresented somewhat differently. That is to say that the tables shall include results that comprise the premiumfrom IV Quarter of 2006 and I, II and III Quarters from 2007 and total premium for 2007, which denoteprevious result increased for IV Quarter from 2007. This will enable comparison with preceding year.The 2007 brought also changes in chart of accounts and balance schemes for insurance companies. The dataon income and expenditure represent net income and net expenditure. This means that all expenses andearnings from retrocession are already calculated as an increase or decrease of a certain position of a balancesheet.10


MEHMED-PAŠA SOKOLOVI} BRIDGE | VI{EGRADMOST MEHMED-PAŠE SOKOLOVI}A | VI{EGRAD


ANNUAL REPORT 2007SOCIO - ECONOMIC ENVIRONMENT IN WHICH BOSNA RERESULTS WERE ACHIEVEDA 2007 year cannot be considered a year of prosperity for Bosnia and Herzegovina. Still, despite unstablepolitical situation in the country, its economy recorded better trends. Of course, this reflected to BH insuranceindustry. Unfortunately, there are no adequately updated data on insurance premium tendency in BHfor 2007. The last data published by two entities’ agencies show the growth of insurance premium in F BiHof 11,90% compared to the same period of 2006 and the growth of 10,74% in R Srpska. This suggests that2007 recorded higher increase of insurance premium than it had in previous years.Table 1 shows the tendencies of insurance premium participation in gross domestic product (GDP) and insurancepremium per capita.Table 1 INSURANCE PREMIUM IN RELATION TO GDP AND INSURANCE PREMIUM PER CAPITAPROGNOSISPLANYear 2003 2004 2005 2006 2007 2008GDP in KM mio 14.505,00 15.786,00 16.928,00 19.106,00 20.061,30 21.264,98Insurance Premium in KM 263.866.897 295.804.289 336.729.509 360.711.802 402.391.892 475.841.430Premium in % of GDP 1,82% 1,87% 1,99% 1,89% 2,01% 2,24%Premium per capita (in KM) 68,32 76,97 87,60 93,86 104,71 123,76GDP in EUR mio 7.416,29 8.071,25 8.655,15 9.768,74 10.257,18 10.873Insurance Premium in EUR 134.913.002 151.242.331 172.167.064 184.429.016 205.739.707 243.293.860Premium in % of GDP 1,82% 1,87% 1,99% 1,89% 2,01% 2,24%Premium per capita (in EUR) 34,93 39,36 44,79 47,99 53,54 63,28Population in thousand 3.862 3.843 3.844 3.843 3.843 3.845Average Exchange Rate of EUR 1,95583 1,95583 1,95583 1,95583 1,95583 1,95583Note: Projection for 2007 is based on data for 6 months of 2007These data illustrate slow changes in participation of insurance premium in GDP but also announce a possibilityof its increase if projection for 2007 fulfils. The premium per capita is in increase which is not a result onlyof the increase of insurance premium but partially a result of population stagnation. On the other side, theparticipation of insurance premium in GDP had not recorded any increase in the last four years (2003 - 2006).When we compare data from surrounding countries or some other European countries, we get devastatingtruth that BH citizens spend minimum amount for insurance in comparison to the rest of Europe.These trends, as a result, positively influenced realization of reinsurance premium in Bosna RE. However, itmust be noted that, as for the BH market, there are still two statements that negatively influence reinsuranceas an insurance category.First of all, the insurance is in BiH considered an expenditure that should be avoided or decreased tominimum no matter the volume of exposure to certain risks. This is proved by the fact that major partof BH property is not insured no matter whether it is private or public.The competition within insurance companies shifted from the field of MTPL insurance to Voluntaryinsurance. The law on public purchases and compulsory tenders stimulated competition even more.14


ANNUAL REPORT 2007The insurance premium is reduced to minimum and all insurance methods are based more or less onluck rather than on statistics and mathematical calculations.Some of the insurance companies are well aware of the market situation but a little could be changed until itis understood by the insureds and especially by the state.Luckily, there were no greater losses on BH market as well as globally. This fact results in rather stable situationin international insurance and reinsurance market. Yet, the entire market is at constant alert. The projectionmodels of large losses, particularly those caused by natural hazards, are permanently reviewed. Of course, thesemodels are followed by calculating models for expected claims. The whole market is observed closely by ratingagencies that mark and register lower or higher ratings for insurers or reinsurers. Such a position forces themto constant in depth control of accepted risks. Continuation of acquisitions, particularly in the reinsurancemarket, enhanced dependency on several reinsurers which, on the other side, narrowed the selection of flexiblesolutions referring to retrocession conditions. In all respects, the movements in international reinsurancemarket reflect deeply to Bosna RE business.On the bases of stated facts it must be concluded that 2007 was a difficult year. Although these facts significantlyinfluenced business result in 2007, it can be considered a good one.16


ROMAN BRIDGE | ILID`ARIMSKI MOST | ILID`A


ANNUAL REPORT 2007REINSURANCE PREMIUM AND LOSSESThe review of realized and paid reinsurance premium and losses for 2007 is given in the Table 2.2007 2007+IV Qtr.Reinsurance Premium 38,726,671 48,374,195Reinsurance Losses 16,597,522 20,162,622The number of factors definitely affects the volume of realized reinsurance premium and losses. One of theimportant factors is premium and losses movement in the insurance market Bosna RE operates, but the moreimportant factor is a number and structure of concluded reinsurance treaties, conditions, etc.The number of reinsurance treaties that Bosna RE concludes with its cedents increase every year. The trend ofconcluded treaties is shown in the graph below (Graph 1) and demonstrates trends for the period of 12 yearsand refers only to inward reinsurance treaties.Graph 1The treaties concluded for 2007 have not significantly changed referring to their structure or conditions incomparison to treaties from previous year. The relation between proportional and non-proportional treatieshas not changed. It seems that Bosna RE cedents prefer proportional treaties, which is logical considering thestrength of total BH insurance market.The reinsurance premium realized in 2007 amounts KM 38.726.671, i.e. KM 48.374.195, with IV Quarter of2007 included. The first result is for 29,38% better then realization in 2006, i.e. it is for 15,48% increased inrelation to the planned reinsurance premium for 2007. Those indicators are given in the Table of Income andExpenses and shall not be separately explained in the text to follow.20


ANNUAL REPORT 2007The trend of reinsurance premium realized by Bosna RE in the last 7 years is shown in Table 3.2001 2002 2003 2004 2005 2006 2007 2007+IV qtrU KMReinsurance Premium 20.180.723 24.556.026 27.696.659 30.986.250 30.163.596 29.932.347 38.726.671 48.374.195Premium Growth Index 100,00 121,68 112,79 111,88 97,35 99,23 129,38 161,61The participation of Bosna RE in losses, i.e. paid up reinsurance losses in 2007 is presented in Table 4.2001 2002 2003 2004 2005 2006 2007 2007+IV qtrU KMReinsurance Losses 7.290.913 7.758.011 9.838.326 13.579.294 19.509.583 14.084.978 16.597.522 20.162.622Losses Growth Index 100,00 106,41 126,82 138,02 143,67 72,20 117,84 143,15Total amount of paid up losses is KM 16.597.522 which is for 12,01% more than paid up losses for previousyear and for 9,60% more than it is planned. With the losses from the IV Quarter of 2007 added the amount isKM 20.162.622, that is for 40,07% more than planned, i.e. for 43,14% more than realized in 2006. Realizedpremium and losses paid in 2007 are shown in the Graph 2. The Graph 3 represents the review of reinsurancepremium and losses growth index.Graph 222


ANNUAL REPORT 2007Graph 3In its nominal amount, reinsurance losses are significantly lower that the premiums but the losses tend togrow faster than the premiums. During the period of 12 years, reinsurance losses grew 28 times and reinsurancepremium for 17 times. This twelve years long tendency of reinsurance losses growth was interrupted in2006 when a drop of 37,80% in comparison to previous year was registered. Such oscillations are not resultof a pattern but simply, several years were affected by one or two larger losses which led to abrupt oscillationsin the period 2005 / 2006. Small and inhomogeneous portfolios, such as is Bosna RE’s, are dependent onsuch influences. The reinsurance losses grew again in 2007 but did not reach the record from 2005. However,considering IV Quarter of 2007 and state of reserves, the reinsurance losses growth index shall surely pass thelimit of 3.000,00 KM in the period to come.A part of a risk that exceeds its capacity Bosna RE places to international insurance market through variousforms of retrocession treaties. Of course, the retrocession is accompanied by payment of a part of reinsurancepremium.The self-retained reinsurance premium amounts KM 18,17, i.e. KM 23,96 million, which means continuationof growth of self-retained premium disturbed in 2006. That year was obviously an exception. The reason forthis is purchase of additional protections for Bosna RE portfolio. That is to say, protection of Bosna RE and itscedents is an imperative of the Company. All these elements could be seen from the Table 5 and Graph 4.24


ANNUAL REPORT 2007Table 5 TOTAL PREMIUM, RETROCESSION PREMIUM AND SELF-RETAINED PREMIUM FOR THE PERIOD 1996-2007Total Premium Retrocession Premium Self-Retained Premium1996 2.377.100 1.889.706 487.3941997 7.083.261 5.968.412 1.114.8491998 8.702.914 7.510.263 1.192.6511999 12.698.807 9.438.442 3.260.3652000 16.761.244 12.944.731 3.816.5122001 20.180.591 14.614.791 5.565.8002002 24.555.778 15.947.480 8.608.2982003 27.696.659 19.498.141 8.198.5182004 30.986.250 24.128.741 6.857.5092005 30.163.596 16.930.545 13.233.0512006 29.932.347 20.833.435 9.098.9122007 38.726.671 20.552.130 18.174.5412007+IV qtr 48.374.195 24.413.442 23.960.754Graph 4The trend of growth of self-retained premium continued in 2007, which is the result of strengthening of BosnaRE. As we have already mentioned, this trend was interrupted in 2006 as a result of Bosna RE purchase ofadditional protection for accepted risks. Namely, the structure of Bosna RE portfolio is rather inhomogeneousand despite rigorous attention in risk acceptance and constant estimates on exposure, it is exposed to greatchanges in case of only several greater or number of smaller losses. Of course, such a policy of the Companyprotection measures enables it to enter international reinsurance market.26


ANNUAL REPORT 2007But, still stands the fact that some of Bosna RE cedents have insufficient experience in insurance and reinsurancebusiness. The PML estimate, risk and portfolio management are for some of them a great problem.Therefore, Bosna RE accepted, as a permanent goal, a practice of maximum support for its clients in issue ofrisk acceptance.The comparative growth indexes of total reinsurance premium, retrocession premium and self-retained premiumare shown in the Graph 5 and related table.In the period concerned the reinsurance premium increased for 16,2 times, retrocession premium for 10,8times and self-retained premium for 37,2 times.Graph 5The movement of losses within Bosna RE self-retention and retrocession is presented in the Table 6 and theirpercentage ratio on the Graph 6.28


ANNUAL REPORT 2007Table 6 TOTAL LOSSES, RETROCESSION LOSSES AND SELF-RETAINED LOSSES FOR THE PERIOD 1996 - 2007Total Losses Retrocession Losses Self-Retained Losses1996 7.083.261 6.304.102 779.1591997 8.702.914 7.658.564 1.044.3501998 12.698.807 10.413.022 2.285.7851999 16.761.244 13.241.383 3.519.8612000 7.316.318 5.950.608 1.365.7102001 7.290.913 5.555.949 1.734.9632002 7.758.011 4.859.996 2.898.0152003 9.838.326 6.701.543 3.136.7832004 13.579.294 12.194.214 1.385.0802005 19.509.583 14.437.992 5.071.5912006 14.084.978 7.137.045 6.947.9342007 15.777.100 4.926.154 10.850.9462007+IV qtr 20.162.622 6.836.578 13.326.044Total losses paid up on the basis of retrocession amounts KM 4,92 million, for 30,97% less than in previousyear. The losses in self-retention amount KM 10,85 million that is an increase of 56,18% regarding 2006. This,of course reflects the significant increase of risks in Bosna RE self-retention.The Graph 6 shows the ratio of the losses paid out of Bosna RE self-retention and retrocession.Graph 630


ANNUAL REPORT 2007A decrease of retrocession participation in losses and at the same time the increase of losses participation inBosna RE self-retention is mostly a result of an increase of a portion of risks self-retained by Bosna RE in 2007.In fact, maximum self-retentions of Bosna RE were not increased but were used in a way which was enabledby the increased Company’s capital. Therefore, considering all factors influencing the safety of a reinsurer,necessary precautions, clear perception of any potential hazard and additional protection, it is necessary to putemphasis on active role of Bosna RE as reinsurer.In comparison to previous year, the structure of reinsurance premium realized by Bosna RE has not significantlychanged. A Motor Hull with 27,96% still dominates in realized premium. It is followed by 08 and 09insurance classes (Fire and Other Property Insurance). The Class 09 recorded a decrease of participation intotal premium which is a consequence of decrease of Bosna RE participation in one of the larger treaty in RMacedonia market.There are no significant changes in other insurance classes. It may be worth mentioning that insurance class19 (Life) actually represents additional accident insurance within life insurance.The structure of reinsurance premium is given in the Table 7.Table 7 THE STRUCTURE OF REINSURANCE PREMIUM PER INSURANCE CLASSES2006 2007 2007+IV qtr Index Index+IV qtr 2006 2007 2007+IV qtr1 Accident 1.337.216 2.036.457 2.387.256 152,29 178,52 4,47% 5,26% 4,93%2 Health 1.100.142 997.542 1.200.135 90,67 109,09 3,68% 2,58% 2,48%3 Motor Hull 7.723.069 10.826.683 14.037.622 140,19 181,76 25,80% 27,96% 29,02%4 Railway Hull 0 0 0 0,00 0,00 0,00% 0,00% 0,00%5 Aircraft Hull 545.162 415.465 415.465 76,21 76,21 1,82% 1,07% 0,86%6 Marine Hull 7.956 40.546 56.384 509,62 708,70 0,03% 0,10% 0,12%7 Goods in Transit 1.173.072 1.860.486 2.366.628 158,60 201,75 3,92% 4,80% 4,89%8 Fire and Other Perils 5.538.741 7.519.957 9.191.104 135,77 165,94 18,50% 19,42% 19,00%9 Property Other 8.957.587 8.455.414 10.223.010 94,39 114,13 29,93% 21,83% 21,13%10 Motor TPL 1.538.294 4.030.057 5.533.232 261,98 359,70 5,14% 10,41% 11,44%11 Aviation TPL 406.042 318.505 318.505 78,44 78,44 1,36% 0,82% 0,66%12 Marine TPL 25.694 237 237 0,92 0,92 0,09% 0,00% 0,00%13 General Liability 793.705 1.378.562 1.572.658 173,69 198,14 2,65% 3,56% 3,25%14 Credit 0 5.462 5.462 0,00 0,00 0,00% 0,01% 0,01%15 Guarantee 14.927 0 6.233 0,00 41,76 0,05% 0,00% 0,01%16 Financial Loss 142.106 230.958 258.024 162,53 181,57 0,47% 0,60% 0,53%17 Legal Protection 0 0 0 0,00 0,00 0,00% 0,00% 0,00%18 Assistance 0 0 0 0,00 0,00 0,00% 0,00% 0,00%19Life Assurance (LifeAssurance and AnnuityAssurance)628.633 610.340 802.240 97,09 127,62 2,10% 1,58% 1,66%TOTAL 29.932.347 38.726.671 48.374.195 129,38 161,61 100,00% 100,00% 100,00%32


ANNUAL REPORT 2007The enactment of set of by-laws, at the end of 2006, introduced new law legislative to entity markets andoverall insurance market in Bosnia and Herzegovina. Although this process is expected to bring significantchanges, it is now clear that those expectations were great and unreasonable. Neither the introduction of thenew laws fulfilled its purpose nor would it be possible to be realized in near future. This, in the meantime,gives the space for insurance companies’ activities, which are in many cases outside the law. Bosna RE as anqualified reinsurance company is well aware of such activities. Despite close collaboration with SupervisoryAgency of F BH and to some extent with Agency of R Srpska, a little has changed. Those that were actingoutside the law continue that practice even supported by the Agency itself (R of Srpska Agency) that issueslicences to foreign reinsurers but only to those registered in Serbia. Due to this practice Bosna RE lost approximatelypremium income in the amount of KM 40 million from 1998 till now.The structure of reinsurance premium based on its origin (Bosnia and Herzegovina, foreign countries) ispresented in Graphs 7 and 8. In comparison to previous year, reinsurance premium coming from abroad wasdecreased as a consequence of a loss of reinsurance portfolio in R of Macedonia. The run-off for the contractsvalid until 2005 from R Croatia almost completely closed and lower participation in foreign contracts resultedin decrease of losses paid up abroad.Graph 734


ANNUAL REPORT 2007Graph 8Considering the fact that Bosnia and Herzegovina insurance market is priority for Bosna RE, the followinggraph gives comparison of reinsurance premium growth index in BH and insurance premium realised at thesame market. Although the reinsurance premium grows faster than insurance premium for the same period,none of these results is satisfying. The growth of the insurance premium volume is slow so it has not reachedyet the level from 1991. The reinsurance premium, more or less, follows this slow growth. After three years ofstagnation, reinsurance premium realised in 2007 recorded the best growth so far. However, it must be notedthat some 50% of this growth relates to actual growth of reinsurance premium while other 50% relates toreinsurance treaties that existed up to that time but with another reinsurer.36


ANNUAL REPORT 2007Graph 938


ANNUAL REPORT 2007Table 8Note 1): There is no reliable information on reinsurance premium for other insurance companies operating in BH market. The amounts given above are calculated on the basis of assumptions andavailable information. Therefore the said amounts should be taken with a dose of reserve.Year 1996 2000 2001 2002 2003 2004 2005 2006 2007Insurance Premium in BiH 62.306.476 226.729.144 227.306.600 266.467.664 263.866.897 295.804.289 334.882.361 360.589.164 402.391.892Insurance Premium in FBiH 62.306.476 178.106.080 178.346.793 193.207.832 194.481.149 222.219.406 243.451.197 265.603.761 297.208.208BiH Reinsurance Premium RealisedBy Bosna RE2.377.100 13.555.882 15.674.147 19.239.233 18.601.747 17.850.509 22.566.434 24.969.619 34.805.132BiH Reinsurance Premium Realised47.542 1.491.147 1.802.527 2.308.708 2.604.245 2.677.576 4.513.287 6.242.405 8.701.283By Foreign Reinsurers 1Total Reinsurance Premium Realised in BiH 2.424.642 15.047.028 17.476.674 21.547.941 21.205.991 20.528.085 27.079.720 31.212.023 43.506.415Participation of Total Reinsurance Premiumin Total Insurance Premium3,89% 6,64% 7,69% 8,09% 8,04% 6,94% 8,09% 8,66% 10,81%Participation of Bosna RE ReinsurancePremium in Total Insurance Premium in BiH3,82% 5,98% 6,90% 7,22% 7,05% 6,03% 6,74% 6,92% 8,65%Participation of Reinsurance Premium ofOther Reinsurers in Total Insurance Premiumin BiH0,08% 0,66% 0,79% 0,87% 0,99% 0,91% 1,35% 1,73% 2,16%Participation of Reinsurance Premium ofBosna RE in total Insurance Premium inFederation of BiH3,82% 7,61% 8,79% 9,96% 9,56% 8,03% 9,27% 9,40% 11,71%40


ANNUAL REPORT 2007Finally, it must be emphasized that Bosna RE is the single BH reinsurer licensed to operate in BH territory.It does not mean Bosna RE is the only company reinsuring insurance companies registered in BH. Table 8shows trends in insurance and reinsurance premium growth for BH and F BH based on available indications.Although data on reinsurance premium with other reinsurers are not reliable, it is almost certain that about1/4 of total reinsurance premium in BH insurance market goes to other reinsurance companies.Graph 1042


VIADUCT “JARAPAGA” | MARTIN BRODVIADUKT “JARAPAGA” | MARTIN BROD


ANNUAL REPORT 2007BOSNA RE CAPITALBosna RE capital is given in Table 9:Share CapitalTreasury SharesReserves (Legaland Statutory)DividentpaymentRetainedEarningsAt 31 December 2004 5.029.700 - 4.263.020 - 1.208.437 10.501.157Allocation of retainedearnings- - 606.061 402.376 -1.008.437 -Transfer from (to) - - 80.000 - -80.000 -Dividend - - - -402.376 - -402.376Net profit for 2005 - - - - 2.059.225 2.059.225At 31 December 2005 5.029.700 0 4.949.081 0 2.179.225 12.158.006Allocation of retainedearnings- - 1.426.552 452.673 -1.879.225 -Transfer from (to) - - 120.000 - -120.000 -Dividend - - - -452.673 - -452.673Treasury Shares purchase - -18.200 - - - -18.200Net profit for 2006 - - - - 2.519.185 2.519.185At 31 December 2006 5.029.700 -18.200 6.495.633 0 2.699.185 14.206.318Allocation of retainedearnings- - - - - -Transfer from (to) - - 180.000 - -180.000 -Dividend - - - - -451.035 -451.035Sale of treasury shares - 18.200 16.800 - - 35.000Net profit for 2007 - - - - 2.452.743 2.452.743At 31 December 2007 5.029.700 0 6.692.433 0 4.520.893 16.243.026TotalBosna RE capital was in 2007 increased for 14,43% compared to 2006. Share capital remained at the level of2006 since there were no reasons necessitating its increase. The reserves were increased for 21,95%, whichrepresents the increase for the portion of profit realized in 2007.Table 10 and graph to follow give the review of all elements of reinsurance premium (gross and net), BosnaRE equity and capital and net reinsurance premium ratio.Return on total equity amounts:2005 2006 2007Profit before Tax 2,549,308.00 2,972,310.00 2,607,935.00Tax on Profit 490,083.00 453,125.00 155,192.00Net Profit 2,059,225.00 2,519,185.00 2,452,743.00Average equity 11,329,581.50 13,182,162.00 15,224,672.00ROE 18.18% 19.11% 16.11%46


ANNUAL REPORT 2007Graph 1148


OLD BRIDGE | MOSTARSTARI MOST | MOSTAR


ANNUAL REPORT 2007INCOME AND EXPENSESBalance Sheet and Profit and Loss Account for 2007 business year are made in accordance to the InsuranceLaw, Accounting Law and Code of Accounting Principles and Accounting Standards. Independent Auditors,Deloitte d.o.o. Sarajevo, audited financial statements and issued its independent auditors report that is incorporatedin balance statements. Although the law does not prescribe engagement of an international auditor,due to pronounced international character of reinsurance industry, Bosna RE Management established it asits business standard.Basic principles, rules and methods of valuation of balance items applied in business operation for the lastyear were:Tangible and non-tangible assets are recorded at their purchase valueDepreciation is calculated per linear method, applying the Decision by Government of Federation ofBH and decision of the Management of the Company.Revaluation of permanent assets, receivables and liabilities has not been done as price index of manufacturersof industrial product was lower than 10%.Receivables and liabilities from abroad are converted under the average rate of exchange as at 31December 2006The correction of the value of receivables is made for the receivables older than one year in accordancewith international accounting standardIt is necessary to mention again, as we have explained at the beginning of this report, that accountingmethod was changed in 2007. In other to enable comparison, the table of the report is adjusted as follows:A year 2006, was converted from the old chart of account to the new one and balanced according to netprinciple.For 2007, a plan made according to the old gross balancing method was converted to net methodRealization in 2007, shown in net system, i.e. new balancing scheme as a year 2007 that consists of IVQuarter from 2006 and I, II and III Quarter from 2007. At the same time the result for 2007 is shownwith IV Quarter.Total income realized in 2007 amounts KM 37,92 million that is for 64,48% more than it is realized in 2006i.e. 89,23% more than it is planned for 2007. The results that include IV Quarter are almost identical. 1The gross reinsurance premium amounts KM 38,72 million, i.e. KM 48,37 million including IV Quarter estimation.The net premium income is KM 18,17 million, i.e. KM 23,96 million, that is 47,92% of total income or64,04% including IV Quarter.The retrocession premium amounts KM 20,55 million that is 53,06% of total realized premium. With additionof IV Quarter estimate, the ratio of retrocession and total realized reinsurance premium is 50,46% : 49,54%.The retrocession commission amounts KM 4,32 million, i.e. KM 4,54 million. It must be noted that balancesheet shows deferred amount that means the total amount of this commission should be increased for KM1,20 million to get the amount for 2007.The gross reinsurance claims amounts KM 15,77 million, i.e. including effect of IV Quarter, KM 20,16 million.1The difference in realization that does not include IV Quarter of 2007 and realization that includes it, shall be discussedonly if it is significant and essentially influence the result.52


ANNUAL REPORT 2007The participation of retrocession in claims is KM 4,92 million, i.e. KM 6,83 million. Net claims borne by BosnaRE amount KM 10,85 million, i.e. KM 20,16 million.The reinsurance commission Bosna RE assigns to its clients to cover their acquisition costs amounts KM 7,21million, excluding IV Quarter effects. With these effects the amount is KM 6,47 million. Note that the lastamount is a part charged to 2007 balance of account and should be increased for KM 2,70 million to get thetotal amount of commission Bosna RE was charged with. The review of these statements together with effectsof IV Quarter is given in the table to follow.Table 11Gross Commission 9,180,077.462007 Gross Commission 6,472,429.73Gross Commission - Time Deferred 2,707,647.73Total Retrocession Commission 4,329,054.452007 Retrocession Commission 1,201,299.81Retrocession Commission - Time Deferred 5,530,354.26Net Commission paid by Bosna RE 3,649,723.20Net Comission paid by Bosna RE 2007 2,143,375.28Net Commission paid by Bosna RE-Time Deferred 1,506,347.92Statement of technical reserves is given in the Table 12No. Basis As at 31. December 2006 As at 31. December 20071 Loss Reserve 9,539,042.91 7,028,270.182 IBNR 2,976,973.42 3,192,427.483 Mass and Catastrophe Loss 0.00 0.004 Unearned Premium 2,867,232.12 9,238,228.335 Bonuses and Rebates Reserve 0.00 -290,882.13TOTAL 15,383,248.45 19,168,043.86The statement of Loss Reserves is decreased for KM 2,52 million, IBNR remained almost at the same level,while the unearned premium considerably increased for KM 6,37 million. This is manly the result of additionof IV Quarter to the account since almost total premium amount for this period is reserved through unearnedpremium. The same applied to loss reserves since IV quarter losses previously allocated to reserves, are nowcalculated through regular statement of account. For the first time, in 2007 we made bonuses and rebatesreserves. This primarily relates to profit commissions and corrections according to sliding scale commissions,accrued in 2007 and previous years which shall be paid in 2008. Considering the results of some treatiescorrected for sliding scale commission that presents an income for Bosna RE, this item in technical reservesstatement has negative sign.54


ANNUAL REPORT 2007The review of other business expenses and particularly acquisition costs is given in Table 13.TOTAL EXPENSESWITHOUT LOSSES ANDCOMMISSIONRealisation2006Plan2007Realisation IVQtr Excluded0-Jan-00Realisation IVQtr Included31-Dec-073/1 3/2 4/1 4/21 2 3 4 5 6 7 83.080.400,03 2.871.000,00 2.882.525,11 3.125.587,87 93,58 100,40 101,47 108,87ACQUISITION COSTS 2.690.278,65 2.492.000,00 2.625.189,14 2.762.975,40 97,58 105,34 102,70 110,87GROSS PREMIUM 29.932.347,06 33.534.000,00 38.726.671,27 48.374.195,19NET PREMIUM 9.098.912,32 14.530.000,00 18.174.541,35 23.960.753,52EXPENSES IN RESPECT OFGROSS PREMIUM8,99% 7,43% 6,78% 5,71%EXPENSES IN RESPECT OFNET PREMIUM29,57% 17,15% 14,44% 11,53%It is obvious from the table that expenses in relation to reinsurance premium net as well as gross have tendencyof constant decrease.Total income for 2007 amounts KM 37,92 million, i.e. KM 37,41, including IV quarter effect.Total reinsurance reinsurance expenses for 2007 amount KM 34,99 million, i.e. KM 34,80 million.The difference between income and expenses amounts KM 2.607.935,49, which represents gross profit for2007.56


ANNUAL REPORT 2007To the Shareholders of Bosna Reosiguranje d.d. SarajevoWe have audited the accompanying unconsolidated financial statements of Bosna Reosiguranje d.d. Sarajevo(‘the Company’), set out on pages 3 to 37, which comprise the balance sheet as at 31 December 2007, and theincome statement, statement of changes in equity and statement of cash flows for the year then ended, anda summary of significant accounting policies and other explanatory notes.Management’s Responsibility for the Financial StatementsManagement is responsible for the preparation and fair presentation of these unconsolidated financial statementsin accordance with International Financial Reporting Standards. This responsibility includes: designing,implementing and maintaining internal control relevant to the preparation and fair presentation of financialstatements that are free from material misstatement, whether due to fraud or error; selecting and applyingappropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.Auditor’s ResponsibilityOur responsibility is to express an opinion on these unconsolidated financial statements based on our audit.We conducted our audit in accordance with International Standards on Auditing. Those standards require thatwe comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whetherthe financial statements are free from material misstatement.An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in thefinancial statements. The procedures selected depend on the auditor’s judgment, including the assessmentof the risks of material misstatement of the financial statements, whether due to fraud or error. In makingthose risk assessments, the auditor considers internal control relevant to the Company’s preparation and fairpresentation of the financial statements in order to design audit procedures that are appropriate in the circumstances,but not for the purpose of expressing an opinion on the effectiveness of the Company’s internalcontrol. An audit also includes evaluating the appropriateness of accounting policies used and the reasonablenessof accounting estimates made by management, as well as evaluating the overall presentation of thefinancial statements.We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for ouraudit opinion.OpinionIn our opinion, the unconsolidated financial statements present fairly, in all material respects, the financialposition of the Company as of 31 December 2007, and the results of its operations and its cash flows for theyear then ended in accordance with International Financial Reporting Standards.Emphasis of matterWithout qualifying our opinion, we draw attention to the fact that The Company has prepared these unconsolidatedfinancial statements based on and in accordance with the law in Federation of Bosnia and Herzegovina,and that in these financial statements its investments in subsidiaries and associates are valued at cost.For a better understanding of the Group as a whole, users should read the consolidated financial statements,as stated in Note 3.Deloitte d.o.o.Sarajevo, 22 February 200858


ANNUAL REPORT 2007Bosna Reosiguranje d.d. SarajevoUnconsolidated income statement for the year ended 31 December 2007(All amounts are expressed in KM)Notes 2007 2006Reinsurance premium revenue 5 38,564,909 30,103,376Reinsurance premium ceded to re-insurers, net 5 (20,975,152) (20,899,485)Net reinsurance premium revenue 17,589,757 9,203,891Reinsurance claims and loss adjustment expenses 6 (12,341,266) (19,032,168)Reinsurance claims recovered from re-insurers, net 6 1,601,420 9,751,190Net claims and loss adjustment expenses (10,739,846) (9,280,978)Commission income 4,329,054 5,111,400Commission expenses (6,621,105) (5,517,379)Net commissions (2,292,051) (405,979)Net income / (loss) from insurance 4,557,860 (483,066)Investment income 7 833,304 4,848,444Other operating income 8 175,959 1,335,320Sales, administrative and other operating expenses 9 (2,782,490) (2,690,648)Foreign exchange (losses) gains (176,700) (37,740)Profit before tax 2,607,935 2,972,310Income tax expense 10 (155,192) (453,125)Net profit 2,452,743 2,519,185Earnings per share 11 634.60 652.915. NET REINSURANCE PREMIUM 2007 2006Reinsurance premium, domestic 43,005,816 24,969,618Reinsurance premium, foreign 5,368,379 4,962,728Increase in allowance for impairment of receivables - (166,445)Change in the unearned premium provision (9,809,286) 337,475Premium revenue arising from the insurance contracts issued 38,564,909 30,103,376Reinsurance premium ceded to re-insurers (24,413,442) (20,833,435)60


ANNUAL REPORT 2007Change in the unearned premium provision ceded to re-insurers 3.438.290 (66,050)Reinsurance premium ceded to re-insurers, net (20,975,152) (20,899,485)17,589,757 9,203,8916. REINSURANCE CLAIMS AND LOSS ADJUSTMENT EXPENSES 2007 2006Reinsurance claims and loss adjustment expenses, domestic 17,673,220 11,530,780Reinsurance claims and loss adjustment expenses, foreign 2,489,402 2,554,198Change in the provision for incurred but not reported claims 1,652,181 3,209,914Change in the provision for reported claims (9,961,180) 1,737,276Change in provision for bonuses and discounts 487,643 -Reinsurance claims arising from the insurance contracts issued 12,341,266 19,032,168Reinsurance claims recovered from re-insurers (6,836,578) (7,137,045)Change in the provision for incurred but not reported claims (1,436,725) (3,141,941)Change in the provision for reported claims 7,450,407 527,796Change in provision for bonuses, discounts and premiums (778,524) -Reinsurance claims recovered from re-insurers (1,601,420) (9,751,190)10,739,846 9,280,9787. INVESTMENT INCOME 2007 2006Interest on bank deposits 556,402 576,267Dividends 223,284 219,571Income from sale of investment 48,002 -Investment contract income - 3,971,086Decrease in allowance for impairment of loans - 81,520Other investment income 5,616 -833,304 4,848,4448. OTHER OPERATING INCOME 2007 2006Rent 152,446 152,445Gain on disposal of property and equipment, net 14,180 142,590Collected written off receivables 9,328 1,023,367Other 6 16,91862


ANNUAL REPORT 2007175,960 1,335,3209. SALES, ADMINISTRATIVE AND OTHER OPERATING EXPENSES 2007 2006Gross salaries 1,056,609 1,026,125Other employee benefits and management bonuses 365,984 255,280Services 257,126 252,145Depreciation 259,174 249,052Taxes 171,020 170,292Meal allowance, transportation and vacation allowance 114,783 108,815Insurance premiums 109,529 156,399Memberships 83,662 70,759Advertising and entertainment 62,771 65,681Maintenance 49,937 58,934Material and energy 68,787 49,760Bank fees 48,053 38,631Donations 11,309 19,700Other expenses 31,326 169,0752,782,490 2,690,64810. INCOME TAX EXPENSE 2007 2006Profit before income tax 2,607,935 2,972,310Tax effect of non-recognized expenses 58,468 180,079Dividends and portion in profit for which taxes have been paid (205,984) (29,459)Income allocation to reserves (391,190) (445,847)Total taxable profit 2,069,229 2,677,083Income tax at 30% 620,769 803,125Income tax relief from investment in property and equipment (465,577) (350,000)Tax expense for the year 155,192 453,125Effective tax rate for the year 7.5% 15.24%64


ANNUAL REPORT 200710. INCOME TAX EXPENSE (CONTINUED) 2007 2006Balance at the beginning of the year 70,880 56,195Increase based on depreciation charge for the year 14,573 14,68585,453 70,880Provision for deferred tax assets (85,453) (70,880)Balance at the end of the year - -11. EARNINGS PER SHARE 2007 2006Net profit 2,452,743 2,519,185Weighted average number of ordinary shares forthe purposes of calculating earnings per share 3,865 3,858Earnings per share 634.60 652.9166


ANNUAL REPORT 2007Bosna Reosiguranje d.d. SarajevoUnconsolidated balance sheet as at 31 December 2007(All amounts are expressed in KM)ASSETSNon-current assetsNotes 2007 2006(Restated)Property and equipment 12 1,400,321 792,517Investment in property 13 982,478 1,033,960Investments in subsidiaries 14 183,465 184,720Investments in associates 15 4,182,675 3,175,975Deferred acquisition costs 1,506,348 631,941Financial assetsEquity instrumentsAvailable for sale 16 3,290,048 2,537,903Debt instrumentsDeposits 17 10,930,8030 10,850,846Loans 18 - 1.365.848Reinsurance assets(re-insurers’ share of reinsurance liabilities) 24 28,774,354 30,904,093Reinsurance premium receivables and claims 19 18,474,041 9,908,913recovered from re-insurersOther receivables 20 66,660 235,456Other assets 21 826,259 395,921Cash and cash equivalents 22 8,046,553 7,081,881TOTAL ASSETS 78,664,005 69,825,974EQUITY AND LIABILITIESShare capital 23 5,029,700 5,029,700Treasury shares - (18,200)Safety reserves 6,692,433 6,495,633Retained earnings 4,520,893 2,699,18516,243,026 14,206,3168


ANNUAL REPORT 2007LIABILITIESReinsurance liabilities 24 47,942,399 46,925,282Reinsurance premium and claims payables 25 10,346,552 6,508,313Other liabilities 26 4,039,608 2,186,061Provisions 92,420 -62,420,979 55,619,656TOTAL EQUITY AND LIABILITIES 78,664,005 69,825,974PROPERTY AND EQUIPMENTCOST OR VALUATIONLand Buildings Equipment Computer Other Totaland furnitureAt 31 December 2005 4.630 1.331.379 695.626 177.655 297.444 2.506.734(Restated)Additions - - 138.448 13.795 35.609 187.852Disposals - (320.000) (120.084) (12.830) - (452.914)At 31 December 2006 4,630 1,011,379 713,990 178,620 333,053 2,241,672Additions - - 130,906 95,500 642,910 869,315Disposals - - (106,261) (36,873) - (143,134)At 31 December 2007 4,630 1,011,379 738,635 237,247 975,963 2,967,854ACCUMULATED DEPRECIATIONAt 31 December 2005 - 556,818 569,789 114,375 200,241 1,441,223(Restated)Depreciation - 41,927 74,827 41,741 39,076 197,571Disposals - (57,000) (119,809) (12,830) - (189,639)At 31 December 2006 - 541,745 524,807 143,286 239,317 1,449,155Depreciation 37,927 74,901 38,492 56,372 207,692Disposals - - (52,441) (36,873) - (89,314)At 31 December 2007 - 579,672 547,267 144,905 295,689 1,567,53370


ANNUAL REPORT 2007CARRYING AMOUNTAt 31 December 2007 4,630 431,707 191,368 92,342 180,274 1,400,321At 31 December 2006 4,630 469,634 189,183 35,334 93,736 792,517(Restated)INVESTMENT PROPERTYTotalCOST OR VALUATIONAt 31 December 2005 (Restated) 1,372,838Additions -At 31 December 2006 1,372,838Additions -At 31 December 2007 1,372,838ACCUMULATED DEPRECIATIONAt 31 December 2005 (Restated) 287,396Depreciation 51,482At 31 December 2006 338,878Depreciation 51,482At 31 December 2007 390,360CARRYING AMOUNTAt 31 December 2007 982,478At 31 December 2006 1,033,96072


ANNUAL REPORT 2007INVESTMENTS IN ASSOCIATESCompany name Reporting date Business % 2007 2006DUF Prof-in d.o.o., Sarajevo 31 December Fund managing company 35.03 589,138 589,137Triglav BH osiguranje d.d. Sarajevo 31 December Insurance 28.59 1,282,490 1,282,490Sarajevostan d.d., Sarajevo 31 December Housing service 21.54 1,311,047 1,304,347ASA osiguranje d.d. Sarajevo 31 December Insurance 20.00 1,000,000 -4,182,675 3,175,974ASSETS AVAILABLE FOR SALEAvailable for sale Principal activity (%) 2007 2006Sarajevo osiguranje d.d., Sarajevo Insurance 1.85 1,009,383 660,408Bosna Sunce osiguranje d.d., Sarajevo Insurance 5.20 418,400 418,400IF Prof plus d.d., Sarajevo Investment fund 2.42 968,524 968,524Lido osiguranje d.d., Tuzla Insurance 5.18 148,400 145,160Croatia Lloyd d.d., Zagreb, Croatia Reinsurance 0.34 106,718 106,434ABS banka d.d., Sarajevo Banking 0.08 - 12,000PBS d.d., Sarajevo Banking 0.00 8,700 8,700Sava reosiguranje d.d., Ljubljana, Slovenia Reinsurance 0.001 9,044 3,428Union banka d.d., Sarajevo Banking 0.62 210,580 210,580Conny d.o.o., Beograd, Serbia Limited company 0.43 4,269 4,269Osiguritelna Polisa a.d. Skopje Insurance 6.97 406,030 -3,290,048 2,537, 90374

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