Elmo - Annual Report 2012 by 26th frame

Co. Reg. No. C3500

CONTENTS Directors’ report Independent auditor’s report Profit and loss account

4-5 6

Technical account – general business Non-technical account

7 8

Balance sheet

Statement of comprehensive income

Statement of changes in equity

Statement of cash flows

Notes to the financial statements

12-44

DIRECTORS’ REPORT The directors present their report and audited financial statements for the year ended 31 December 2012. PRINCIPAL ACTIVITIES The principal activities of the company are that of an insurance company licensed in terms of Section 7 of the Insurance Business Act, 1998 by the Malta Financial Services Authority to write general business in Malta. REVIEW OF THE BUSINESS The company registered a profit before tax for the year of €2,171,362 which compared favourably to the €1,209,614 reported in 2011. Profit after tax amounted to €1,702,486, a significant improvement on the profit of €507,754 registered in 2011. These results were achieved despite the incidence of a number of significant claims arising from a severe storm that caused widespread flooding in September 2012. The company’s technical contribution before taking account of investment income amounted to €768,975 in 2012 compared to €1,956,081 in 2011. The shortfall has been compensated, in the main, by an improved investment income result of €1,487,691 net of related expenses, which compared positively with the €668,370 investment loss registered in 2011. During the year the company’s share capital was raised from €4,023,300 to €5,000,000 and shareholders’ funds increased from €10,286,159 to €11,188,645. Shareholders’ funds are comfortably in excess of the company’s regulatory capital requirements, both under Solvency I and also under Solvency II, when applying the MFSA’s Standard Formula criteria. KEY DEVELOPMENTS This year can best be described as one of consolidation. The company’s Board has devoted considerable effort in respect of: 1. Organisational Structure 2. Infrastructure Development 3. Product Development 4. Solvency II preparations. Organisational Structure During the year priority was given to the succession process in respect of the company’s long-serving senior management team which is approaching retirement age. In 2012, the Board appointed new heads to our Commercial Lines and Claims Management Departments.

We intend to strengthen our management team and have plans in place to employ an in-house lawyer to head up a new Corporate Legal Department. In addition, we have taken steps to improve communication with our distribution network, by empowering individual departmental managers to oversee relations with each introducing segment, be it with our branches, TII’s and brokers. Infrastructural development After spending two years refurbishing our Craig Street office, we embarked on a similar exercise in respect of our Abate Rigord Street office. In May 2012 we vacated our staff from these premises and reallocated them to a temporary office nearby. At the same time we undertook extensive refurbishment works and gutted the building, upgrading almost everything. We are pleased to note that by the middle of April 2013 we managed to relocate our staff back into our Abate Rigord Street office. Our investment in technology continues unabated. We continue to invest very heavily in software, hardware and both in external and internal support in terms of the quality and quantity of IT personnel. Product development Considerable effort is being invested in widening our product line. Over the last two years we have introduced Health 123, an SME package Gap and Car Warranty insurance. We also paved the way to repackage our Motor Comprehensive cover to include, amongst several other new additional features, free roadside assistance. Solvency II We have made considerable progress over the course of the last twelve months in preparing for Solvency II, the introduction of which will be phased over the ensuing years, starting from 1st January 2014. The MFSA, in mid February 2013 undertook one of its routine onsite compliance visits of the company. Extensive work went into this exercise and no material issues were encountered during our discussions with the Authority on their findings. As a result, the Board is of the opinion that its preparatory work in this area is paying off. RESULTS AND DIVIDEND The profit and loss account is set out on pages 7 and 8. During the year under review the company distributed a net interim dividend of €1,776,700 (2011: €700,000). The directors do not recommend the payment of a final dividend.

DIRECTORS The directors of the company who held office during the year were: William Harding - Chairman David Bartoli - Managing Director Alan Bartoli Roger Bellamy John Cooper Godfrey Leone Ganado

governing the preparation and dissemination of financial statements may differ from requirements or practice in Malta. AUDITORS The auditors, PwC, have indicated their willingness to continue in office and a resolution for their re-appointment will be proposed at the Annual General Meeting. By order of the Board

STATEMENT OF DIRECTORS’ RESPONSIBILITIES FOR THE FINANCIAL STATEMENTS The directors are required by the Insurance Business Act, 1998 and the Companies Act, 1995 to prepare financial statements which give a true and fair view of the state of affairs of the company as at the end of each financial period and of the profit or loss for that period. In preparing the financial statements, the directors are responsible for: ■ ensuring that the financial statements have been drawn up in accordance with International Financial Reporting Standards as adopted by the EU; ■ selecting and applying appropriate accounting policies; ■ making accounting estimates that are reasonable in the circumstances; ■ ensuring that the financial statements are prepared on the going concern basis unless it is inappropriate to presume that the company will continue in business as a going concern.

William Harding Chairman

David Bartoli Managing Director

“Elmo” Abate Rigord Street Ta’ Xbiex Malta 18 June 2013

The directors are also responsible for designing, implementing and maintaining internal controls relevant to the preparation and the fair presentation of the financial statements that are free from material misstatement, whether due to fraud or error, and that comply with the Insurance Business Act, 1998 and the Companies Act, 1995. They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The financial statements of Elmo Insurance Limited for the year ended 31 December 2012 are included in the Annual Report 2012, which is published in hard-copy printed form and may be made available on the company’s website. The directors are responsible for the maintenance and integrity of the Annual Report on the website in view of their responsibility for the controls over, and the security of, the website. Access to information published on the company’s website is available in other countries and jurisdictions, where legislation

INDEPENDENT AUDITOR’S REPORT To the Shareholders of Elmo Insurance Limited REPORT ON THE FINANCIAL STATEMENTS We have audited the financial statements of Elmo Insurance Limited on pages 7 to 44, which comprise the balance sheet as at 31 December 2012, the profit and loss account, the statements of comprehensive income, changes in equity and cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information. Directors’ Responsibility for the Financial Statements As explained more comprehensively in the Statement of directors’ responsibilities for the financial statements on page 4, the directors are responsible for the preparation of financial statements that give a true and fair view in accordance with International Financial Reporting Standards (IFRSs) as adopted by the EU and the requirements of the Maltese Companies Act, 1995 and Insurance Business Act, 1998, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation of financial statements that give a true and fair view 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 entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion In our opinion the financial statements ■ give a true and fair view of the balance sheet of the company as at 31 December 2012, and of its financial performance and its cash flows for the year then ended in accordance with IFRSs as adopted by the EU; and ■ have been properly prepared in accordance with the requirements of the Maltese Companies Act, 1995 and Insurance Business Act, 1998. REPORT ON OTHER LEGAL AND REGULATORY REQUIREMENTS We also have responsibilities under the Maltese Companies Act, 1995 to report to you if, in our opinion: ■ The information given in the directors’ report is not consistent with the financial statements. ■ Adequate accounting records have not been kept, or that returns adequate for our audit have not been received from branches not visited by us. ■ The financial statements are not in agreement with the accounting records and returns. ■ We have not received all the information and explanations we require for our audit. ■ Certain disclosures of directors’ remuneration specified by law are not made in the financial statements, giving the required particulars in our report. We have nothing to report to you in respect of these responsibilities.

PricewaterhouseCoopers 78 Mill Street Qormi Malta Romina Soler Partner 18 June 2013

PROFIT AND LOSS ACCOUNT

TECHNICAL ACCOUNT – GENERAL BUSINESS

Year ended 31 December

2012 2011 Notes € € Earned premiums, net of reinsurance Gross premiums written 4 13,024,083 12,932,229 Outward reinsurance premiums (4,050,351) (3,907,326) ____________ ____________ Net premiums written 8,973,732 9,024,903 ____________ ____________ Change in the gross provision for unearned premiums 15 142,994 122,969 Change in the provision for unearned premiums, reinsurers’ share 15 32,084 (43,268) ____________ ____________

175,078 79,701 ____________ ____________ Earned premiums, net of reinsurance 9,148,810 9,104,604 Allocated investment return transferred from the non-technical account (page 8) 6 912,902 Other technical income 323,749 325,819 ____________ ____________

Total technical income 10,385,461 9,430,423 ____________ ____________ Claims incurred, net of reinsurance Claims paid - gross amount 15 6,634,370 6,847,428 - reinsurers’ share 15 ____________ ____________ (1,097,105) (782,024)

5,537,265 6,065,404 ____________ ____________ Change in the provision for claims - gross amount 15 1,083,405 (586,957) - reinsurers’ share 15 ____________ ____________ (466,288) (61,222)

617,117 (648,179) ____________ ____________ Claims incurred, net of reinsurance

6,154,382 5,417,225

Allocated investment charge transferred from the non-technical account (page 8) 6 - 421,638 Net operating expenses 5 2,549,202 2,057,117 ____________ ____________

Total technical charges 8,703,584 7,895,980 ____________ ____________

____________ ____________ Balance on the technical account for general business (page 8)

1,681,877 1,534,443

PROFIT AND LOSS ACCOUNT NON-TECHNICAL ACCOUNT

Year ended 31 December

2012 2011 Notes â&#x201A;Ź â&#x201A;Ź Balance on the technical account for general business (page 7) 1,681,877 1,534,443 Administration expenses 5 (85,304) (78,097) Investment income/(charge) 6 1,553,724 (604,172) Investment expenses and charges 6 (66,033) (64,198) Allocated investment (return)/charge transferred to the general business technical account (page 7) 6 (912,902) 421,638 ____________ ____________

Profit before tax 2,171,362 1,209,614 Tax expense 9 (468,876) (701,860) ____________ ____________

____________ ____________

Profit for the year 1,702,486 507,754 The notes on pages 12 to 44 are an integral part of these financial statements.

BALANCE SHEET As at 31 December

2012 2011 Notes € € ASSETS Intangible assets – computer software 11 213,109 172,846 Tangible assets - land and buildings 12 3,497,145 3,458,063 - plant and equipment 12 356,695 272,472 Investments: - investment in associated undertaking 13 27,785 14,208 - other investments 14 17,072,362 16,502,856 Deferred taxation 20 208,351 221,354 Reinsurers’ share of technical provisions 15 3,907,317 3,408,945 Deferred acquisition costs 16 752,356 749,769 Debtors: - arising out of direct insurance operations 17 3,773,427 3,616,899 - other debtors 17 72,784 120,695 Prepayments and accrued income 17 182,536 175,105 Current taxation 523,420 265,654 Cash at bank and in hand 24 ____________ ____________ 595,512 207,189

____________ ____________

Total assets 31,182,799 29,186,055 EQUITY AND LIABILITIES Capital and reserves Called up share capital 18 5,000,000 4,023,300 Revaluation reserve 19 1,255,926 1,255,926 Profit and loss account 4,932,719 5,006,933 ____________ ____________

Total equity 11,188,645 10,286,159 ____________ ____________ LIABILITIES Technical provisions 15 16,810,542 15,870,131 Deferred taxation 20 412,255 412,255 Creditors: - interest-bearing borrowings 21 389,841 267,602 - creditors arising out of direct insurance operations 22 1,413,666 1,494,951 - accruals and deferred income 22 ____________ ____________ 967,850 854,957 Total liabilities 19,994,154 18,899,896 ____________ ____________ Total equity and liabilities 31,182,799 29,186,055

____________ ____________ The notes on pages 12 to 44 are an integral part of these financial statements. The financial statements on pages 7 to 44 were authorised for issue by the Board on 18 June 2013 and were signed on its behalf by:

William Harding Chairman

David Bartoli Managing Director

STATEMENT OF COMPREHENSIVE INCOME Year ended 31 December

2012 2011 € € Profit for the year – total comprehensive income 1,702,486 507,754

____________ ____________ STATEMENT OF CHANGES IN EQUITY Profit Share Revaluation and loss capital reserve account Total Notes € € € € Balance at 1 January 2011 4,023,300 1,255,926 5,199,179 10,478,405 Comprehensive income Profit for the year - total comprehensive income - - 507,754 507,754 ____________ ____________ ____________ ____________ Transactions with owners Dividends - ordinary shares - total transactions with owners 10 - - (700,000) (700,000) ____________ ____________ ____________ ____________

____________ ____________ ____________ ____________

Balance at 31 December 2011 4,023,300 1,255,926 5,006,933 10,286,159 Balance at 1 January 2012 4,023,300 1,255,926 5,006,933 10,286,159 Comprehensive income Profit for the year - total comprehensive income - - 1,702,486 1,702,486 ____________ ____________ ____________ ____________ Transactions with owners Increase in share capital 18 976,700 - - 976,700 Dividends - ordinary shares - total transactions with owners 10 - - (1,776,700) (1,776,700) ____________ ____________ ____________ ____________

____________ ____________ ____________ ____________

Balance at 31 December 2012 5,000,000 1,255,926 4,932,719 The notes on pages 12 to 44 are an integral part of these financial statements.

11,188,645

STATEMENT OF CASH FLOWS Year ended 31 December

2012 2011 Notes € € Operating activities Cash generated from operations 23 1,278,760 1,439,681 Dividends received 6 259,137 272,599 Interest received 367,403 379,766 Tax paid (713,639) (739,853) ____________ ____________ Net cash generated from operating activities 1,191,661 1,352,193 ____________ ____________ Investing activities Purchase of intangible assets 11 (181,091) (72,847) Purchase of plant and equipment 12 (288,587) (284,542) Purchase of investments – fair value through profit or loss 14 (2,249,967) (4,453,327) Disposal of investments – fair value through profit or loss 14 3,105,229 4,820,311 Net movement in investments – loans and receivables 14 (511,161) (444,264) ____________ ____________ Net cash used in investing activities (125,577) (434,669) ____________ ____________ Financing activities Dividends paid 10 (1,776,700) (700,000) Issue of share capital 18 976,700 ____________ ____________ Net cash used in financing activities (800,000) (700,000) ____________ ____________ Increase in cash and cash equivalents 266,084 217,524

____________ ____________ Movement in cash and cash equivalents At beginning of year (60,413) (277,937) Net cash inflow 266,084 217,524 ____________ ____________

____________ ____________ At end of year

205,671 (60,413)

The notes on pages 12 to 44 are an integral part of these financial statements.

NOTES TO THE FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies adopted in the preparation of these financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.

1.1. Basis of preparation These financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the EU, the Insurance Business Act, 1998 and the Companies Act, 1995. The financial statements are prepared under the historical cost convention as modified by the fair valuation of financial assets at fair value through profit or loss and the revaluation of land and buildings. The preparation of financial statements in conformity with IFRSs as adopted by the EU requires the use of certain accounting estimates. It also requires directors to exercise their judgement in the process of applying the company’s accounting policies (see Note 2 – Critical accounting estimates and judgements). The balance sheet is organised in increasing order of liquidity, with additional disclosures on the current or non-current nature of the company’s assets and liabilities provided within the notes to the financial statements. Standards, interpretations and amendments to published standards effective in 2012 In 2012, the company adopted new standards, amendments and interpretations to existing standards that are mandatory for the company’s accounting period beginning on 1 January 2012. The adoption of these revisions to the requirements of IFRSs as adopted by the EU did not result in substantial changes to the company’s accounting policies. Standards, interpretations and amendments to published standards that are not yet effective Amendment to IAS 1, ‘Financial statements presentation’ regarding other comprehensive income. The main change resulting from these amendments is a requirement for entities to group items presented in ‘other comprehensive income’ on the basis of whether subsequently, they are potentially reclassifiable to profit or loss (reclassification adjustments). The amendments do not address which items are presented in other comprehensive income. IFRS 13, ‘Fair value measurement’, aims to improve consistency and reduce complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across IFRSs. The requirements, which are largely aligned between IFRSs and US GAAP, do not extend the use of fair value accounting, but provide guidance on how it should be applied where its use is already required or permitted by other standards. IFRS 9, ‘Financial instruments’, addresses the classification and measurement of financial assets, and replaces the multiple classification and measurement models in IAS 39 with a single model that has only two classification categories: amortised cost and fair value. Classification under IFRS 9 is driven by the reporting entity’s business model for managing the financial assets and the contractual characteristics of the financial assets. IFRS 9, ‘Financial instruments’, also addresses the classification and measurement of financial liabilities, and retains the majority of the requirements in IAS 39 in relation to financial liabilities. Subject to adoption by the EU, IFRS 9 is effective for financial periods beginning on, or after, 1 January 2015. The company is considering the implications of the standard and its impact on the company’s financial results and position, together with the timing of its adoption taking cognisance of the endorsement process by the European Commission, and will also consider the impact of the remaining phases of IFRS 9 when completed.

1.2. Foreign currency translation (a) Functional and presentation currency Items included in the financial statements are measured using the currency of the primary economic environment in which the entity operates (“the functional currency”). The financial statements are presented in euro (€), which is the Company’s functional and presentation currency.

(b) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement within ‘administrative expenses’.

1.3. Revenue recognition Revenue comprises the fair value for services and is recognised as follows: (a) Rendering of services Premium recognition is described in accounting policy 1.15 dealing with insurance contracts. (b) Interest income Interest income from financial assets not classified as fair value through profit or loss is recognised on a time proportionate basis using the effective interest method. When a receivable is impaired, the company reduces the carrying amount to its recoverable amount, being the estimated future cash flow discounted at the original effective interest rate of the instrument and continues unwinding the discount as interest income. (c) Dividend income Dividend income is recognised when the right to receive payment is established. (d) Other net fair value gains or losses from financial assets at fair value through profit or loss Other gains or losses arising from changes in the fair value of the ‘Financial assets at fair value through profit or loss’ category are presented in the profit and loss account within ‘Net fair value gains or losses on financial assets at fair value through profit or loss’ in the period in which they arise.

1.4. Investment return Investment return includes dividend income, other net fair value movements on financial assets at fair value through profit or loss (including interest income from financial assets, classified as fair value through profit and loss), interest income from financial assets not classified as fair value through profit or loss and is net of investment expenses, charges and interest. The investment return is allocated between the technical and non-technical profit and loss accounts on a basis which takes into account that technical provisions are fully backed by investments.

1.5. Property, plant and equipment Tangible assets comprising land and buildings, office furniture and equipment and motor vehicles are initially recorded at cost. Property is subsequently shown at market value, based on valuations by external independent valuers, less subsequent depreciation. Valuations are carried out on a regular basis such that the carrying amount of property does not differ materially from that which would be determined using fair values at the reporting date. All other plant and equipment are subsequently stated at historical cost less depreciation. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the company and the cost of the item can be measured reliably. All other repairs and maintenance costs are charged to the profit and loss account during the financial period in which they are incurred. Increases in the carrying amount arising on revaluation are credited to the revaluation reserve in shareholders’ equity. Decreases that offset previous increases of the same asset are charged against the revaluation reserve; all other decreases are charged to the income statement.

NOTES TO THE FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 1.5. Property, plant and equipment (continued) Depreciation is calculated on the straight line method to write off the cost of the assets, other than land, to their residual values over their estimated useful life as follows: % Buildings 2 Improvement to buildings 10 Office furniture and equipment 20 Motor vehicles 20 The assets’ residual values and useful lives are reviewed and adjusted as appropriate at each reporting date. Gains and losses on disposals are determined by comparing proceeds with carrying amount and are included in the profit and loss account. Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount.

1.6. Intangible assets – computer software Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortised using the straight-line method over their estimated useful lives of 4 years. Costs associated with developing or maintaining computer software programmes are recognised as an expense as incurred.

1.7. Investment in associated undertakings Associated undertakings are all entities over which the company has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associated undertakings are accounted for by the equity method of accounting and are initially recognised at cost. Equity accounting involves recognising in the profit and loss account, the company’s share of the associate’s profit or loss for the year and the share of post-acquisition movements in reserves is recognised in reserves. The cumulative post-acquisition movements are adjusted against the cost of the investment. The company’s investment in associated undertaking is carried in the balance sheet at an amount that reflects its share of the net assets of the associate and includes goodwill (net of any accumulated impairment loss) on acquisition. Equity accounting is discontinued when the carrying amount of an investment in an associated undertaking reaches zero, unless the company has incurred obligations or guaranteed obligations in respect of the associated undertaking. On disposal of an investment, the difference between the net disposal proceeds and the carrying amount is charged or credited to the profit and loss account.

1.8. Financial assets The company classifies its financial assets in the following categories: financial assets at fair value through profit or loss and loans and receivables. The classification depends on the purpose for which the financial assets were acquired. The directors determine the appropriate classification of the financial assets at the time of purchase and re-evaluate such designation at every reporting date.

(a) Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss are part of a group of investments that is managed on a portfolio basis and whose performance is evaluated and reported internally on a fair value basis to the company’s key management personnel in accordance with a documented investment strategy. (b) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than those that the company intends to sell in the short term or that it has designated as fair value through profit or loss. They include, inter alia, debtors, deposits held with credit or financial institutions and cash and cash equivalents. All purchases and sales of investments are recognised on the trade date, which is the date that the company commits to purchase and sell the asset. All investments are initially recognised at fair value plus, in the case of all financial assets not carried at fair value through profit or loss, transaction costs that are directly attributable to their acquisition. Investments are derecognised when the rights to receive cash flows from the investments have expired or where they have been transferred and the company has also transferred substantially all risks and rewards of ownership. Financial assets at fair value through profit or loss are subsequently re-measured at fair value. Loans and receivables are carried at amortised cost using the effective interest method, less any provision for impairment. Realised and unrealised gains and losses arising from changes in fair value of the ‘financial assets at fair value through profit or loss’ category are included in the profit and loss account in the period in which they arise. The fair value of quoted investments is based on quoted market prices at the reporting date. If the market for an investment is not active, the company establishes fair value by using valuation techniques.

1.9. Impairment of assets (a) Impairment of financial assets carried at amortised cost The company assesses at each reporting date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that have occurred after the initial recognition of the asset (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. Objective evidence that a financial asset or group of assets is impaired includes observable data that comes to the attention of the company about the following events: (i) (ii) (iii) (iv)

significant financial difficulty of the issuer or debtor; a breach of contract, such as default or delinquency in payments; it becoming probable that the issuer or debtor will enter bankruptcy or other financial reorganisation; observable data indicating that there is a measurable decrease in the estimated future cash flow from a group of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the group.

The company first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant. If the company determines that no objective evidence of impairment exists 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. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment.

NOTES TO THE FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 1.9. Impairment of assets (continued) (a) Impairment of financial assets carried at amortised cost (continued) If there is objective evidence that an impairment loss has been incurred on loans and receivables carried at amortised cost, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the financial asset’s original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the profit and loss account. 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 improved credit rating), the previously recognised impairment loss is reversed by adjusting the allowance account. The amount of the reversal is recognised in the profit and loss account. (b) Impairment of other non-financial assets Assets that are subject to amortisation or depreciation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units).

1.10. Cash and cash equivalents For the purposes of the statement of cash flows, cash and cash equivalents comprise cash in hand and deposits held at call with banks which are held for operational purposes, net of bank overdrafts.

1.11. Share capital Shares are classified as equity when there is no obligation to transfer cash or other assets.

1.12. Dividends Dividends on ordinary shares are recognised in equity in the period in which they are declared.

1.13. Current and deferred tax The tax expense for the period comprises current and deferred tax. Tax is recognised in the profit and loss account, except to the extent that it relates to items recognised directly in equity. In this case, the tax is also recognised in equity. Deferred tax is recognised using the liability method for all temporary differences arising between the tax bases of assets and liabilities and their carrying values for financial reporting purposes. However, if the deferred income tax arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss, it is not accounted for. Deferred tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the end of the reporting period and are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled. Deferred tax assets are recognised only to the extent that future taxable profit will be available against which the temporary differences can be utilised.

1.14. Borrowings Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost. Interest costs are charged against income without restriction. No borrowing costs have been capitalised.

1.15. Insurance contracts - classification The company issues contracts that transfer significant insurance risk and that are classified as insurance contracts. As a general guideline, the company defines as significant insurance risk the possibility of having to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder. Insurance contracts – General business The results for direct business are determined on an annual basis whereby the incurred cost of claims, commissions and related expenses are charged against the earned proportion of premiums, net of reinsurance as follows: (i) Premiums written relate to business incepted during the year together with any differences between the booked premiums for prior years and those previously accrued, less cancellations. (ii) Unearned premiums represent the proportion of premiums written in the year that relate to unexpired terms of policies in force at the balance sheet date, calculated on a time apportionment basis. (iii) Commissions and other acquisition costs that vary with and are related to securing new contracts and renewing existing contracts are deferred over the period in which the related premiums are earned. These are capitalised and are shown as deferred acquisition costs (“DAC”) in the balance sheet. DAC is amortised over the term of the policies as the premium is earned. All other costs are recognised as expenses when incurred. (iv) Claims incurred comprise claims and related expenses paid in the year and changes in the provision for outstanding claims, including provisions for claims incurred but not reported (“IBNR”) and related expenses, together with any other adjustments to claims from previous years. Where applicable, deductions are made for salvage and other recoveries. (v) Provision is made at the year-end for the estimated cost of claims incurred but not settled at the reporting date, including the cost of claims incurred but not yet reported to the company. The estimated cost of claims includes expenses to be incurred in settling claims and a deduction for the expected value of salvage and other recoveries. The company takes all reasonable steps to ensure that it has appropriate information regarding its claims exposures. However, given the uncertainty in establishing claims provisions, it is likely that the final outcome will prove to be different from the original liability established. Liabilities for unpaid claims are estimated using the input of assessments for individual cases reported to the company and statistical analysis for the claims incurred but not reported, and to estimate the expected ultimate cost of more complex claims that may be affected by external factors (such as court decisions). The company does not discount its liabilities for unpaid claims. (vi) Provision in the form of an unexpired risk provision is made for any deficiencies arising when unearned premiums, net of associated acquisition costs, are insufficient to meet expected claims and expenses after taking into account future investment return on the investments supporting the unearned premiums provision and unexpired risks provision. The expected claims are calculated having regard to events that have occurred prior to the reporting date. (vii) The above method of provisioning satisfies the minimum liability adequacy that is required by IFRS 4. Reinsurance contracts held Contracts entered into by the company with reinsurers under which the company is compensated for losses on one or more contracts issued by the company and that meet the classification requirements for insurance contracts are classified as reinsurance contracts held.

NOTES TO THE FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 1.15. Insurance contracts - classification (continued) Reinsurance contracts held (continued) The benefits to which the company is entitled under its reinsurance contracts held are recognised as reinsurance assets. These assets consist of short-term balances due from reinsurers (classified within debtors), as well as longer term receivables (classified within reinsurersâ&#x20AC;&#x2122; share of technical provisions) that are dependent on the expected claims and benefits arising under the related reinsured insurance contracts. Amounts recoverable from or due to reinsurers are measured consistently with the amounts associated with the reinsured insurance contracts and in accordance with the terms of each reinsurance contract. Reinsurance liabilities are primarily premiums payable for reinsurance contracts and are recognised as an expense when due. The company assesses its reinsurance assets for impairment on a regular basis. If there is objective evidence that the reinsurance asset is impaired, the company reduces the carrying amount of the reinsurance asset to its recoverable amount and recognises that impairment loss in the profit and loss account. The company gathers the objective evidence that a reinsurance asset is impaired using the same process adopted for financial assets held at amortised cost. The impairment loss is also calculated following the same method used for these financial assets. These processes are described in accounting policy 1.9. Receivables and payables related to insurance contracts Receivables and payables are recognised when due. These include amounts due to and from agents, brokers and insurance contract holders. If there is objective evidence that an insurance receivable is impaired, the company reduces the carrying amount of the insurance receivable accordingly and recognises that impairment loss in the profit and loss account. The company gathers the objective evidence that an insurance receivable is impaired using the same process adopted for financial assets held at amortised cost. The impairment loss is calculated following the same method used for these financial assets. These processes are described in accounting policy 1.9.

2. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS IN APPLYING ACCOUNTING POLICIES Estimates and judgments are continually evaluated and based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. In the opinion of the directors, the accounting estimates and judgements made in the course of preparing these financial statements are not difficult, subjective or complex to a degree which would warrant their description as critical in terms of the requirements of IAS 1, other than the estimate of the ultimate liability arising from claims made under insurance contracts. There are several sources of uncertainty that need to be considered in the estimate of liabilities that the company will ultimately pay for insurance claims. In particular, insurance risks including exposure to liability can span over more than one accounting year, and this increases the uncertainty surrounding the estimate for final settlement. The company applies conventional statistical models in order to determine the ultimate liability of claims as further described in Note 3.1. The directors believe that the liability arising from claims under insurance contracts is adequately reserved as at the financial year end. Further detail is provided in Note 15 to these financial statements.

3. MANAGEMENT OF INSURANCE AND FINANCIAL RISK The company issues contracts that transfer insurance risk. The company is also exposed to financial risk. This section summarises these risks and the way the company manages them.

3.1. Insurance risk The risk under any one insurance contract is the possibility that the insured event occurs and the uncertainty of the amount of the resulting claim. By the very nature of an insurance contract, this risk is random and therefore unpredictable. The terms and conditions of the contracts set out the bases for the determination of the companyâ&#x20AC;&#x2122;s liability should the insured event occur. The risks underwritten include accident, motor (including third party liability), marine and transport, fire and other damage to property, engineering, and liability. Details of gross premiums written and claims incurred analysed by class are provided in the segmental analysis (Note 4). For a portfolio of insurance contracts where the theory of probability is applied to pricing and provisioning, the principal risk that the company faces under its insurance contracts is that the actual claims and benefit payments exceed the carrying amount of the insurance liabilities. This could occur because the frequency or severity of claims are greater than estimated. Insurance events are random and the actual number and amount will vary from year to year from the estimate established using statistical techniques. Experience shows that the larger the portfolio of similar insurance contracts, the smaller variability about the expected outcome will be. In addition, a more diversified portfolio is less likely to be affected across the board by a change in any subset of the portfolio. The company has developed its insurance underwriting strategy to diversify the type of insurance risks accepted and within each category of business to achieve a sufficiently large population of risks to reduce the variability of the expected outcome. Factors that aggravate insurance risks include the lack of risk diversification in terms of type and amount of risk, geographical location and type of industry covered. (a) Frequency and severity of claims The frequency and severity of claims can be affected by several factors including increasing levels of court awards and the risks of a single event that can affect a number of individual risks insured by the company, such as flood or an earthquake. The company manages these risks through its underwriting strategy, adequate reinsurance arrangements and proactive claims handling. Underwriting risk The directors manage exposure to insurance risk through an Underwriting Committee (U.C.) that considers aggregation of risk, and establishes risk retention levels. The underwriting strategy attempts to ensure that the risks underwritten are well diversified in terms of type and amount of risk and industry. Disciplined underwriting, encompassing risk assessment, risk management, pricing and exposure control is critical to the companyâ&#x20AC;&#x2122;s success. The goal is for underwriters to be in a position to: - Understand and assess each risk, - Make appropriate decisions within their area of competence and authority limits, - Differentiate between risks, - Apply suitable terms and conditions in order to manage the portfolio, - Control exposure, - Improve the predictability of the loss experience and make appropriate use of the companyâ&#x20AC;&#x2122;s technical capacity.

NOTES TO THE FINANCIAL STATEMENTS 3. MANAGEMENT OF INSURANCE AND FINANCIAL RISK (CONTINUED) 3.1. Insurance risk (continued) (a) Frequency and severity of claims (continued) Each of the company’s underwriters has a specific license that sets clear parameters for the business that they can underwrite, based on the competence of the individual underwriter. The U.C. looks at company underwriting issues, reviewing and agreeing underwriting direction and setting policy and directives where appropriate, and limits on the overall retention of risk that the company carries. The company’s management of the underwriting and claims risks restricts underwriting of specific high risk classes of business to underwriters with appropriate technical competence and includes reviewing the performance and management of selected individual insurance portfolios throughout the company. Pricing is generally based upon historical claims frequencies and claims severity averages, adjusted for inflation and trended forward. While claims remain the company’s principal cost, allowance is also made in the pricing procedures for acquisition expenses, administration expenses, investment income, the cost of reinsurance, and for a profit loading that adequately covers the cost of the capital exposed to risk. The company has the right not to renew individual policies or to reprice on renewal, it can impose deductibles and it has the right to reject the payment of a fraudulent claim. Reinsurance arrangements are in place as further described below. Reinsurance risk The company reinsures a portion of the risks underwritten to control exposure to losses, to reduce volatility, and to protect capital. The type of reinsurance cover, and the level of retention, are based on the company’s internal risk management assessment, which takes into account the risk being covered and the sums assured. The reinsurance strategy and programme are set and agreed by the Reinsurance Committee on an annual basis. The reinsurance arrangements include a mix of proportional, facultative and non-proportional cover, which limit the liability of the company to any one individual claim or event. Monthly reviews of aggregates are carried out to ensure that adequate reinsurance is in place. Periodical meetings are held with the company’s reinsurance brokers, the purpose of which is to systematically agree the renewal process of the company’s reinsurance requirements, and to ensure a formalised means of communication between Elmo and its reinsurance brokers. Good “ad hoc” contact with reinsurance brokers is maintained during the year when dealing with risks that are not catered for by standard reinsurance treaties. Further, reinsurance arrangements are in place with RSA to protect Elmo from adverse development of outstanding claims that the company assumed from RSA when the portfolio transfer agreement between RSA and Elmo was executed on 1 May 2004. The company monitors the financial condition of reinsurers on an ongoing basis, and reviews its reinsurance arrangements regularly to ensure that its counterparty exposure to individual reinsurance groups is within the parameters set by the U.C., and the Malta Financial Services Authority. The company does not place reinsurance with reinsurers having a credit rating lower than ‘A-’. Concentration of insurance risk All risks underwritten by the company are based in Malta. The distribution of premium by insurance business category is summarised in Note 4 to the financial statements. The directors consider that the insurance portfolio is not unduly concentrated, also taking into account the nature and extent of reinsurance protection acquired by the company.

Claims handling Risks surrounding known claims are mitigated through the company’s inhouse teams of skilled claims technicians who apply their experience and knowledge to the circumstances of individual claims. These teams are responsible for investigating and adjusting claims, together with specialist independent loss adjustors that might be engaged depending on exigencies. Claim estimates are reviewed periodically and adjusted on the basis of information that becomes available specific to the claim as well as changes in external factors such as judicial decisions and legislation. The company generally pursues early settlement of claims to reduce its exposure to unpredictable developments. Sources of uncertainty in the estimation of future claim payments Claims on contracts are accounted for on a claims-occurrence basis. The company is liable for all insured events that occurred during the term of the contract, even if the loss is discovered after the end of the contract term. As a result, the estimation of claims incurred but not reported (IBNR) is generally subject to a greater degree of uncertainty than the estimation of the cost of settling claims already notified to the company. Certain classes of business can take several years to develop, in particular claims involving casualty, and are therefore subject to a greater degree of uncertainty than other classes of business which are typically settled in a shorter period of time. The estimated cost of claims includes direct expenses to be incurred in settling claims, net of the expected subrogation value and recoveries. The company takes all reasonable steps to ensure that it has appropriate information regarding its claims exposures. However, given the uncertainty in establishing claims provisions, it is possible that the final outcome will prove to be different from the original liability established. The liability for these contracts comprises a provision for IBNR and a provision for reported claims not yet paid at the balance sheet date (see Note 15). In calculating the estimated cost of unpaid claims, the company uses a combination of estimation techniques, based partly on known information and partly on statistical analyses of a historical experience. Reserves are analysed by line of business. Case reserves are established on each individual claim and are adjusted as new information becomes known during the course of handling the claim. Lines of business for which claims data (e.g. paid claims and case reserves) emerge over a long period of time are referred to as long tail lines of business. Lines of business for which claims data emerge more quickly are referred to as short tail lines of business. Risks underwritten by the company are typically short tail, although certain lines of business may take longer to develop, including, for example, personal accident and employers’ liability. The company’s claims managers regularly review reserves for both current and prior accident years using the most recent claims data. These reserve reviews incorporate a variety of judgments, and involve extensive analysis. The ultimate cost of outstanding claims, including claims incurred but not reported, is subsequently estimated through statistical analyses of historical claims trends, which are projected forward giving greater weighting to recent years. Additional qualitative judgment is applied to assess the extent to which past trends may not apply in the future. Note 15 presents the development of the estimate of ultimate claim cost for claims notified in a given year. This gives an indication of the accuracy of the company’s estimation techniques for claims payable.

3.2. Financial risk The company is exposed to financial risk through its financial assets, financial liabilities, and insurance and reinsurance assets and liabilities. The key financial risk is that the proceeds from its financial assets are not sufficient to fund the obligations arising from its insurance risk. The most important components of this financial risk are the interest rate risk, equity price risk, currency risk, credit risk and liquidity risk. These risks arise from open positions in interest rate, currency and equity products, all of which are exposed to general and specific market movements. The risk management policies employed by the company to manage these risks are discussed below.

NOTES TO THE FINANCIAL STATEMENTS 3. MANAGEMENT OF INSURANCE AND FINANCIAL RISK (CONTINUED) 3.2. Financial risk (continued) Market risk (a) Interest rate risk In general, the company is exposed to risk associated with the effects of fluctuations in the prevailing levels of market interest rates. Assets issued at variable rates expose the company to cash flow interest rate risk. Assets issued at fixed rates expose the company to fair value interest rate risk. The total assets and liabilities subject to interest rate risk are as follows:

2012 2011 € € ____________ ____________

Assets at floating interest rates 1,894,154 1,426,258 Assets at fixed interest rates 7,872,550 8,297,027 ____________ ____________ 9,766,704 9,723,285

____________ ____________ ____________ ____________ Liabilities at floating interest rates

401,205 267,602

Interest rate risk is principally managed through the investment in debt securities having a wide range of maturity dates. Moreover, investment parameters exist to limit exposure to any one particular issuer and any one particular security. Note 14 incorporates maturity information with respect to the company’s assets. The exposure to interest rate risk in respect of borrowings is not considered to be significant. Insurance liabilities are not directly sensitive to the level of market interest rates, as they are not discounted and contractually non-interest bearing. The impact of interest rates on insurance liabilities (e.g. in the case of damages awarded by the courts) is considered within the company’s reserving policy and is mitigated by interest accruing on investments. Up to the balance sheet date the company did not have any hedging policy with respect to interest rate risk as exposure to such risks was not deemed to be significant by the directors. i) Sensitivity Analysis - interest rate risk The sensitivity analysis for interest rate risk illustrates how changes in the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates at the reporting date. At 31 December 2012, if interest rates at that date would have been 50 basis points (2011: 100 basis points) lower with all other variables held constant, pre-tax profit for the year would have been €99,887 (2011: €265,296) higher. An increase of 50 basis points (2011: 100 basis points), with all other variables held constant, would have resulted in pre-tax profits being €97,818 (2011: €252,861) lower. (b) Price risk The company’s financial assets are also susceptible to the risk of changes in value due to changes in the prices of equities in respect of investments held and classified on the balance sheet as fair value through profit or loss. The directors manage this risk of price volatility by entering into a diverse range of investments including equities and collective investment schemes. The company has an active Investment Committee that has established a set of investment guidelines that is also approved by the Board of Directors. These guidelines provide parameters for investment management, including contracts with external portfolio managers. The directors review market value fluctuations arising on the company’s investments on a regular basis. Investment parameters and diversification procedures also consider solvency restrictions imposed by the relevant Insurance Regulations.

The total assets subject to equity price risk are as follows:

2012 2011 € € ____________ ____________

____________ ____________ Assets subject to equity price risk

7,868,895 6,952,599

i) Sensitivity analysis – equity price risk The sensitivity for equity price risk illustrates how changes in the fair value of equity securities will fluctuate because of changes in market prices, whether those changes are caused by factors specific to the individual equity issuer, or factors affecting all similar equity traded in the market. The sensitivity for equity price risk is based on global equity returns, assuming that currency exposures are hedged. Given the investment strategy and asset mix of the company a 10% (2011: 10%) positive or negative movement in equity prices is considered to be an appropriate benchmark for sensitivity purposes. An increase and a decrease of 10% (2011:10%) in equity prices, with all other variables held constant, would result in an impact on the pre-tax profit for the year of €786,889 (2011: €695,260). (c) Currency risk Currency risk arises from the possibility that fluctuations in foreign exchange rates will impact on the amounts that are paid to settle liabilities and on the amounts that are realised from the company’s assets. Most of the company’s liabilities are in local currency and are therefore not subject to currency risk. The company’s exposure to foreign exchange risk arises primarily from investments that are denominated in currencies other than the euro. The company’s Investment Committee establishes allowable thresholds with regards to the company’s exposure to foreign exchange risk. Currency exposure is also regulated by the Regulations underlying the Maltese Insurance Business Act, 1998. i) Sensitivity analysis – currency risk As at 31 December 2012, the company’s exposure to foreign currency investments, represented 34% (2011: 31%) of the company’s total investments. The strengthening or weakening of the functional currency by 10% (2011: 10%) against the other currencies with all other variables held constant, would result in an impact on pre-tax profit for the year of €559,534 (2011: €503,891). (d) Credit risk Credit risk is the risk that a counterparty will be unable to pay amounts in full when due. Key areas where the company is exposed to credit risk are: ■ Investments and cash and cash equivalents; ■ Reinsurers’ share of insurance liabilities; ■ Amounts due from reinsurers in respect of claims already paid; ■ Amounts due from policy holders and insurance intermediaries. The company places limits on the level of credit risk undertaken from the main categories of financial instruments. These limits also take due consideration of the solvency restrictions imposed by the relevant Regulations. The investment strategy of the company considers the credit standing of the counterparty and control structures are in place to assess and monitor these risk thresholds. The company structures the levels of credit risk it accepts by limiting as far as possible its exposure to a single counterparty or groups of counterparty. Limits on the level of credit risk are approved by the directors, and the credit terms allowed depend on the distribution channel through which business is secured. Frequent meetings are held, attended by directors, in order to monitor the overall credit situation, and to take remedial measures as appropriate. Debtors are stated net of a provision for impairment (Note 17). The directors consider that the company is not exposed to material concentration of credit risk in respect of trade debtors due to the large number of customers comprising the company’s debtor base.

NOTES TO THE FINANCIAL STATEMENTS 3. MANAGEMENT OF INSURANCE AND FINANCIAL RISK (CONTINUED) 3.2. Financial risk (continued) (d) Credit risk (continued) Reinsurance is used to manage insurance risk. This does not, however, discharge the company’s liability as primary insurer. If a reinsurer fails to pay a claim for any reason, the company remains liable for the payment to the policyholder. The creditworthiness of reinsurers is monitored on an annual basis by reviewing their financial strength prior to finalisation of any contract. The company’s policy is to only contract reinsurers with a minimum rating of A-. The company is also exposed to credit risk for its cash at bank and investments. The company’s cash is placed with quality financial institutions. Assets bearing credit risk at the balance sheet date are analysed as follows: As at 31 December 2012

AAA A to A- BBB Unrated Total to AA to BB € € ____________ ____________ € € ____________ € ____________ ____________

Debt securities at fair value 1,938,778 4,522,689 ____________ ____________ 1,647,795 - ____________ 8,109,262 through profit or loss ____________ ____________ Loans and receivables Deposits with banks or credit institutions - - 560,673 533,532 1,094,205 Insurance and other receivables 36,588 46,249 32,028 3,848,204 3,963,069 - 476,310 ____________ ____________ 26,594 92,608 ____________ 595,512 Cash and cash equivalents ____________ ____________ 36,588 522,559 619,295 4,474,344 5,652,786 ____________ ____________ ____________ ____________ ____________ Reinsurers’ share of technical 1,748,680 720,966 ____________ ____________ - - ____________ 2,469,646 provisions (see note above) ____________ ____________ Total assets bearing credit risk

____________ ____________ ____________ ____________ ____________ 3,724,046

5,766,214

2,267,090

4,474,344

16,231,694

As at 31 December 2011

AAA A to A- BBB Unrated Total to AA to BB € € ____________ ____________ € € ____________ € ____________ ____________

Debt securities at fair value 2,551,222 5,601,232 ____________ ____________ 814,759 - ____________ 8,967,213 through profit or loss ____________ ____________ Loans and receivables Deposits with banks or credit institutions - - 59,750 523,294 583,044 Insurance and other receivables 43,177 62,802 12,532 3,739,839 3,858,350 - 89,841 ____________ ____________ 45,597 71,751 ____________ 207,189 Cash and cash equivalents ____________ ____________ 43,177 152,643 117,879 4,334,884 4,648,583 ____________ ____________ ____________ ____________ ____________ Reinsurers’ share of technical 1,500,492 502,866 ____________ ____________ - - ____________ 2,003,358 provisions (see note above) ____________ ____________ Total assets bearing credit risk

____________ ____________ ____________ ____________ ____________ 4,094,891

6,256,741

932,638

4,334,884

15,619,154

As at 31 December 2012 and 2011 the company had significant exposure to the Government of Malta through investments in debt securities and/or treasury bills. These were equivalent to 10% in 2012 (2011: 12%) of the company’s total assets.

(e) Liquidity risk The company’s exposure to liquidity risk arises from the eventuality that the frequency or severity of claims are greater than estimated. Liquidity risk is the risk that cash may not be available to pay obligations when due at a reasonable cost. The directors do not consider this risk to be significant given the nature of the company’s financial assets and liabilities. The company’s financial assets are considered to be readily realisable as they consist of local and foreign securities listed on recognised stock markets. Moreover, the company ensures that a reasonable level of funds is available at any point in time for unexpected large claims and the company may also resort to overdraft facilities which provide a short-term means of finance. The table below analyses the company’s financial liabilities into relevant maturity groupings based on the remaining period at the reporting date to the contractual maturity date. The amounts disclosed in the table are the expected timing cash flows arising from the company’s liabilities. As at 31 December 2012

Contracted undiscounted cash outflows

Between Between Less than one and two and Over one year two years five years five years Total € € € € € ____________ ____________ ____________ ____________ ____________ Bank overdraft Insurance and other payables

389,841 - - - 389,841 2,381,515 - - - 2,381,515 ____________ ____________ ____________ ____________ ____________ 2,771,356 - - - 2,771,356

____________ ____________ ____________ ____________ ____________

Expected undiscounted cash outflows

Between Between Less than one and two and Over one year two years five years five years Total € € ____________ ____________ € € ____________ € ____________ ____________

____________ ____________ ____________ ____________ ____________

Technical provisions - Claims outstanding 4,892,207 1,715,481 3,029,220 1,401,008 As at 31 December 2011

11,037,916

Contracted undiscounted cash outflows

267,602 - - - 267,602 2,349,908 - - - 2,349,908 ____________ ____________ ____________ ____________ ____________ 2,617,510 - - - 2,617,510

____________ ____________ ____________ ____________ ____________

Expected undiscounted cash outflows

Between Between Less than one and two and Over one year two years five years five years Total € € € € € ____________ ____________ ____________ ____________ ____________

____________ ____________ ____________ ____________ ____________

Technical provisions - Claims outstanding 4,345,746 1,520,490 2,770,789 1,317,486

9,954,511

NOTES TO THE FINANCIAL STATEMENTS 3. MANAGEMENT OF INSURANCE AND FINANCIAL RISK (CONTINUED) 3.3. Capital risk management The company’s objectives when managing capital are: ■ to comply with the insurance capital requirements required by the Maltese insurance regulator (“MFSA”); ■ to safeguard the company’s ability to continue as a going concern so that it can continue to provide returns for shareholders and benefits for other stakeholders; and, ■ to provide an adequate return to shareholders by pricing insurance contracts commensurately with the level of risk. In order to maintain or adjust the capital structure, the company may issue new shares or capitalise contributions received from its shareholders. The company is required to hold regulatory capital for its general insurance business in compliance with the rules issued by the Malta Financial Services Authority (MFSA). The minimum capital requirement must be maintained at all times throughout the year. The company monitors its capital level on a regular basis, by ensuring that sufficient assets are maintained to match insurance liabilities and to provide solvency cover. Any transactions that may potentially affect the company’s solvency position are immediately reported to the directors and shareholders for resolution prior to notifying the MFSA. As at 31 December 2012, the company’s net admissible assets in this regard amounted to €11,188,645 (2011: €10,286,159). The company was compliant with its regulatory capital requirements throughout the financial period. The current year amounts are, in general, estimates that are updated once calculations prepared for regulatory submissions are final.

3.4. Fair value estimate The fair value of publicly traded investments is based on quoted market prices at the balance sheet date. At 31 December 2012 and 31 December 2011, the carrying amount of the Company’s other financial assets and liabilities approximated their fair values. The following table presents the Company’s assets that are measured at fair value at 31 December 2012, by level of the following fair value measurement hierarchy: ■ Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1). ■ Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (level 2). ■ Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (level 3). 2012 2011 Level 1 Level 1 € € ____________ ____________ Assets Fair value through profit or loss - Equity securities, other variable yield securities and units in unit trusts – listed 7,868,895 6,952,599 - ____________ Debt securities 8,109,262 ____________ 8,967,213

____________ ____________

Total assets 15,978,157 The company’s investments are quoted in active markets and accordingly are classified as level 1.

15,919,812

4. SEGMENTAL ANALYSIS General business Gross premiums written and gross premiums earned by class of business Gross premiums written Gross premiums earned 2012 2011 2012 2011 € ____________ ____________ € € ____________ € ____________ Direct insurance Motor (third party liability) 1,828,595 1,761,153 1,835,332 1,775,905 Motor (other classes) 5,638,628 5,760,924 5,750,319 5,698,369 Fire and other damage to property 3,351,929 3,164,255 3,319,890 3,247,874 Other classes 2,204,931 2,245,897 2,261,536 2,333,050 ____________ ____________ ____________ ____________

____________ ____________ ____________ ____________

13,024,083 12,932,229 13,167,077 13,055,198

Gross claims incurred, gross operating expenses and reinsurance balance by class of business

Gross claims incurred Gross operating expenses Reinsurance balance 2012 2011 2012 2011 2012 2011 € € € ____________ ____________ € € ____________ € ____________ ____________ ____________

Direct insurance Motor (third party liability) 1,372,646 1,558,981 500,135 462,005 97,681 (133,908) Motor (other classes) 3,863,441 3,795,955 1,578,356 1,475,962 282,071 363,394 Fire and other damage to property 1,797,140 798,121 956,080 854,713 521,852 988,388 Other classes 684,548 107,414 784,003 753,908 283,898 400,003 ____________ ____________ ____________ ____________ ____________ ____________

____________ ____________ ____________ ____________ ____________ ____________

7,717,775 6,260,471 3,818,574 3,546,588 1,185,502 1,617,877

Gross premiums written emanate from contracts concluded in or from Malta. The reinsurance balance represents a charge or credit to the technical account arising from the aggregate of all items relating to reinsurance outwards.

NOTES TO THE FINANCIAL STATEMENTS 5. NET OPERATING EXPENSES 2012 2011 ____________ € ____________ € Acquisition costs 3,083,865 2,837,770 Change in deferred acquisition costs, net of reinsurance 29,751 23,708 Administrative expenses 790,262 763,207 Reinsurance commissions and profit participation ____________ (1,269,372) (1,489,471) ____________

____________ ____________

2,634,506 2,135,214 Allocated to: Technical profit and loss account 2,549,202 2,057,117 Non-technical account 85,304 78,097 ____________ ____________

____________ ____________ 2,634,506

2,135,214

Total commissions for direct business accounted for in the financial year amounted to €892,977 (2011: €744,577). Further detail on expenses by nature is provided in Note 7 to the financial statements.

6. INVESTMENT RETURN 2012 2011 ____________ € ____________ € Dividends received from investments at fair value through profit or loss 259,137 272,599 Net gains/(losses) from financial investments at fair value through profit or loss 1,266,769 (861,741) Interest receivable/(payable) in relation to other loans and receivables 14,241 (4,930) Share of gains/(losses) of associated undertaking 13,577 (10,100) ____________ ____________ 1,553,724 (604,172) ____________ ____________ Investment expenses and charges Investment expenses and charges ____________ (66,033) (64,198) ____________ (66,033) (64,198) ____________ ____________ Total investment return/(charges) 1,487,691 (668,370)

____________ ____________

Allocated as follows: Technical profit and loss account 912,902 (421,638) Non-technical account 574,789 (246,732) ____________ ____________

____________ ____________ 1,487,691

(668,370)

7. EXPENSES BY NATURE 2012 2011 ____________ € ____________ € Staff costs (Note 8) 2,079,857 2,066,703 Directors’ remuneration (Note 8) 10,800 10,800 Amortisation of intangible assets (Note 11) 140,828 105,933 Depreciation of property, plant and equipment (Note 12) 165,282 131,900 Professional indemnity insurance 62,326 62,514 Increase in debtors impairment provision (Note 17) 54,090 86,905 Legal and professional fees 183,622 148,752 Advertising 140,310 146,261 Other expenses 1,109,485 993,248 ____________ ____________

____________ ____________ Total administrative expenses

3,946,600

3,753,016

Allocated to: Technical profit and loss account 3,861,296 3,674,919 Non-technical account 85,304 78,097 ____________ ____________

____________ ____________ 3,946,600

3,753,016

Fees charged by the auditor for services rendered during the financial period ended 31 December 2012 and 2011 amounted to: 2012 2011 ____________ € ____________ € Annual statutory audit 34,574 33,630 Other assurance services 2,950 2,950 Tax advisory and compliance services 1,573 1,573 Other 181 181 ____________ ____________

____________ ____________

39,278 38,334

8. STAFF COSTS 2012 2011 ____________ € ____________ € Salaries 1,968,331 1,961,312 Social security costs ____________ 122,326 116,191 ____________

____________ ____________

2,090,657 2,077,503 The average number of persons employed during the year was: ____________ 2012 2011 ____________ Managerial 14 12 Technical 62 62 Administrative 7 8 ____________ ____________

____________ ____________

83 82 Staff costs amounting to €24,667 (2011: €24,894) were reimbursed from related undertakings (Note 25).

NOTES TO THE FINANCIAL STATEMENTS 9. TAX EXPENSE 2012 2011 ____________ € ____________ € Current tax expense 455,873 849,824 Deferred tax charge/(credit) (Note 20) ____________ 13,003 (147,964) ____________

____________ ____________

Tax expense 468,876 701,860 The tax on the company’s profit before tax differs from the theoretical amount that would arise using the basic tax rate as follows: 2012 2011 ____________ € ____________ € Profit before tax 2,171,362 1,209,614 ____________ ____________ Tax on profit at 35% 759,977 423,365 Adjusted for tax effect of: Income subject to reduced rates of tax (88,716) (59,856) Expenses not deductible for tax purposes 11,275 12,793 (Gains)/losses not subject to tax (58,590) 171,704 Movement in deferred tax not recognised (150,319) 150,319 Other differences (4,751) 3,535 ____________ ____________

____________ ____________

Tax expense 468,876 701,860 Deferred income tax assets are recognised for losses carry-forwards to the extent that the realisation of the related tax benefit through future taxable gains is probable.

10. DIVIDENDS The directors declared a net interim dividend of €1,776,700 during 2012 equivalent to 43 cents per share. The directors do not propose the payment of a final dividend in respect of 2012. The net dividend declared in respect of 2011 was €700,000 (17 cents per share).

11. INTANGIBLE ASSETS Computer software € ____________ At 1 January 2011 Cost 480,868 Accumulated amortisation (274,936) ____________

____________

Net book amount 205,932 Year ended 31 December 2011 Opening net book amount 205,932 Additions 72,847 Amortisation charge (105,933) ____________

____________

Closing net book amount 172,846 At 31 December 2011 Cost 553,715 Accumulated amortisation (380,869) ____________

____________

Net book amount 172,846 Year ended 31 December 2012 Opening net book amount 172,846 Additions 181,091 Amortisation charge (140,828) ____________

____________

Closing net book amount 213,109 At 31 December 2012 Cost 734,806 Accumulated amortisation (521,697) ____________

____________ Net book amount Amortisation of €140,828 (2011:€105,933) is included in net operating expenses in the technical account.

213,109

NOTES TO THE FINANCIAL STATEMENTS 12. TANGIBLE ASSETS Office Land and furniture & Motor buildings equipment vehicles Total € € € € ____________ ____________ ____________ ____________ At 1 January 2011 Cost or valuation 3,601,377 625,942 132,801 4,360,120 Accumulated depreciation (175,141) (493,958) (113,128) (782,227) ____________ ____________ ____________ ____________

____________ ____________ ____________ ____________

Net book amount 3,426,236 131,984 19,673 3,577,893 Year ended 31 December 2011 Opening net book amount 3,426,236 131,984 19,673 3,577,893 Additions 61,529 223,013 - 284,542 Depreciation charge ____________ ____________ ____________ ____________ (29,702) (89,831) (12,367) (131,900)

____________ ____________ ____________ ____________

Closing net book amount 3,458,063 265,166 7,306 3,730,535 At 31 December 2011 Cost or valuation 3,662,906 848,955 132,801 4,644,662 Accumulated depreciation (204,843) (583,789) (125,495) (914,127) ____________ ____________ ____________ ____________

____________ ____________ ____________ ____________

Net book amount 3,458,063 265,166 7,306 3,730,535 Year ended 31 December 2012 Opening net book amount 3,458,063 265,166 7,306 3,730,535 Additions 69,548 219,039 - 288,587 Depreciation charge ____________ ____________ ____________ ____________ (30,466) (131,163) (3,653) (165,282)

____________ ____________ ____________ ____________

Closing net book amount 3,497,145 353,042 3,653 3,853,840 At 31 December 2012 Cost or valuation 3,732,454 1,067,994 132,801 4,933,249 Accumulated depreciation ____________ ____________ ____________ ____________ (235,309) (714,952) (129,148) (1,079,409)

____________ ____________ ____________ ____________

Net book amount 3,497,145 353,042 3,653 3,853,840 The company’s land and buildings were revalued on 31 December 2010 by independent professional architects on the basis of an open market valuation. The surplus arising on revaluation, net of deferred taxation, was credited to the revaluation reserve in 2010.

13. INVESTMENT IN ASSOCIATED UNDERTAKING 2012 2011 ____________ € ____________ € Year ended 31 December At beginning of year 14,208 24,308 Share of results of associate ____________ 13,577 (10,100) ____________

____________ ____________

At end of year 27,785 14,208 At 31 December Cost 74,250 74,250 Share of results (46,465) (60,042) ____________ ____________

____________ ____________ Closing cost and net book amount The associated undertaking is shown below:

27,785 14,208

Associated undertaking Registered Class of Percentage of Office shares held shares held 2012 2011 JLT Insurance Management Malta Alfred Craig Street, Ordinary 33% 33% Limited Ta’ Xbiex Shares The following financial information available to the company relates to the investment that is classified as an associate as at the balance sheet date. Assets Liabilities Profit/(Loss) for the year € € € ____________ ____________ ____________

____________ ____________ ____________

2012 216,769 78,402 41,142 2011 101,290 50,697 (30,606) ____________ ____________ ____________

14. INVESTMENTS The investments are summarised by measurement category in the table below: 2012 2011 ____________ € ____________ € Fair value through profit or loss 15,978,157 15,919,812 Loans and receivables ____________ 1,094,205 583,044 ____________

____________ ____________ 17,072,362 16,502,856

NOTES TO THE FINANCIAL STATEMENTS 14. INVESTMENTS (CONTINUED) (a) Investments at fair value through profit or loss 2012 2011 ____________ € ____________ € Equity securities, other variable yield securities and units in unit trusts - listed 7,868,895 6,952,599 Debt securities 8,109,262 8,967,213 ____________ ____________

____________ ____________ Total investments at fair value through profit or loss 15,978,157 15,919,812 2012 2011 ____________ € ____________ € Maturity of fixed income debt securities: Within one year 1,980,056 533,925 Between 1 and 2 years 1,553,172 2,554,815 Between 2 and 5 years 4,382,431 5,762,919 Over 5 years 193,603 115,554 ____________ ____________

____________ ____________ 8,109,262 All other securities classified as fair value through profit or loss are non-current in nature.

8,967,213

The movements in investments classified as fair value through profit or loss are summarised as follows: 2012 2011 ____________ € ____________ € Year ended 31 December At beginning of year 15,919,812 17,533,242 Additions 2,249,967 4,453,327 Disposals (sale and redemptions) (2,978,596) (5,001,092) Net fair value gains/(losses) 786,974 (1,065,665) ____________ ____________

____________ ____________

At end of year 15,978,157 15,919,812 As at 31 December Cost 16,239,837 16,968,465 Accumulated net fair value (losses)/gains ____________ (261,680) ____________ (1,048,653)

____________ ____________ Net book amount 15,978,157 15,919,812

(b) Loans and receivables 2012 2011 ____________ € ____________ €

____________ ____________ Deposits with banks or credit institutions 1,094,205 583,044 Maturity of deposits with banks or credit institutions: 2012 2011 ____________ € ____________ € Within 3 months 1,094,205 83,044 Within 6 months ____________ - 500,000 ____________

____________ ____________ 1,094,205 583,044 The above deposits earn interest as follows: 2012 2011 ____________ € ____________ €

____________ ____________ At fixed rates

1,094,205 583,044

15. INSURANCE LIABILITIES AND REINSURANCE ASSETS 2012 2011 ____________ € ____________ € Gross technical provisions Claims reported and loss adjustment expenses 10,476,281 9,384,123 Claims incurred but not reported 561,635 570,388 Provision for unearned premiums ____________ 5,772,626 5,915,620 ____________

____________ ____________ 16,810,542 15,870,131 Reinsurers’ share of technical provisions Claims reported and loss adjustment expenses 2,378,719 1,911,713 Claims incurred but not reported 90,927 91,645 Provision for unearned premiums 1,437,671 1,405,587 ____________ ____________

____________ ____________ 3,907,317 3,408,945 Net technical provisions Claims reported and loss adjustment expenses 8,097,562 7,472,410 Claims incurred but not reported 470,708 478,743 Provision for unearned premiums 4,334,955 4,510,033 ____________ ____________

____________ ____________ 12,903,225 12,461,186

NOTES TO THE FINANCIAL STATEMENTS 15. INSURANCE LIABILITIES AND REINSURANCE ASSETS (CONTINUED) Technical provisions are considered to be substantially current in nature. The gross claims reported are net of expected recoveries from salvage and subrogation. The amounts for salvage and subrogation at the end of 2012 and 2011 are not material. Technical provisions are established to cover the expected ultimate liability for claims and loss adjustment expenses in respect of all claims that have occurred at the balance sheet date. The provisions established cover reported claims and associated loss adjustment expenses, as well as claims incurred but not yet reported to the company, and are based on undiscounted estimates of future claim payments. Outstanding claims provisions for reported claims are based primarily on individual case estimates by reference to known facts at the date of estimation. The ultimate cost of outstanding claims, including incurred but not reported claims, is estimated through statistical analysis of historical claims trends as further described in note 3.1 to these financial statements. The main assumption underlying this analysis is that past claims development experience can be used to project future claims development, and hence ultimate claims costs. Additional qualitative judgement is applied to assess the extent to which past trends may not apply in the future. Based on this process, no key variable has been identified for which a change could have a material impact on the profit or loss for the year. The development of insurance liabilities provides a measure of the companyâ&#x20AC;&#x2122;s ability to estimate the ultimate value of claims. The top half of the table in the next page illustrates how the companyâ&#x20AC;&#x2122;s estimate of total claims incurred for each accident year has changed at successive year-ends. The bottom half of the table reconciles the cumulative claims to the amount appearing in the balance sheet. The accident-year basis is considered to be the most appropriate for the business written by the company. The development of insurance liabilities is presented for accident years to date during which the company has been operating as insurance principal. The development of the liabilities assumed by the company on 1 May 2004 on transfer of the insurance portfolio formerly underwritten by Royal & Sun Alliance p.l.c. is presented separately. As described in note 3.1, the adverse development of claims reserves acquired by way of this portfolio transfer is protected through a reinsurance arrangement with RSA.

1 May 2004 to Pre 1 May 31 December 2004 2004 2005 2006 2007 2008 2009 2010 2011 2012 Total € € € € € € € € € € € ____________ ____________ ____________ ____________ ____________ ____________ ____________ ____________ ____________ ____________ ____________

Liability recognised in the balance sheet

Current estimates of cumulative claims Cumulative payments to date

- at end of accident year - one year later - two years later - three years later - four years later - five years later - six years later - seven years later - eight years later

764,078

41,172

206,081

451,385

499,432

(124,280)

788,825

999,593

1,367,775

3,574,209

8,568,270

______________ ______________ ______________ ______________ ______________ ______________ ______________ ______________ ______________ ______________ ______________

(4,978,557) (3,278,750) (4,490,971) (4,832,053) (5,802,762) (4,698,178) (5,502,382) (5,443,476) ______________ (5,167,251) ______________ ______________ (3,281,927) (47,476,307) ______________ ______________ ______________ ______________ ______________ ______________ ______________ ______________

5,742,635 3,319,922 4,697,052 5,283,438 6,302,194 4,573,898 6,291,207 6,443,069 6,535,026 6,856,136 56,044,577

5,901,655 4,016,942 6,354,353 6,760,611 7,102,909 5,856,088 6,652,598 7,105,804 6,357,989 6,856,136 5,958,612 3,778,515 5,934,930 6,575,277 7,245,191 5,550,170 6,526,922 7,049,285 6,535,027 5,752,459 3,640,529 4,982,967 5,756,854 6,623,046 5,033,011 6,379,127 6,443,069 5,636,865 3,455,629 4,936,520 5,547,184 6,468,003 4,664,100 6,291,207 5,609,298 3,400,832 4,917,314 5,322,511 6,361,100 4,573,898 5,896,475 3,365,652 4,899,052 5,277,193 6,302,194 5,781,532 3,336,134 4,741,973 5,283,438 5,734,569 3,324,858 4,697,052 5,742,635 3,319,922

Estimate of the ultimate claims costs:

The development table is presented net of reinsurance. Development trends extracted in gross terms were found to be similar.

15. INSURANCE LIABILITIES AND REINSURANCE ASSETS (CONTINUED)

NOTES TO THE FINANCIAL STATEMENTS

NOTES TO THE FINANCIAL STATEMENTS 15. INSURANCE LIABILITIES AND REINSURANCE ASSETS (CONTINUED) Movements in insurance liabilities and reinsurance assets (a) Claims and loss adjustment expenses (including IBNR) Year ended 2012 Gross Reinsurance Net € € € ____________ ____________ ____________ Total at beginning of year 9,954,511 (2,003,358) 7,951,153 ____________ ____________ ____________ Claims settled during the year (6,634,370) 1,097,105 (5,537,265) Increase/(decrease) in liabilities - arising from current year claims 8,246,855 (1,390,719) 6,856,136 - ____________ ____________ ____________ arising from prior year claims (529,080) (172,674) (701,754)

____________ ____________ ____________

Total at year end 11,037,916 (2,469,646) 8,568,270 Year ended 2011 Gross Reinsurance Net ____________ ____________ ____________ € € € Total at beginning of year 10,541,468 (1,942,137) 8,599,331 ____________ ____________ ____________ Claims settled during the year (6,847,428) 782,024 (6,065,404) Increase/(decrease) in liabilities - arising from current year claims 7,296,007 (938,018) 6,357,989 - arising from prior year claims (1,035,536) 94,773 (940,763) ____________ ____________ ____________

____________ ____________ ____________

Total at year end 9,954,511 (2,003,358) 7,951,153 Variations occur when compared to prior year claims estimates due to a combination of factors including claims being settled for different amounts than estimated, and changes made to reserve estimates as more information becomes available. Favourable movements are indicative of a prudent reserving methodology in prior years.

(b) Provision for unearned premiums The movements for the year are summarised as follows: Year ended 2012 Gross Reinsurance Net ____________ ____________ ____________ € € € At beginning of year 5,915,620 (1,405,587) 4,510,033 Net charge to profit and loss (142,994) (32,084) (175,078) ____________ ____________ ____________

____________ ____________ ____________

At end of year 5,772,626 (1,437,671) 4,334,955 Year ended 2011 Gross Reinsurance Net ____________ ____________ ____________ € € € At beginning of year 6,038,589 (1,448,855) 4,589,734 Net charge to profit and loss (122,969) 43,268 (79,701) ____________ ____________ ____________

____________ ____________ ____________ At end of year

5,915,620 (1,405,587) 4,510,033

16. DEFERRED ACQUISITION COSTS 2012 2011 ____________ ____________ € € Year ended 31 December At beginning of year 749,769 760,146 Net credit/(charge) to profit and loss 2,587 (10,377) ____________ ____________

____________ ____________ At end of year

752,356

749,769

Deferred acquisition costs are all classified as current assets.

17. DEBTORS AND PREPAYMENTS AND ACCRUED INCOME 2012 2011 € € ____________ ____________ Debtors Debtors arising out of direct insurance operations - due from policyholders 2,727,507 2,753,048 - due from intermediaries 1,045,920 863,851 Amount due from related parties (Note 25) 72,068 102,654 Other debtors 716 18,041 ____________ ____________

____________ ____________

3,846,211 3,737,594 Prepayments and accrued income Accrued interest 116,855 120,756 Prepayments 65,681 54,349 ____________ ____________

____________ ____________ 182,536

175,105

Amounts due from related parties are unsecured, interest-free and repayable on demand.

NOTES TO THE FINANCIAL STATEMENTS 17. DEBTORS AND PREPAYMENTS AND ACCRUED INCOME (CONTINUED) Debtors are presented net of an allowance for impairment of €484,729 (2011: €430,639). As at 31 December 2012, debtors amounting to €2,417,612 (2011: €2,258,048) were fully performing, whereas debtors amounting to €1,355,815 (2011: €1,358,851) were past due but not impaired. These dues related to a number of independent parties for whom there is no recent history of significant default. The ageing analysis of the trade receivables which were past due but not impaired at year end is as follows: 2012 2011 € ____________ € ____________ Within credit terms 651,161 645,840 Not more than 3 months overdue 391,050 332,907 More than 3 months overdue 313,604 380,104 ____________ ____________

____________ ____________ 1,355,815

1,358,851

18. SHARE CAPITAL 2012 2011 € ____________ € ____________ Authorised 2,488,350 (2011: 2,000,000) ordinary “A” shares of €1 each 2,488,350 2,000,000 2,488,350 (2011: 2,000,000) ordinary “B” shares of €1 each 2,488,350 2,000,000 23,300 ordinary “C” shares of €1 each 23,300 23,300 ____________ ____________

____________ ____________

5,000,000 4,023,300 Issued and fully paid 2,488,350 (2011: 2,000,000) ordinary “A” shares of €1 each 2,488,350 2,000,000 2,488,350 (2011: 2,000,000) ordinary “B” shares of €1 each 2,488,350 2,000,000 23,300 ordinary “C” shares of €1 each 23,300 23,300 ____________ ____________

____________ ____________

5,000,000 4,023,300 By virtue of a resolution dated 23 August 2012, the shareholders resolved to increase, amend and substitute the authorised and issued share capital of the company from 4,023,300 divided into 2,000,000 ordinary “A” shares, 2,000,000 ordinary “B” shares and 23,300 ordinary ”C” shares of €1 each, to €5,000,000 divided into 2,488,350 ordinary “A” shares, 2,488,350 ordinary “B” shares and 23,300 ordinary “C” shares of €1 each. “A”, “B” and “C” ordinary shares rank pari passu in all respects except for the appointment of directors. The holders of ordinary “A” and ordinary “B” shares have the right to appoint one director for every ten percent of the share capital held by reference to the nominal value of shares. The holders of ordinary “C” shares have the right to appoint one director.

19. REVALUATION RESERVE

2012 2011 € ____________ € ____________

____________ ____________ At 1 January and at 31 December

1,255,926 1,255,926

The balance at 31 December is made up as follows: 2012 2011 € ____________ € ____________

____________ ____________ Revaluation reserve arising on land and buildings This reserve is not a distributable reserve.

1,255,926 1,255,926

20. DEFERRED TAXATION 2012 2011 € € ____________ ____________ Balance at 1 January 190,901 338,865 Movements during the year: Profit and loss account (Note 9) ____________ 13,003 (147,964) ____________

____________ ____________

Balance at 31 December - net 203,904 190,901 Deferred taxation is calculated on temporary differences under the liability method using a principal tax rate of 35% (2011: 35%) except for temporary differences on investment property that are calculated under the liability method using a principal tax rate of 12% of the carrying amount. The year end balance comprises: 2012 2011 € € ____________ ____________ Temporary differences attributable to depreciation of fixed assets (20,278) (6,885) Temporary differences attributable to fair value adjustments - investments (29,832) (75,159) Temporary differences attributable to revaluation of land and buildings 412,255 412,255 Temporary differences attributable to provision for impairment of doubtful debtors ____________ (158,241) (139,310) ____________

____________ ____________

Balance at 31 December - net 203,904 190,901

NOTES TO THE FINANCIAL STATEMENTS 20. DEFERRED TAXATION (CONTINUED) eferred income tax assets and liabilities are offset when there is a legally enforceable right to set off a current asset against a D current tax liability. The following amounts determined after appropriate offsetting are shown in the balance sheet: 2012 2011 € € ____________ ____________ Deferred tax asset (208,351) (221,354) Deferred tax liability 412,255 412,255 ____________ ____________

____________ ____________

203,904 190,901 The above temporary differences are considered to be substantially non-current in nature.

21. INTEREST-BEARING BORROWINGS 2012 2011 € € ____________ ____________

____________ ____________ Bank overdraft (Note 24)

389,841 267,602

The bank overdraft bears an interest rate of 4.75% (2011: 4.75%) is secured by a hypothec on the company’s property.

22. CREDITORS 2012 2011 € € ____________ ____________ Other creditors Creditors arising out of direct insurance operations ____________ 1,413,666 1,494,951 ____________

____________ ____________

1,413,666 1,494,951 Accruals and deferred income Accrued expenses 326,470 245,915 Deferred income 641,380 609,042 ____________ ____________

____________ ____________

967,850 854,957 The above creditors are considered to be current in nature.

23. CASH GENERATED FROM OPERATIONS econciliation of profit before tax to cash generated from operations: R 2012 2011 € € ____________ ____________ Profit before tax 2,171,362 1,209,614 Adjustments for: Investment income (Note 6) (1,553,724) 604,172 Amortisation (Note 11) 140,828 105,933 Depreciation (Note 12) 165,282 131,900 Impairment of debtors (Note 17) 54,090 86,905 Movements in: Technical provisions (net) 442,039 (727,879) Debtors and prepayments, including DAC (172,725) (122,285) Creditors and accruals ____________ 31,608 151,321 ____________

____________ ____________ Cash generated from operations 1,278,760

1,439,681

24. CASH AND CASH EQUIVALENTS For the purpose of the statement of cash flows, the year end cash and cash equivalents comprise the following: 2012 2011 € € ____________ ____________ Cash at bank and in hand 595,512 207,189 Bank overdraft (389,841) ____________ (267,602) ____________

____________ ____________ ____________ ____________

205,671 (60,413) Interest bearing: - at floating rates 139,468 (148,062)

NOTES TO THE FINANCIAL STATEMENTS 25. RELATED PARTY TRANSACTIONS Due to common ultimate shareholders, the directors consider the Cassar and Cooper Group and the C & H Bartoli Group to be related parties (including related entities and close family of shareholders). Trading transactions with related parties during the year were as follows: 2012 2011 € € ____________ ____________ (a) Entities with significant influence over the entity (including related entities and close family of shareholders) Gross premium receivable, net of claims paid 55,188 40,925 Reimbursement of expenses for back-office support 32,189 25,386 Net rent payable (31,135) (31,726) Commission payable (181,691) (181,691) (b) Other related parties Fees payable 93,137 80,443 Year end balances arising from the above transactions: 2012 2011 € € ____________ ____________

____________ ____________ ____________ ____________

Entities with significant influence over the entity (including related entities and close family of shareholders) (Note 17) Amounts due by 72,068 102,654 The above balances are unsecured, interest free and repayable on demand.

____________ ____________ 26. COMMITMENTS Commitments for capital expenditure not provided for in these financial statements are as follows:

2012 2011 € € ____________ ____________

____________ ____________ Authorised and contracted - computer hardware and software

27. STATUTORY INFORMATION Elmo Insurance Limited is a limited liability company and is incorporated in Malta.

- 20,231

www.elmoinsurance.com Head Office: Abate Rigord Street, Ta’ Xbiex XBX 1111, Malta Tel: (+356) 2343 0000 Fax: (+356) 2134 5037 Email: info@elmoinsurance.com Branches: Birkirkara • Bormla • Paola • Qormi • Rabat • St. Paul’s Bay • Valletta • Zebbug Elmo Insurance Limited is authorised to carry out general insurance business and is regulated by the Malta Financial Services Authority.