Insurance joint stock company Parex Dz v ba · 2010. 5. 10. · In November 2009 the Company’s...

Insurance joint stock company Parex Dzīvība

Annual report for the year ended 31 December 2009

Prepared in accordance with International Financial Reporting Standards

Riga, 2010

AAS Parex Dzīvība Unified registration number: 40003786859 Annual report 2009 Address: Republikas laukums 2a, Riga, LV-1010

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Contents

General information 3 Report of the Management 4 – 5 Statement of responsibility of the management 6 Statement of comprehensive income 7 Statement of financial position 8 Statement of cash flow 9 Statement of changes in equity 10 Notes to the financial statements 11 – 34 Independent auditors’ report 35 – 36


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General information

Name of the company Parex Dzīvība Legal status of the company Insurance joint stock company Number, place and date of registration 40003786859, Riga, 2 December 2005 Address Republikas laukums 2a,

Riga, LV-1010 Shareholder IPAS Parex Asset Management (100%)

Republikas laukums 2a, Riga, LV-1010

Name and positions of Board members Raimonds Vesers (Chairman of the Board) – appointed on 01/08/2007 Jolanta Jērāne – appointed on 02/06/2008 Jēkabs Kaņeps - from 23/05/2006 to 01/09/2009 Sergejs Zaicevs - from 02/12/2005 to 19/03/2009 Olga Voskobojeva – appointed on 19/03/2009

Name and positions of Councilor Uģis Vorons (Chairman of the Council) – appointed on 29/12/2009 Sergejs Zaicevs – appointed on 15/06/2009 Māris Macijevskis – appointed on 29/12/2009 Agnese Paegle – appointed on 29/12/2008 Roberts Idelsons (Chairman of the Council) from 02/12/2005 to 29/12/2009 Sergejs Medvedevs – from 02/12/2005 to 02/06/2009 Gatis Kokins - from 15/06/2009 to 29/12/2009 Juris Punculs – from 02/12/2005 to 29/12/2009 Raits Černajs - from 05/12/2007 to 19/03/2009 Financial year 1 January – 31 December 2009 Name and address of the certified audit company and certified auditor in charge

PricewaterhouseCoopers SIA Certified audit company Licence No.5 Kr. Valdemara Street 19 Riga, LV-1010 Latvia Certified auditor in charge: Ilandra LejiņaCertificate No. 168


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Report of the Management Description of the insurer’s development and financial position during the year AAS Parex Dzīvība (hereinafter - the Company) obtained a life insurance licence on 8 June 2007. In November 2007 the Company started signing unit-linked life insurance contracts, or Uzkrājums+.

During the reporting year the Company’s priority was unit-linked life insurance contracts with option to choose conservative or growth-oriented investment policy. In addition to clients were available mortgage life insurance and term-life products.

In November 2009 the Company’s sole shareholder IPAS Parex Asset Management increased the Company’s share capital by LVL 200 000 to LVL 3 million.

The amount of gross premiums received during the year reached LVL 409 thousand (11% decrease compared to 2008).

The result of the Company for the year 2009 is a profit in amount of LVL 27 thousand (2008: a loss of LVL 247 thousand). The performance of the Company was affected by two key factors: administrative expenses and the result of investing activities. Net operational expenses decreased by 19% to LVL 217 thousand compared to previous year. Decrease of expenses is explained by activities performed in 2009 targeted to reduce administrative expenses, including remuneration, advertisement and marketing, business trips and training expenses. In 2009 the Company’s investment portfolio was managed conservatively – mainly investing in low risk debt obligations and term deposits. However due to the positive development of LVL and EUR interest rates, the investment result was positive and amounted to LVL 220 thousand.

The Company’s performance during the year has been adversely affected also by deterioration of the economic situation in Latvia and by the specific situation with Parex bank AS, which prevented growth of sales of long-term savings products.

Future development forecasts In 2010 the Company is expecting further decrease of the unit-linked insurance market, which will be predetermined mainly by the complicated economic situation in Latvia – growing unemployment, falling wages and changes in tax legislation. However, the Company is expecting the growth of written premiums by offering effective solutions for medium and long-term investments to clients.

Own share acquisition No own shares were acquired in the reporting year.

Risk management objectives and policies related to financial instruments The Company’s investment portfolio as at 31 December 2009 was LVL 2.85 million. The Company’s uncommitted funds are invested in financial assets with the aim to generate additional revenue and to ensure adequate liquidity.

On 12 June 2007 the Company signed an agreement on asset portfolio trust management with IPAS Parex Asset Management. The investment policy to be used in asset management is presented in Annex 1 Investment Policy to the agreement. The objective of making investments is to achieve long-term capital gains, maintaining the well-balanced portfolio structure by making investments mainly in the Republic of Latvia, other EU Member States, EEA and OECD countries - equity shares and debt securities, investment funds, money market instruments and deposits with credit institutions. The investment portfolio is balanced in terms of investments both in equity shares and debt securities, different currencies and countries, thus ensuring safety of investments and protection against excessive fluctuations of the portfolio.

In determining the prices of insurance services AAS Parex dzīvība controls that the prices reflect the changes both on financial and insurance markets. The prices should be sufficient to enable the Company to pay insurance indemnities claimed.

During the reporting year, credit risk of the investment portfolio accounted for the largest exposure. The risk was minimised according to the investment policy, by diversifying investments.


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Report of the Management (continued) The Company’s investment portfolio is managed in such a manner so as to minimise liquidity risk, i.e. part of the portfolio is in cash or short-term deposits (with maturities of less than one month) with banks. If necessary, investments in equity shares and debt securities, investment certificates of investment funds, and other financial instruments may be sold at market rates within reasonable timeframe. Suggestion as to profit distribution The management suggests that the profit for 2009 should be directed to cover the losses of previous years.

__________________ R. Vesers Chairman of the Board 16 April 2010


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Statement of responsibility of the management The management of AAS Parex Dzīvība confirm that the financial statements for the year ended 31 December 2009 are prepared in accordance with the International Financial Reporting Standards as adopted in the European Union and statutory requirements of the Republic of Latvia, based on relevant accounting methods that have been applied in a consistent manner, and give a true and fair view of the financial position of the Company as at the end of the reporting year, as well as the results of its operations and cash flows for the reporting year.

Management decisions and assumptions in preparing the financial statements were prudent and reasonable. The management of AAS Parex Dzīvība is responsible for maintaining accounting records in accordance with the statutory requirements, for safeguarding of the Company’s assets and immediate prevention of any fraud and other illegal activity.

___________________ __________________ U. Vorons R.Vesers Chairman of the Council Chairman of the Board 16 April 2010


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Statement of comprehensive income

Notes 2009 2008LVL LVL

Net written premiums 4 14,141 7,042Net change in unearned premium reserve 4 (2,348) (2,648)

Net earned premiums 11,793 4,394

Fee income 5 23,992 27,418Net income / (loss) on financial assets and liabilities held for trading 6 127,839 (149,784)Net interest revenue and similar income 7 92,213 137,950Net foreign exchange (loss) / gain (10,745) 1,211Other revenue 385 2,799

Other revenue 233,684 19,594

Net change in insurance liabilities 10 (206) (1,231)Net claims paid (735) (100)

Net insurance claims (941) (1,331)

Client acquisition costs 8 (4,512) (37,943)Administrative expenses and investments management expenses 9 (39,148) (40,902)Staff costs 20 (136,687) (165,080)Depreciation and amortisation 11,12 (20,448) (19,240)Interest expenses (14,890) (6,225)Other expenses (1,576) (251)

Net operating expenses (217,261) (269,641)

Profit / (loss) before corporate income tax 27,275 (246,984)Corporate income tax 23 - -Net profit / (loss) for the year 27,275 (246,984)

Notes on pages 11 to 34 form an integral part of these financial statements.

___________________ __________________ U. Vorons R.Vesers Chairman of the Council Chairman of the Board 16 April 2010


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Statement of financial position

Notes 31.12.2009. 31.12.2008.ASSETS LVL LVL

Intangible assets 11 73,423 91,829Equipment 12 2,146 4,187Investments:

Financial assets held for trading 13 2,060,454 1,315,170Financial assets designated at fair value through profit or loss 13 708,901 314,127Term deposits with credit institutions 13 788,201 1,175,988

Reinsurance assets 2,775 1,176Direct insurance receivables 8,442 1,962Corporate income tax receivable 16 6,964 6,964Prepaid expense 280 596Other receivables 357 191Cash and cash equivalents 17 174,910 185,478

TOTAL ASSETS 3,826,853 3,097,668

EQUITY AND LIABILITIES

EquityShare capital 18 3,000,000 2,800,000Accumulated deficit (221,337) (248,612)

Total equity 2,778,663 2,551,388Insurance liabilities 15 10,738 6,585Investment contracts 14 987,260 462,425Direct insurance payables - 792Reinsurance payables 3,073 1,585Finance lease liabilities 11 28,688 40,880Other liabilities 19 10,796 21,929Accrued liabilities 21 7,635 12,084

Total Liabilities 1,048,190 546,280TOTAL EQUITY AND LIABILITIES 3,826,853 3,097,668


____________________ __________________ U. Vorons R.Vesers Chairman of the Council Chairman of the Board 16 April 2010


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Statement of cash flow

2009 2008LVL LVL

Cash flow from operating activitiesPremiums received from direct insurance 409,795 455,090Cash paid for administrative and other expenses (241,426) (275,711)Other income from operating activities 13,509 6,157Total cash flow generated from operating activities 181,878 185,536

Cash flow from investing activities

Fixed income securities (601,943) (426,628)Shares and other non-fixed income securities (279,220) (238,512)Term deposits with credit institutions 370,524 237,435Income from fixed income securities 34,574 28,981Income from term deposits with credit institutions 83,461 77,082Total cash flow used in investing activities (392,604) (321,642)

Cash flow from financing activitiesShare issue 200,000 300,000Total cash flow generated from financing activities 200,000 300,000

(Decrease) / Increase in cash and cash equivalents (10,726) 163,894

Cash and cash equivalents at the beginning of the year 185,478 24,214Result of foreign exchange rate fluctuations 158 (2,630)Cash and cash equivalents at the end of the year 174,910 185,478

Notes on pages 11 to 34form an integral part of these financial statements.


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Statement of changes in equity

Share capital Accumulated loss Total equityLVL LVL LVL

As at 31/12/2007 2,500,000 (1,628) 2,498,372Increase in share capital 300,000 - 300,000Total comprehensive loss for the reporting year - (246,984) (246,984)As at 31/12/2008 2,800,000 (248,612) 2,551,388Increase in share capital 200,000 - 200,000Total comprehensive income for the reporting year - 27,275 27,275As at 31/12/2009 3,000,000 (221,337) 2,778,663

Attributable to equity holder of the Company



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Notes to the financial statements 1. The Company and its operations

AAS Parex Dzīvība (the Company) is part of the Parex Group. The sole shareholder of the Company is IPAS Parex Asset Management. The Company’s ultimate controlling party is the Republic of Latvia. The holder of the state share is the State Joint Stock Company Latvian Privatisation Agency. The Company’s business is provision of life insurance. The Company provides clients with unit-linked and guaranteed return investment products, as well as with life and accident insurance. The Company’s office is in Riga, Republikas laukums 2a. These financial statements have been authorised for issue by the Board on 16 April 2010. 2. Accounting policies 2.1. Basis of preparation The financial statements of AAS Parex Dzīvība have been prepared on historic cost basis except for financial assets and liabilities measured at fair value in accordance with International Financial Reporting Standards (IFRS) as adopted in the European Union, which comprise standards and interpretations issued by the International Accounting Standards Board, and International Accounting Standards and Standing Interpretations Committee interpretations issued by the International Accounting Standards Committee that were in effect as at 31 December 2009. These financial statements have been prepared based on a going concern basis. The financial statements have been presented in full lats (LVL), without santims. As disclosed in note 1 to the financial statements, the Company is part of Parex group. Parex group and it`s employees comprise the Company`s biggest group of customers (see Note 22). At the end of 2008, as a result of the impact of the financial crisis on the operations of AS Parex banka (the Bank) the Latvian government became the majority shareholder of the Bank. Following the initial government support, the Bank has received further liquidity support from the State Treasury of the Republic of Latvia. Additional support was received by the Bank from the European Bank for Reconstructions and Development, which on 16 April 2009 became a minority shareholder of the Bank. On 8 May 2009, the Cabinet of Ministers approved an initial restructuring plan for the Bank, which was developed to assert the state support. Since then the plan has been re-assessed several times with the latest restructuring plan having been approved by the Cabinet of Ministers on 23 March 2010 where the Plan proposed to restructure the Bank’s strategic assets out into a new legal entity. The restructuring process will commence after the approval of the plan by the European Commission is obtained. In the meantime, the Bank continues to be dependant on the state support.

Instability in the global and Latvian financial markets and economies Along with changes caused by the economic and financial crisis since 2008, among other things, financial markets have experienced material changes in the form of diminishing financial assets and increasing financing costs, and uncertainty in the business and investment environment has increased. Changes in the global financial markets have caused banks and other financial institutions to go bankrupt, with bank rescues being undertaken in many countries including Latvia. Although the recovery trend is strengthening in the global economy, it is currently not possible to predict reliably when Latvia’s economy will begin to grow again. Management is unable to estimate reliably the possible effects on the Company’s financial position of any further instability in the economies and financial markets of Latvia and other countries in the region as well as the economic downturn in Latvia. Management believes it is taking all the necessary measures to support sustainable growth of the Company’s business in the present circumstances.

Changes in accounting policies (a) Interpretations and amendments to standards effective in 2009 Certain new IFRS became effective for the Company from 1 January 2009. Listed below are those new or amended standards or interpretations and the nature of their impact on the Company’s accounting policies:


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Notes to the financial statements (continued) 2. Accounting policies (continued) 2.1. Basis of preparation (continued) IAS 1 (revised). ‘Presentation of financial statements’ – effective 1 January 2009. The revised standard prohibits the presentation of items of income and expenses (that is, ‘non-owner changes in equity’) in the statement of changes in equity, requiring ‘non-owner changes in equity’ to be presented separately from owner changes in equity in a statement of comprehensive income. As a result the Company presents in the statement of changes in equity all owner changes in equity, whereas all non-owner changes in equity are presented in the statement of comprehensive income. Comparative information has been re-presented so that it also is in conformity with the revised standard. As the change in accounting policy only impacts presentation aspects, there is no impact on the recognition or measurement of specific transactions and balances. IFRS 7 ‘Financial instruments – Disclosures’ (amendment) – effective 1 January 2009. The amendment requires enhanced disclosures about fair value measurement and liquidity risk. In particular, the amendment requires disclosure of fair value measurements by level of a fair value measurement hierarchy. As the change in accounting policy only results in additional disclosures, there is no impact on the recognition or measurement of specific transactions and balances. (b) Standards, amendments and interpretations effective on 1 January 2009 but not relevant to the Company. IFRS 1 First time adoption of IFRS and IAS 27 Consolidated and separate financial statements (Amendment, effective for annual periods beginning on or after 1 July 2009). IFRS 1 (revised) First-time adoption (effective date from annual periods beginning on or after 1 July 2009). The revised standard is not yet endorsed in EU. IFRS 8, Operating Segments. The standard applies to entities whose debt or equity instruments are traded in a public market or that file, or are in the process of filing, their financial statements with a regulatory organisation for the purpose of issuing any class of instruments in a public market. IFRS 8 requires an entity to report financial and descriptive information about its operating segments, with segment information presented on a similar basis to that used for internal reporting purposes. IAS 23 Borrowing Costs – Revised (effective for annual periods beginning on or 1 January 2009). The revised standard eliminates the option of expensing all borrowing costs and requires borrowing costs to be capitalised if they are directly attributable to the acquisition, construction or production of a qualifying asset. The Company has no borrowing costs amended for capitalisation, and therefore the amendment does not impact the Company’s financial statements. IAS 27 (revised), 'Consolidated and separate financial statements', (effective from 1 July 2009). The revised standard requires the effects of all transactions with non-controlling interests to be recorded in equity if there is no change in control and these transactions will no longer result in goodwill or gains and losses. The standard also specifies the accounting when control is lost. Any remaining interest in the entity is re-measured to fair value, and a gain or loss is recognised in profit or loss. IAS 27 (revised) is not relevant to the Company. Puttable Financial Instruments and Obligations Arising on Liquidation—IAS 32 and IAS 1 Amendment. The amendment requires classification as equity of some financial instruments that meet the definition of financial liabilities Classification of Rights Issues - Amendment to IAS 32 (issued 8 October 2009; effective for annual periods beginning on or after 1 February 2010). The amendment exempts certain rights issues of shares with proceeds denominated in foreign currencies from classification as financial derivatives. (effective 1 February 2010, EU not yet endorsed). IAS 39 Financial Instruments: Recognition and Measurement: Eligible Hedged Items (Amendment, effective with retrospective application for annual periods beginning on or after 1 July 2009).


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Notes to the financial statements (continued) 2. Accounting policies (continued) 2.1. Basis of preparation (continued) IFRIC 12 Service concession arrangements (Effective for annual periods beginning on or after 1 January 2008; for entities applying IFRS as adopted in EU effective for periods beginning 30 March 2009). IFRIC 13 Customer Loyalty Programmes (effective for annual periods on or after 1 July 2008; for entities applying IFRS as adopted in the EU effective for annual periods beginning after 31 December 2008). IFRIC 14 IAS 19 – The Limit on Defined Benefit Asset, Minimum Funding Requirements and their Interaction (effective for annual periods on or after 1 July 2008; for entities applying IFRS as adopted in the EU effective for annual periods beginning after 31 December 2008). IFRIC 15 Agreements for construction of real estates (effective for annual periods beginning on or after 1 January 2009). The interpretation is not yet endorsed in EU. IFRIC 16 Hedges of a net investment in a foreign operation (effective for annual periods beginning on or after 1 October 2008, for entities applying IFRS as adopted in the EU effective for annual periods beginning after 1 July 2009). IFRIC 17 Distribution of Non-Cash Assets to Owners (effective for annual periods beginning on or after 1 July 2009). The interpretation is not yet endorsed in EU. IFRIC 18 Transfer of assets from customers Effective for transfers of assets from customers received on or after 1 July 2009). The interpretation is not yet endorsed in EU. IFRIC 19, Extinguishing financial liabilities with equity instruments (effective for annual periods beginning on or after 1 July 2010). This interpretation clarifies the accounting when an entity renegotiates the terms of its debt with the result that the liability is extinguished through the debtor issuing its own equity instruments to the creditor. A gain or loss is recognised in the profit and loss account based on the fair value of the equity instruments compared to the carrying amount of the debt. IFRIC 19 is not relevant to the Company’s operations. (effective 1 July 2010, EU not yet endorsed). (c) Standards, amendments and interpretations that are not yet effective and not relevant for the Company’s operations IFRS 3 (revised), 'Business combinations' (revised January 2008; effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 July 2009). The revised standard continues to apply the acquisition method to business combinations, with some significant changes. For example, all payments to purchase a business are to be recorded at fair value at the acquisition date, with contingent payments classified as debt subsequently re-measured through the income statement. There is a choice on an acquisition-by-acquisition basis to measure the non-controlling interest in the acquire either at fair vale or at the non-controlling interest’s proportionate share of the acquiree’s net assets. All acquisition-related costs should be expensed. The standart is not relevant to the Company as no such transactions performed by the company. IFRS 9, Financial Instruments Part 1: Classification and Measurement. IFRS 9 was issued in November 2009 and replaces those parts of IAS 39 relating to the classification and measurement of financial assets. While adoption of IFRS 9 is mandatory from 1 January 2013, earlier adoption is permitted. The Company is considering the implications of the standard, the impact on the Company and the timing of its adoption by the Company. (effective 1 January 2013, EU not yet endorsed). IFRS 1 First time adoption of IFRS (Amendment, effective for annual periods beginning on or after 1 January 2010). The amendment is not yet endorsed in EU. IFRS 2 Share-based payment (Amendments, effective for annual periods beginning on or after 1 January 2010). These amendments are not yet endorsed in EU. The Company expects that the adoption of the pronouncements listed above will have no significant impact on its financial statements in the period of initial application.


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Notes to the financial statements (continued) 2. Accounting policies (continued) 2.2. Use of estimates, assumptions and judgements The reported amounts of assets and liabilities in certain areas are affected by the internal methodologies, decisions and estimates made by the Company. 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. Major of such areas are classification of contracts (see Note 2.11), deferred tax recognition (see Note 23), accrued unused annual leave expenses (see Note 21) and IBNR (see Note 15). The management of the Company considers that the majority of securities owned by the Company are quoted in active market, accordingly their fair value correspond to the available quoted market prices. 2.3. Foreign currency translation (a) Functional and presentation currency

Items included in the financial statements of the Company are measured using the currency of the primary economic environment in which the Company operates (‘the functional currency’). The financial statements are presented in Latvian Lats (LVL), 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 the year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the income statement.

The exchange rates of the principal foreign currencies applied by the Company at the balance sheet dates:

31.12.2009. 31.12.2008.

1 USD 0.489 0.495

1 EUR 0.702804 0.702804

2.4. Equipment and intangible assets

Equipment

Equipment of the Company are non-current assets that are used in business activities of the Company with the useful life of over one year. An item of equipment is initially recognized at its cost which consists of the purchase price and other expenditures directly related to the acquisition that are necessary for bringing the asset to its operating condition and location. An item of equipment is subsequently measured at its cost less any accumulated depreciation and any impairment losses if any.

Subsequent expenditure relating to non-current assets is added to the carrying amount of the asset when it is probable that future economic benefits, in excess of the originally assessed standard of performance of the existing equipment item, will flow to the Company. All other subsequent expenditure made to restore the future economic benefits that an enterprise can expect from the originally assessed standard of performance of the equipment item, is recognized as an expense in the income statement in the period in which it is incurred.

The depreciation charge is recognised in profit or loss for each asset or each part of assets on a straight-line basis over the estimated useful lives of the assets. The estimated useful life varies from 3 to 5 years.

Depreciation is calculated on the difference between cost and expected residual value at the end of the asset’s useful life. If the expected residual value at the end of the useful life cannot be estimated reliably, it shall be zero. Where an asset's carrying amount is greater than its estimated recoverable amount (higher of an asset's net selling price and its value in use), it is written down immediately to its recoverable amount.


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Notes to the financial statements (continued) 2. Accounting policies (continued) 2.4. Equipment and intangible assets (continued)

Intangible assets

Software, which is independent from hardware, is classified as an intangible asset. An intangible asset is initially recognized at cost, comprising of its purchase price and any directly attributable expenditure. After initial recognition, an intangible asset is carried at its cost less any accumulated amortization and any impairment losses. Intangible assets are amortized using the straight-line method. The estimated useful life varies from 3 to 6 years.

Intangible assets are amortised, assuming that their residual value is zero.

Depreciation and amortisation rates, residual values, and depreciation and amortisation methods are reviewed at each reporting date. 2.5. Corporate income tax Income tax is assessed for the period in accordance with Latvian tax legislation. The tax rate stated by Latvian tax legislation is 15%.

Deferred income tax is provided in full, using the balance sheet liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability settled.

The principal temporary differences arise from different intangible asset amortization and equipment depreciation rates, as well as accruals for unused annual leave and from tax losses carried forward. Deferred income tax asset is recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.

The carrying amount of the deferred income tax asset is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the deferred income tax asset to be utilised.

2.6. Reinsurance assets The Company cedes insurance risk in the normal course of business for all its business. Amounts due to reinsurers are estimated in a manner consistent with the associated reinsured policies and in accordance with the reinsurance contract.

The benefits to which the Company is entitled under its reinsurance contracts held are recognized as reinsurance assets. These assets consist of short-term balances due from reinsurers. 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 recognized as an expense when due.

The Company assesses its reinsurance assets for impairment on a quarterly 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 recognizes that impairment loss in the income statement.

2.7. Fair values of financial assets and liabilities Fair values are based on quoted market prices for the specific asset or liability or comparisons with other highly similar financial instruments. Establishing valuations where there are no quoted market prices inherently involves the use of judgment and applying judgment in establishing reserves against indicated valuations for aged positions, deteriorating economic conditions (including country specific risks), concentrations in specific industries, types of instruments or currencies, market liquidity and other factors. Based on management estimate, fair values of financial assets and liabilities match to their carrying values.


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Notes to the financial statements (continued) 2. Accounting policies (continued) 2.7. Fair values of financial assets and liabilities (continued)

IFRS 7 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. The Company classifies all of its financial assets in the following category of the hierarchy:

- Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities. This level includes listed equity shares and debt instruments on exchanges and exchanged traded derivatives like futures.

2.8. Financial assets The Company makes investments according to Latvian laws, it’s investment policy and the Board’s decisions. The Company has delegated the investing function to IPAS Parex Asset Management that performs investment management in accordance with the respective outsourcing agreement.

Regular purchases and sales of financial assets are recognised on the settlement date. Financial assets are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and the Company has transferred substantially all risks and rewards of ownership.

Depending on management's intention and the purpose for which the financial assets were acquired, the financial assets are classified in the following categories:

• financial assets at fair value through profit or loss;

• loans and receivables;

• held-to-maturity investments;

• available-for-sale financial assets.

Management determines the classification of its investments at initial recognition and re-evaluates this at every reporting date. All of the Company's financial assets are classified either as financial assets at fair value through profit or loss or loans and receivables and in the reporting period the Company has not classified any financial assets as "held-to-maturity investments" or "available-for-sale financial assets".

(a) Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss include financial assets, which have been designated as at fair value through profit or loss at initial recognition and financial assets held for trading purposes (i.e. a financial asset acquired or incurred principally for the purpose of reselling or repurchasing in the near term). Majority of the Company financial assets classified as Financial assets at fair value through profit or loss are Financial assets designated as at fair value through profit or loss at inception as those are financial assets held in internal funds to match insurance and investment contracts liabilities that are linked to the changes in fair value of these assets. The designation of these assets to be at fair value through profit or loss eliminates or significantly reduces a measurement or recognition inconsistency (sometimes referred to as 'an accounting mismatch') that would otherwise arise from measuring assets or liabilities or recognizing the gains and losses on them on different bases. Financial assets at fair value through profit or loss are initially recognized at fair value at the settlement date which is the fair value of the consideration paid for the financial investment (less transaction costs). After initial recognition, financial assets in this category are subsequently measured at their fair value. Changes in fair values of these assets are recognized consistently, either as a profit or loss in the income statement of the reporting period. Realized and unrealized gains and losses arising from changes in the fair value of Financial assets at fair value through profit or loss are included in the income statement in the period in which they arise. Interest earned and dividends received are included in Investment income.


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Notes to the financial statements (continued) 2. Accounting policies (continued) 2.8. Financial assets (continued)

(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 at fair value through profit or loss. Loans and receivables are recognized initially at fair value plus accrued interest, less provision for impairment. A provision for impairment of loans and receivables is established when there is objective evidence that the Company will not be able to collect all amounts due according to their original terms. Receivables arising from insurance contracts are also classified in this category and are reviewed for impairment as part of the impairment review of loans and receivables.

2.9. Insurance receivables and reinsurance contracts Receivables and payables are recognized when due. These include amounts due to and from agents, brokers and insurance contract holders. If there is objective evidence that the insurance receivable is impaired, the Company reduces the carrying amount of the insurance receivable accordingly and recognizes that impairment loss in the income statement. The Company gathers the objective evidence that an insurance receivable is impaired using the same process adopted for loans and receivables. The impairment loss is also calculated under the same method used for these financial assets. When amounts due from insurance debtors become overdue, the policy is cancelled and respective amounts are reversed against premium written.

The master reinsurance contract should be in the mandatory form of the quota share, surplus/quota share treaty. Risks that are in excess of the limits set by the reinsurance contract or, in their essence, do not comply with the terms of the quota share treaty, are reinsured on an optional basis.

2.10. Cash and cash equivalents Cash and cash equivalents include cash at bank and short-term deposits with an original maturity of three months or less at the date of placement.

2.11. Product classification

The Company issues contracts that transfer insurance risk or financial risk or both. In accordance with International Financial Reporting Standard IFRS 4 contracts entered into with customers have been classified as insurance contracts or investment contracts.

Insurance contracts are those contracts when:

− The insurer accepts significant insurance risk from the policyholder.

− The insurer agrees to compensate the policyholder in the agreed-upon amount if a specified insured event occurs, such as death of the insured person. The policyholder agrees to pay insurance premiums in the manner, terms and amounts specified by the insurance contract, as well as fulfil other obligations provided for by the insurance contract.

− An uncertain future event adversely affecting the policyholder is specified.

Life insurance contracts that do not expose the insurer to significant insurance risk are classified as investment contracts. The term “investment contract” is used for classification purposes only; it is an informal term and refers to a financial instrument that does not fall within the definition of “insurance contract”.

Investment contracts can be reclassified as insurance contracts only when terms of the insurance contract are renegotiated, thus exposing the insurer to significant insurance risk. If this is the case, the above classification of insurance contracts is applied.

Insurance contracts cannot be reclassified as investment contracts. Once a contract has been classified as an insurance contract, it remains an insurance contract until all rights and obligations are extinguished or expire.


18

Notes to the financial statements (continued) 2. Accounting policies (continued) 2.12. Insurance contract liabilities General insurance contract liabilities

General insurance contract liabilities are based on the estimated ultimate cost of all claims incurred but not settled at the balance sheet date, whether reported or not, together with related claims handling costs. Significant delays can be experienced in the notification and settlement of certain type of general insurance claims, therefore the ultimate cost of such claims cannot be known with certainty at the balance sheet date.

The estimations of insurance contract liabilities require assumptions to be used by the management of the Company.

General insurance claims and benefits incurred comprise insurance claims and benefits, claims handling costs, and changes in provisions.

The reserves include the provision for unearned premiums. Reserves for standardised saving products with guaranteed benefit are calculated as premium received less fees deducted and adjusted for accrued guaranteed income. Reserves for accident are calculated based on historical data.

The provision for unearned premiums is established for accident insurance contracts. The estimate is made for each contract individually. The provisions for the contract constitutes the proportionate share of the gross written premiums based on the share of the coverage period after the balance sheet date out of the total lifetime of the contract.

The reinsurer’s share in the unearned premium provision constitutes the proportionate share of the unearned premium provision based on the share of the reinsurance premiums ceded out of the gross written premiums.

The provision for outstanding claims and benefits as at the year end represents the amount of claims incurred during the year but not settled and consists of the following:

• Claims reported but not settled (RBNS). The RBNS provision is made for claims aroused from insured events in relation to life insurance covers that are incurred and reported to the Company up to Balance sheet date, but not yet settled by the Company. Estimate of RBNS is assessed on an individual case by case bases taking into account expected amount of claim and forecasted direct and indirect claims adjustment expenses (if any).

• Claims incurred but not reported (IBNR). The IBNR is made for risk insurance claims (non-life products) that have happened but are not yet reported to the Company. IBNR is calculated using statistical estimate based on prior experience relating to a time difference between the date of reporting the claims and the date of incurring the claims. Liability adequacy testing At each balance sheet date, liability adequacy tests for pure risk insurance contracts and contracts that provide guaranteed return are performed to ensure the adequacy of the contract liabilities. In performing these tests, current best estimates of future contractual cash flows and claims handling and administration expenses, as well as investment income from the assets backing such liabilities, are used. Any deficiency is immediately charged to profit or loss by establishing a provision for losses arising from liability adequacy tests. Liabilities adequacy test provided in actuarial report at each balance date.


19

Notes to the financial statements (continued) 2. Accounting policies (continued) 2.13. Investment contracts Investment contract liabilities are recognised when contracts are entered into and premiums are charged. These liabilities are initially recognised at transaction price excluding any transaction costs directly attributable to the issue of the contract. Deposits and withdrawals are recorded directly as an adjustment to the liability in the balance sheet, known as deposit accounting.

Financial liabilities for given type of agreements equals fair value of underlying financial assets, which in the case of the Company's products are units of open investment funds. The fair value of financial liabilities for investment contracts without fixed terms is determined using the current unit values in which the contractual benefits are denominated. These unit values reflect the fair values of the financial assets contained within the investments funds linked to the financial liability. The fair value of the financial liabilities is obtained by multiplying the number of units attributed to each contract holder at the balance sheet date by the unit value for the same date. When contracts contain both a financial risk component and a significant insurance risk component and the cash flows from the two components are distinct and can be measured reliably, the underlying amounts are unbundled. Any premiums relating to the insurance risk component are accounted for on the same bases as insurance contracts and the remaining element is accounted for as a deposit through the balance sheet as described above.

2.14. Revenue Premium income For short-term insurance contracts premiums are recognised as revenue (earned premiums) proportionally over the period of coverage. For long-term contracts with fixed and guaranteed terms premiums are recognised as revenue when they become payable by the contract holder.

Investment income

Interest income is recognised in the income statement for all interest bearing financial instruments, using the effective interest rate method. The effective interest rate method is a method for calculating the adjusted cost of a financial asset or a financial liability (or groups of financial assets or financial liabilities) and the allocation of interest income and expenses over the relevant time period. The effective interest rate is a rate which exactly discounts future expected cash flows to the carrying amount of a financial asset or a financial liability over the expected useful life of the financial instrument. In order to calculate the effective interest rate, the Company assesses cash flows taking account of all contractual terms, but not future discounts All significant contractual service fees paid or received between the parties, transaction costs and other supplementary payments or deductions are included in the calculation. Interest income from financial assets at fair value through profit or loss is disclosed as interest income.

Other income

Income from investment contracts (commission fees for contract and provision handling) are recognised on a monthly basis at the rates fixed in the insurance contract. Income from the accumulated amount is recognised upon expiration or early termination of the contract.

2.15. Leases

Finance lease

Leases of assets under which the Company has substantially all the risks and rewards or ownership are classified as finance leases. Finance leases are capitalised at the inception of lease at the lower of the fair value of the leased asset or the present value of the minimum lease payments. The interest element of lease payments is charged to the profit and loss account so that as to produce a constant periodic rate of interest on the remaining balance of the liability


20

Notes to the financial statements (continued) 2. Accounting policies (continued) 2.15. Leases (continued) Operating lease

Lease in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any financial incentives received from the lessor) are charged to the profit and loss account on a straight-line basis over the period of the lease.

2.16. Deferred client acquisition costs The Company does not recognise any deferred client acquisition costs, because the Company is currently in start-up phase. All client acquisition costs are currently expensed.

2.17. Events after the balance sheet date Material circumstances that have an effect on the valuation of assets and liabilities and became evident between the balance sheet date and the date of preparing the financial statements, but are related to transactions that took place in the reporting period or earlier periods, are recorded in the financial statements. 3. Risk management 3.1. Regulatory framework The operations of the Company are also subject to local regulatory requirements within the jurisdiction where it operates. Such regulations not only prescribe approval and monitoring of activities, but also impose certain restrictive provisions, e.g. capital adequacy, to minimise the risk of default and insolvency on the part of the insurance companies to meet the unforeseen liabilities as these arise.

Regulators are interested in protecting the rights of the policyholders and maintain close attention to ensure that the Company is satisfactorily managing affairs for their benefit.

The capital management’s objectives are:

• to maintain the required level of stability of the Company thereby providing a degree of security to policyholders,

• to allocate capital efficiently and support the development of business by ensuring that returns on capital employed meet the requirements of its shareholders,

• to retain financial flexibility by maintaining strong liquidity and access to range of capital market,

• to align the profile of assets and liabilities taking account of risk inherent in the business,

• to maintain financial strength to support new business growth and satisfy the requirements of the policyholders, regulators.

According to the regulatory requirements in Latvia, the insurance company should constantly have at its disposal own funds, which should be equal or larger then a determined solvency margin.


21

Notes to the financial statements (continued) 3. Risk management (continued) 3.1. Regulatory framework (continued)

31/12/2009 31/12/2008LVL LVL

Solvency margin (life insurance) 3,299 287Solvency margin (unit-linked) 41,918 30,929Solvency margin based on written premium (non-life) 867 590Solvency margin based on claim (non-life) - -Minimum guarantee fund (LVL)* 2,248,973 2,248,973Solvency margin (The largest amount) 2,248,973 2,248,973

Equity and solvency compliance31/12/2009 31/12/2008

LVL LVLPaid share capital 3,000,000 2,800,000Accumulated loss carried forward from prior years (248,612) (1,628)Current year loss - (246,984)Intangible assets 73,423 91,829Total capital 2,677,965 2,459,559Solvency margin 2,248,973 2,248,973Capital adeguacy 428,992 210,586* Minimum guaranty fund for insurance companies is 3,200,000 EUR or LVL 2,248,973 (according to Latvian bank

EUR currency rate 0.702804 as at 31 December 2009).

3.2. Insurance risks The essential elements of the insurance risk management system comprise ongoing monitoring of actuarial mathematical methods and assumptions, used in calculations of the insurance premiums and liabilities. Insurance risks are hedged applying the appropriate underwriting strategies, actuarial analysis and reinsurance coverage. Claims handling process is governed by the claims handling guidelines.

Insurance risks comprise the actuarial mathematical risk controlling the sufficiency of insurance rates to meet future liabilities and adequacy of provisions to cover future costs.

The Company has issued insurance policies only to residents of Latvia.

The key assumptions to which the estimation of liabilities is particularly sensitive are:

- investment return. These estimates are based on current market returns as well as expectations about future economic and financial developments;

- expenses. Operating expenses assumptions reflect the projected costs of maintaining and services for in-force policies and associated overhead expenses;

- lapse and surrender rate. Lapses relate to the termination of policies due to non-payment of premium. Surrenders relate to the voluntary termination of policies by policyholders. Policy termination assumptions are determined using statistical measures based on product type, policy duration and sales trends.


22

Notes to the financial statements (continued) 3. Risk management (continued) 3.2. Insurance risks (continued)

The Company is measuring the insurance risk by reviewing calculations and testing the adequacy of the liabilities regularly. When deficiencies are identified, they are addressed by management of the Company by changing the pricing policy, adjusting the underwriting policies and reinsurance treaties for the future risks and by creation of additional reserve to cover the potential losses from current policies.

3.3. Financial risks Credit risk basically arises from the following: the portfolio of fixed and non-fixed interest rate securities, adequate reinsurance arrangement, and insolvency risk related to the insurance business. Each area has its own risk management practice to safeguard the Company’s financial position. The management of the Company manages financial risk by assessing its investments individually for possible credit risk. The Company policy is regularly reviewed for pertinence and for changes in the risk environment.

Balances due from reinsurers and customers are subject to insolvency risk, but currently risk is estimated as not material.

The reinsurer has the following ratings granted: AA- by Standard & Poor’s and Aa2 by Moody’s.

Credit risk is the risk one party to financial instrument will cause a financial loss to the other party by failing to discharge an obligation.

The Company signed an agreement on asset portfolio trust management with IPAS Parex Asset Management. The investment policy is presented in Annex 1 Investment Policy to the agreement. The objective of making investments is to achieve long-term capital gains, maintaining the well-balanced portfolio structure by making investments mainly in the Republic of Latvia, other EU Member States, EEA and OECD countries - equity shares and debt securities, investment funds, money market instruments and deposits with credit institutions. The investment portfolio is balanced in terms of investments both in different currencies and countries, thus ensuring safety of investments and protection against excessive fluctuations of the portfolio.

Majority of investment contracts are unit-linked investment policies and policyholders bear the investment risk on the assets held in the unit-linked fund as the policy benefits are directly linked to the value of the assets in the fund. Therefore, the Company has no material credit risk on unit-linked financial assets. 3.4. Liquidity risks Liquidity risk is related to the Company’s ability to meet its liabilities as they fall due, as prescribed by the investment management policy. Liabilities for insurance contracts of non-saving products are estimated to be not material. The Company keeps appropriate level of liquid assets, such as cash balances or deposits in bank, which could be used to settle any liabilities.

Significant part of Company's investment portfolio is allocated to liquid assets; such fixed income securities and investment funds, which could be converted to cash in reasonably short time period and used to settle any liabilities


23

Notes to the financial statements (continued) 3. Risk management (continued) 3.4. Liquidity risks (continued) The table below shows Company’s assets and liabilities based on the time remaining from the balance sheet date to the contractual maturity date.

31.12.2009.

ASSETSWithin 1 month

1-3 month 3-6 months 6-12 months

1-5 years Over 5 years

Total

InvestmentsFinancial assets held for trading 336,569 - 1,125,543 71,623 526,719 - 2,060,454 Financial assets designated at fair value through profit or loss 708,901 - - - - - 708,901 Term deposits with credit institutions - - 788,201 788,201

Direct insurance receivables - 8,442 - - - - 8,442 Reinsurance assets 2,775 - - - - - 2,775 Corporate income tax receivable 6,964 - - - - - 6,964 Prepaid expenses 280 - - - - - 280 Other receivables 357 - - - - - 357 Cash and cash equivalents 174,910 - - - - - 174,910

Total assets 1,230,756 8,442 1,913,744 71,623 526,719 - 3,751,284 LIABILITIES -

-Insurance liabilities - - - 10,738 - - 10,738 Investment contracts 987,260 - - - - - 987,260 Reinsurance payables 3,073 - - - - - 3,073 Finance lease liabilities - - - 17,008 11,680 - 28,688 Other liabilities - 10,796 - - - - 10,796 Accrued liabilities - - - 7,635 - - 7,635

Total liabilities 990,333 10,796 - 35,381 11,680 - 1,048,190 Net position 240,423 (2,354) 1,913,744 36,242 515,039 - 2,703,094


24

Notes to the financial statements (continued) 3. Risk management (continued) 3.4. Liquidity risks (continued)

31.12.2008.

ASSETS Within months

1-3 month

3-6 months 6-12 months

1-5 years Over 5 years

Total

InvestmentsFinancial assets held for trading 579,475 - 636,888 - 98,807 - 1,315,170Financial assets designated at fair value through profit or loss 314,127 - - - - - 314,127 Term deposits with credit institutions - - 1,175,988 - - - 1,175,988

Reinsurance assets 1,176 - - - - - 1,176Direct insurance receivables 1,962 - - - - - 1,962Corporate income tax receivable 6,964 - - - - - 6,964Prepaid expense 596 - - - - - 596Other receivables 191 - - - - - 191Cash and cash equivalents 185,478 - - - - - 185,478

Total assets 1,089,969 - 1,812,876 - 98,807 - 3,001,652

LIABILITIESInsurance liabilities - - - 6,585 - - 6,585Investment contracts 462,425 - - - - - 462,425Direct insurance payables 792 - - - - 792Reinsurance payables 1,585 - - - - 1,585Finance lease liabilities - - - 15,586 25,294 - 40,880Other liabilities 21,929 - - - - - 21,929Accrued expense - - - 12,084 - - 12,084

Total liabilities 486,731 - - 34,255 25,294 - 546,280Net position 603,238 - 1,812,876 (34,255) 73,513 - 2,455,372

3.5. Market risk Market risk is the risk of change in fair value of financial instruments from fluctuations in foreign exchange rates (currency risk), market interest rates (interest rate risk) and market prices (price risk), whether such change in price is caused by factors specific to the individual instrument or its issuer or factors affecting all instruments traded in the market.

Currency risk and interest rate risk are subject to market risk, but currently are estimated as not significant, because majority of Company investments are in EUR and LVL. The greatest part of investment contracts are unit-linked investment policies and policyholders bear the investment risk on the assets held in the unit-linked fund as the policy benefits are directly linked to the value of the assets in the fund.

Financial asset management is governed by the agreement on asset portfolio trust management signed with IPAS Parex Asset Management. This agreement lays down the investment policy, financial instruments, and investment limits for effective management of the investment portfolio.

Market risk is the most significant risk related to financial assets. The Company’s investments mostly represent fixed and non-fixed interest rate securities. Any increase in interest rates produces a material impact on the investment value. Although investing in equity shares is limited for strategic reasons, there exists a certain risk that market values could fluctuate. The risk that market values could fluctuate is assessed on an ongoing basis.

The Company’s net income and equity would increase/ decrease by LVL 7,8 thousand, in case of increase/ decrease in deposit interest rate for 1% (2008: LVL 11,6 thousand).


25

Notes to the financial statements (continued) 3. Risk management (continued) 3.5. Market risk (continued) The Company’s net income and equity would increase/ decrease by LVL 34 thousand, in case of increase/ decrease of 10% value of investment funds (2008: LVL 24 thousand).

3.6. Operational risk Operational risk is the risk related to internal processes, human error, system failure and impact of external circumstances. Human error risk management is based on the guidelines intended to prevent a conflict of interest, access controls, authorisation procedures, effective segregation of duties and internal regulations. All these risks are controlled by the Internal Audit Division according to the Company’s regulations. Operational risks are being assessed on regular basis according to the Company's regulations.

3.7. Concentration risk The management of the Company determines concentration based on currency and type of investment (fixed income or non fixed income, government or non-government institutions). Concentration of key financial assets is disclosed in Note 13 and for Insurance liabilities in Note 15.

4. Net earned premiums

Gross written

premiums

Reinsurer's share of written

premiumsNet written premiums

Change in gross

unearned premium reserve

Reinsurer's share of gross

unearned premium reserve

Net change in unearned

premium reserve

LVL LVL LVL LVL LVL LVLLife insurance - non - saving products 3,442 684 2,758 1,180 310 870 Life insurance - saving products 9,746 2,899 6,847 1,989 949 1,040Accident insurance 5,416 880 4,536 778 340 438

Total in 2009 18,604 4,463 14,141 3,947 1,599 2,348Life insurance - non - saving products 6,137 2,096 4,041 2,004 528 1,476 Accident insurance 3,690 689 3,001 1,270 98 1,172

Total in 2008 9,827 2,785 7,042 3,274 626 2,648

5. Fee income 2009 2008LVL LVL

Commission received for fund purchases 3,231 2,788Commission fee for unit-linked contracts 20,761 24,630

Total 23,992 27,418


26

Notes to the financial statements (continued)

6. Net income / (loss) on financial assets and liabilities held for trading 2009 2008LVL LVL

Income / (loss) on revaluation of fixed income securities 78,729 (5,861)Income / (loss) on revaluation of non-fixed income securities 49,110 (143,923)

Total 127,839 (149,784)

7. Net interest revenue and similar income 2009 2008LVL LVL

Interest revenue on term deposits 66,199 102,796Interest revenue on bank account balances 13,509 4,315Interest revenue on financial assets designated at fair value through profit or loss 12,505 30,839

Total 92,213 137,950

8. Client acquisition costs 2009 2008LVL LVL

Advertisemement expenses 2,606 31,032 Comissions to AS Parex banka 1,906 6,911

Total 4,512 37,943

9. Administrative expenses and investment management expenses 2009 2008LVL LVL

Rent expenses 8,669 5,289Professional fees 10,413 11,061Investment management fees 7,054 3,317Audit fees 5,557 9,039Membership fees 3,310 3,748Other administrative expenses 1,999 3,509Utilities expenses 1,758 1,061Business trips expenses 388 3,878

Total 39,148 40,902

10. Net change in insurance liabilities 2009 2008LVL LVL

Change in claim provision 206 1,231Total 206 1,231


27

Notes to the financial statements (continued)

11. Intangible assets Software and

licences Prepayments Total

Acquisition value as at 31/12/2007 92,106 12,638 104,744Additions for 2008 5,346 - 5,346Acquisition value as at 31/12/2008 97,452 12,638 110,090

Accumulated amortisation as at 31/12/2007 705 - 705Charge for 2008 17,556 - 17,556Accumulated amortisation as at 31/12/2008 18,261 - 18,261

Balance as at 31/12/2007 91,401 12,638 104,039Balance as at 31/12/2008 79,191 12,638 91,829 Acquisition value as at 31/12/2008 97,452 12,638 110,090 Additions for 2009 - - -Acquisition value as at 31/12/2009 97,452 12,638 110,090

Accumulated amortisation as at 31/12/2008 18,261 - 18,261Charge for 2009 18,406 - 18,406Accumulated amortisation as at 31/12/2009 36,667 - 36,667

Balance as at 31/12/2008 79,191 12,638 91,829Balance as at 31/12/2009 60,785 12,638 73,423

In 2007 the Company signed an agreement for the purchase of intangible asset (software) which, in its substance is a finance lease agreement. Therefore, the Company has recognised the intangible assets and finance lease liabilities. Carrying amount of this intangible asset subject to finance lease as at 31 December 2009 is LVL 60,007 (31.12.2008. – LVL 75,008). As at 31 December 2009 the present value of finance lease liabilities was LVL 28.688 (31.12.2008.: 40,880). LVL 17,008 (31.12.2008.: LVL 12,192) was payable within one year, and LVL 11,680 (31.12.2008.: LVL 26,688) was payable later then one year and not later then 5 years). .

Future minimum lease payments 31.12.2009. 31.12.2008.LVL LVL

Payable within 1 year 20,427 16,261Payable after more than 1 year and not later than 5 years 15,275 35,702

35,702 51,963

As at 31 December 2009 prepayments for intangibles include payments for development of data exchange system in amount of LVL 12,638.


28

Notes to the financial statements (continued) 12. Equipment

Computers and other EDP Total

Acquisition value as at 31/12/2007 5,763 5,763Additions for 2008 364 364Acquisition value as at 31/12/2008 6,127 6,127Accumulated depreciation as at 31/12/2007 255 255Charge for 2008 1,684 1,684Accumulated depreciation as at 31/12/2008 1,939 1,939

Balance as at 31/12/2007 5,508 5,508Balance as at 31/12/2008 4,187 4,187Acquisition value as at 31/12/2008 6,127 6,127Additions for 2009 - -Acquisition value as at 31/12/2009 6,127 6,127

Accumulated depreciation as at 31/12/2008 1,939 1,939Charge for 2009 2,042 2,042Accumulated depreciation as at 31/12/2009 3,981 3,981

Balance as at 31/12/2008 4,187 4,187Balance as at 31/12/2009 2,146 2,146

13. Investments 31.12.2009. 31.12.2008.

LVL LVLFinancial assets held for trading 2,060,454 1,315,170Financial assets designated at fair value through profit or loss 708,901 314,127Term deposits with credit insitutions 788,201 1,175,988

Total 3,557,556 2,805,285

Credit risk by type of investments

Other Unit-linked* TotalLVL LVL LVL

Financial assets held for trading 2,060,454 - 2,060,454Financial assets designated at fair value through profit or loss - 708,901 708,901Term deposits 788,201 - 788,201

Total 2,848,655 708,901 3,557,556

Other Unit-linked* TotalLVL LVL LVL

Financial assets held for trading 1,315,170 - 1,315,170Financial assets designated at fair value through profit or loss - 314,127 314,127Term deposits 1,175,988 - 1,175,988

Total 2,491,158 314,127 2,805,285

2009

2008


29

Notes to the financial statements (continued) 13. Investments (continued)

*Unit-linked investment related financial risk is borne by the unit holders. Therefore the maximum related credit risk exposure for these agreements to the Company is shown as Other. These investments have been designated as fair value through profit or loss, because this eliminates accounting mismatch, as relevant investment contracts are valued at fair value. As at 31 December 2009 term deposits in the amount of LVL 788 201 (2008: 1 175 988) and financial assets held for trading in the amount of LVL1 665 606 (2008: 1 054 941) where classified at investment grade, which is defined as Moodey’s ratings above BBB. The other investment did not have ratings assigned. Investment analysis by currency profile

Financial assets held for trading LVL EUR USD TOTALInvestment funds - 336,570 - 336,570Fixed income securities* 655,698 1,068,186 - 1,723,884

Term deposits 573,986 214,215 - 788,201Financial assets designated at fair value through profit or loss* - 567,305 141,596 708,901

Total 1,229,684 2,186,276 141,596 3,557,556

Financial assets held for trading LVL EUR USD TOTALInvestment funds 73,169 182,488 4,572 260,229Fixed income securities* 636,887 418,054 - 1,054,941

Term deposits 1,175,988 - - 1,175,988Financial assets designated at fair value through profit or loss* 3,050 239,782 71,295 314,127

Total 1,889,094 840,324 75,867 2,805,285

31.12.2009

31.12.2008

As at 31 December 2009 fixed income securities consisted of the investments in government securities in the amount of LVL 1,593,982, bank securities in the amount of LVL 71,623 and other company investment securities in the amount of LVL 58,279. As at 31 December 2008 these investments consisted of LVL1,054 thousand of government securities. Investment analysis by maturity profile,

31.12.2009. 31.12.2008.LVL LVL

Up to one month 384 579,475Up to one year 2,321,552 1,812,876From 1 to 5 years 1,233,824 412,935More than 5 years 1,796 -

Total 3,557,556 2,805,286

14. Investment contracts 31.12.2009. 31.12.2008.

LVL LVLInvestment contracts - unit-linked 708,901 314,127Investment contracts - guaranteed return 278,359 148,298

Total 987,260 462,425


30

Notes to the financial statements (continued) 14. Investment contracts (continued)

Investment contracts – unit linked 2009 2008LVL LVL

As at 31.12.2008 314,127 274,957Premiums paid 261,362 304,064Commissions withheld and risk payments (19,260) (29,026) Repurchased fund value (2,129) (1,245)Fair value adjustments 156,847 (239,002)Foreign exchange adjustment (2,046) 4,379As at 31.12.2009 708,901 314,127

Investment contracts – guaranteed return 2009 2008LVL LVL

As at 31.12.2008 148,298 -Premiums received 147,391 157,442Commissions withheld (14,379) (7,646) Payments made (13,294) (3,676)Income from insurance contracts 11,064 1,873Foreign exchange adjustment (721) 305As at 31.12.2009 278,359 148,298

15. Insurance liabilities 2009 2008LVL LVL

Unearned premium reserve life insurance non-saving product 1.650 470Unearned premium reserve life insurance saving product 4.653 2.664Unearned premium reserve accident insurance 2.895 2.117IBNR 1.540 1.334

Total 10.738 6.585All insurance contract liabilities arise from insurance contracts issued to residents of Latvia. 16. Taxes and state social contributions

Balance as at 31/12/2008*

Calculated for 2009

Paid in 2009

Balance as at 31/12/2009*

Corporate income tax (6,964) - - (6,964)Personal income tax - 21,762 (21,767) (5)Statutory social insurance contributions (39) 36,323 (36,555) (271)VAT - 2,530 (2,530) -Unemployment risk duty - 27 (27) -

Total (7,003) 60,642 (60,879) (7,240)

* Overpaid taxes are shown in positions “Other receivables” and “Corporate income tax receivable”.


31

Notes to the financial statements (continued) 17. Cash and cash equivalents

31.12.2009. 31.12.2008.LVL LVL

Cash at bank* 174,910 185,478174,910 185,478

* Cash at bank comprises bank accounts held with AS Parex banka. AS Parex banka is rated: B2 by Moody”s. 18. Share capital In 2009 the share capital of the Company was increased by LVL 200,000. As a result, the share capital of the Company as at 31 December 2009 was LVL 3,000,000 and consisted of 3,000,000 registered voting shares which have been fully paid up. The par value of each share is LVL 1. The sole shareholder of the Company is IPAS Parex Asset Management. The Company manages capital based on the rules set by regulator FCMC, which sets out minimum capital requirement. The Company was in compliance with the requirements as at 31 December 2009 and 31 December 2008. As at 31 December 2009 the Company had excess of capital over minimum required by LVL 429 thousand (31.12.2008 - LVL 210 thousand). 19. Other liabilities

2009 2008LVL LVL

Trade payables 210 311Payments to the Financial and Capital Market Commission and the Insured Protection Fund 44 -Payments for securities 10,521 21,237Other 21 381

Total 10,796 21,929

20. Staff costs In 2009 the average number of employees was 9 (2008: 6). All the staff costs are included in administrative expenses. Breakdown of staff costs (excluding the Board and the Council)

2009 2008LVL LVL

Salaries 34,470 70,560State compulsory social insurance contributions 8,456 16,232

42,926 86,792Salaries include employee salaries, health insurance, unit-linked insurance and unused annual leave expenses. Breakdown of staff costs related to the Board and the Council

2009 2008LVL LVL

Salaries 76,048 66,816State compulsory social insurance contributions 17,713 11,472

Total 93,761 78,288Some Board Members do not receive additional remuneration for their functions in the Board. Salaries include Board and Council members salaries, health insurance, unit-linked insurance and unused annual leave expenses.


32

Notes to the financial statements (continued) 20. Staff costs (continued) In accordance with the Rules of the Cabinet of Ministers of Latvia 22.86 % (2008: 23.65 %) of the total 33.09% of social insurance contributions are used to fund the state defined contribution pension system. 21. Accrued liabilities

2009 2008LVL LVL

Accrued unused annual leave expenses 4,740 6,415Accrued expenses for professional fees 2,722 4,520Other accrued expenses 173 1,149

Total 7,635 12,084

22. Related party disclosures

Related partyInterest income

Purchased services

Receivables, cash and

deposits from related parties

Insurance liabilities to

related parties*

Equity holder of the ParentAS Parex banka 2009 25,987 16,687 389,124 376,100

2008 17,522 16,916 94,320 134,449ParentIPAS Parex Asset Management 2009 - - - 21,552

2008 - 82 - 2,852OtherRīgas Pirmā garāža SIA 2009 - 2,978 - 180

Board and Council Members 2009 - 93,761 - 2,2432008 - 78,288 - 4,824

Total for 2009 25,987 113,426 389,124 400,075Total for 2008 17,522 95,286 94,320 142,125

* Liabilities to related parties include insurance liabilities. Received insurance premium from related parties (including their employees) in 2009 was 52.24% from all premiums (2008: 34,57%).


33

Notes to the financial statements (continued) 23. Corporate income tax for the reporting year and deferred income tax Corporate income tax differs from the theoretically calculated tax amount that would arise applying the 15% rate stipulated by the law to profit / (loss) before taxation:

2009 2008LVL LVL

Income / (loss) before tax 27,275 (246,984)Theoretically calculated tax at a tax rate of 15% 4,091 (37,048)Expenses not deductible for tax purposes (transactions with securities) - 22,547Non-taxable income (transactions with securities) (17,986) -Tax losses forwarded to Parent company for 2008 15,953 -Tax losses forwarded to Parent company for 2009 13,368 -Change in unrecognised deferred tax asset (15,426) 14,501Tax charge - -Deferred income tax is calculated by using the enacted tax rate – 15%. As at 31 December 2009 the Company had accumulated tax losses of Ls 75,046, which it can carry forward and utilise in future years. In accordance with the law “On Corporate Income Tax” tax losses carried forward can be covered in chronological order from taxable income during the following eight years.

Tax losses Expiry term

Tax losses of 2007 75,046 2015

Deferred income tax Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes relate to the same taxation authority. The offset amounts are as follows:

31.12.2009. 31.12.2008.LVL LVL

Deferred income tax assets:- deferred tax asset to be recovered after more than 1 year - -- deferred tax asset to be recovered within 1 year (12,376) (29,762)

(12,376) (29,762)Deferred income tax liabilities:- deferred tax asset to be recovered after more than 1 year 6,231 8,959- deferred tax asset to be recovered within 1 year 2,738 1,970

8,969 10,929

The gross movement on the deferred income tax account is as follows: 2009 2008LVL LVL

Unrecognised deferred tax asset at the beginning of the reporting year (18,833) (4,332)Change in unrecognised deferred income tax asset 15,426 (14,501)Unrecognised deferred tax asset at the end of the reporting year (3,407) (18,833)


34

Notes to the financial statements (continued) 23. Corporate income tax for the reporting year and deferred income tax (continued)

Deferred income tax has been calculated from the following temporary differences between assets and liabilities values for financial reporting and tax purposes:

31.12.2009. 31.12.2008.LVL LVL

Deferred income tax liability:Temporary difference on fixed assets depreciation 8,969 10,929

Deferred income tax assets:Temporary difference on accruals (1,119) (1,640)Tax loss carried forward* (11,257) (28,122)Deferred income tax asset: (3,407) (18,833)

* - no deferred tax asset was recognised for the tax losses amounting to LVL 75,046 (31.12.2008.– Ls 181,398) as it was not probable that future taxable profit would be available against which the unused tax losses could be utilised. 24. Operating lease On 20 May 2008 premises rental agreement has been signed with AS Parex Banka, rent payment was 872 EUR (without VAT) per month. On 1 October 2010 this agreement has been terminated and new agreement for rent of premises has been signed with Rīgas pirmā garāža SIA, rent payment is 971 EUR (without VAT) per month, rent period is till 31 July 2039. Future lease payment analysis

31.12.2009.LVL

Payable within 1 year 8 189Payable after more than 1 year and not later than 5 years 32 756Payable after more 5 years 201 314

242,259

25. Subsequent events

There are no subsequent events since the last date of the reporting year, which would have a significant effect on the financial position of the Company as at 31 December 2009.


35

PricewaterhouseCoopers SIA VAT - LV40003142793 Kr. Valdemara iela 19, Riga, LV-1010, Latvia Telephone +371 67094400 Facsimile +371 67830055 [email protected]

Translation from Latvian original*

INDEPENDENT AUDITORS’ REPORT

To the Shareholder of Parex Dzīvība AAS Report on the Financial Statements

We have audited the accompanying financial statements on pages 7 to 34 of Parex Dzīvība AAS which comprise the balance sheet as of 31 December 2009 and the profit and loss account, statement of changes in equity and cash flow statement for the year then ended and a summary of significant accounting policies and other explanatory notes. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with the International Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. 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 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 judgment, 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 and fair presentation of the financial statements in order to design audit proced

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