Česká pojišťovna a.s. Annual Report 2006
YESTERDAYIn 2007, Česká pojišťovna celebrates 180 years in business; our beginnings date back to 1827. First we
provided only fire insurance. About 40 years later, we added hail insurance. In the next 80 years after
that, we expanded our portfolio to include life and accident assurance, insurance against burglary and
theft, statutory liability insurance, and glass breakage insurance. We also developed our reinsurance
business. After the second World War, insurance companies were nationalized and, subsequently, the
insurance sector as a whole was monopolized. It was not until 28 May 1991 that competition could start
to return to the Czech Republic insurance market. As of 1 May 1992, Česká pojišťovna is a joint stock
company that writes contractual and statutory property insurance, personal lines, liability insurance,
insurance for industry and business, and agricultural insurance, including insurance and reinsurance
ensuing from international trade.
During the past ten years, since Česká pojišťovna was acquired by PPF Group, we have gone from
being a specialized seller of insurance to being a universal financial services provider. Our market share
stands at 33%.
Three years ago, we built a central Client Services department based on modern information
technologies and “digitalized” operations, which has brought about a major increase in the speed and
effectiveness of client communications. The claims handling process has also changed so that now
clients receive claim payments much faster than in the past.
TOMORROWWhile it is true that Česká pojišťovna’s history pre-dates the invention of the telephone, the light bulb,
the gramophone, and the typewriter, our company lives primarily for the present and the future – our
clients. We are the Czech market leader and a major player even by pan-European standards. Compared
with other insurance companies operating in the Czech market, Česká pojišťovna has the broadest
product offering and the highest number of product innovations.
Our primary short- and long-term goal is to maintain our current position as the number-one domestic
insurer in both life and non-life insurance and, at the same time, to grow the company’s value and
increase spontaneous brand recognition among the populace.
As society develops, people’s habits change and their needs change as well. Logically, insurance
products have to develop, too, to keep pace. Today’s clients demand comprehensive coverage of family
and property and maximally flexible products that can adapt to the client’s needs as they change
throughout life. Česká pojišťovna is responding to these changing needs and demands by developing
new insurance products and innovating existing products.
Česká pojišťovna will manage its client relations so as to achieve the best possible understanding of
customers’ needs and wishes.
When Česká pojišťovna was foundedin 1827, its first name was “RoyalImperial Exclusive (Privileged) CzechJoint Fire Damage CompensationInsurance Institute.“
As at 1 October 1828, when Českápojišťovna actually commencedoperating as a property insurer,preliminary premium pledgesalready totaled 12,000,000 Guldens.
Česká pojišťovna was alreadyproviding its services when theVeverka Brothers completed theirinvention, the “ruchadlo”(a precursor of today’s plow), JosefRessel gave the world the inventionof the ship’s propeller, and planswere afoot for construction of thecountry’s first railroad – the ČeskéBudějovice–Linz line – which wascompleted five years later.
The first claim paid went to Mr. J. Lipanský of Loučice, on the Žehušický estate.
At first the company sold only fireinsurance. After about 40 years, itadded, for example, hail insurance.It wasn’t until 1909 that it beganoffering life and accident assurance,as well as insurance againstburglary and statutory liabilityinsurance.
In 1831, the region with the highestnumber of buildings insured againstfire (11,372) was Rakovník.Strangely enough, the region withthe lowest number (574) wasPrague.
Ema Destinová, the famous operasinger, took out a policy from thecompany on 21 May 1920. Thepolicy was for household contentslocated in the chateau in Stráž nadNežárkou.
Česká pojišťovna initiated theestablishment of an association ofdomestic insurers under the name“Prague Insurers‘ Association,“which was registered on 1 July 1915.
Starting in 1914, and for many yearsthereafter, an eel named Pepík livedin the mosaic pool in the company’shead office in Spálená Street.According to records from 1952, the eel had an inventory number and received a monthly allowance of CZK 30.
The first eel in the head officefountain lived to a record age of 62.It lived through two world wars andoutlived several company directors.
In 1937, Česká pojišťovnapurchased a palace – today’scomplex of buildings in VladislavovaStreet – from a knight of the Tomášnoble family.
In 1875, Česká pojišťovnaestablished the “Fund for firefightersinjured in the line of duty.”
In 1918, Česká pojišťovna donated50,000 Krone to relatives of fallenCzechoslovak legionnaires.
Česká pojišťovna made substantialcontributions toward construction of fire department buildings, waterstorage tanks, and new firefightinggear.
When Česká pojišťovna beganselling insurance, the Czech landshad a population of over 6.5 million,the average age was 44 years, and families had 5–9 children, half of which died before reaching fiveyears of age.
The biggest claim paid by theinsurer in the 19th century was for the fire of the National Theatreon 12 August 1881. Despite the sizeof the loss, the event gave thecompany much prestige among the Czech nation and enabled it topromote not only itself, but also the Czech insurance industry as a whole.
1919 saw the establishment of the Union of Česká pojišťovnaRepresentatives, whose missionwas to improve the standard of living of career insurancerepresentatives and their families.
The first regular reinsurance contractwas signed in 1862 with the FirstHungarian Insurance Company.
In 1869, the company purchasedthe Šmerhovský house at 76,Spálená Street. By coincidence, this happened to be the samehouse in which the companycommenced its business in 1827.
After the end of World War I, Českápojišťovna helped to solve a majorresidential housing shortage – bymaking financial contributions andbuilding new apartment buildings.
On 2 March 1923, Česká pojišťovnadonated 10,000 Krone from its four-percent Austrian goldallowance to the Republic’s goldreserves.
As of 1948, Československápojišťovna, national enterprise was the only insurer in the Republic.It operated under the nameČeskoslovenská státní pojišťovnauntil early 1969, when it was brokenup in to Česká státní pojišťovna and Slovenská státní pojišťovna. We have been Česká pojišťovna,akciová společnost since 1992.
As part of its efforts to help buildthe economies of Slovakia andCarpathian Ruthenia after the Czechand Slovak nations gainedindependence in the 1920s, Českápojišťovna engaged in amicablecooperation with the Zemskáhasičská jednota in Slovakia andparticipated in the establishment of the Russian fire insurer “Beskyd”based in Uzhhorod.
Starting on 1 May 1922, Českápojišťovna began publishing the“Pojistný obzor” (Insurance Horizons)journal – at that time it was the onlyCzech private insurance trade journal.
Česká pojišťovna helped to developprotective work clothing, co-founded the air rescue service,provided funding for developmentand manufacture of the Tatra 613ambulance vehicle prototype, andpurchased ambulances and medicalequipment for health care facilities.
Writer Eliška Krásnohorská wasa client of První české vzájemnépojišťovna (First Czech MutualInsurance Company) – she hada household contents insurancepolicy.
After the flood of 2002, Českápojišťovna donated CZK 1 milliontoward repair of the Czech NationalTheatre.
In the 1980s, Česká pojišťovnainsured 17 Czechoslovakoceangoing ships and two ocean-river shipping companies. At the time, Czechoslovakia had the second largest oceangoing fleetamong landlocked countries, after Switzerland.
During the 180 years that FirstCzech Mutual Insurance Companyand its successors have been in business, we have assembled an art collection of enormousaesthetic and historical value.
Česká pojišťovna’s art collectionincludes names such as VáclavBrožík, Josef Václav Myslbek,Mikoláš Aleš, Alfons Mucha,František Ženíšek, Vojtěch Hynais,Julius Mařák, and Luděk Marold.
ČESKÁPOJIŠŤOVNA
Česká pojišťovna is the biggest domestic insurance company with a total market share of 33%.
We currently manage over 10 million insurance contracts and we wrote CZK 39.7 billion in premiums in
2006. Česká pojišťovna is the Czech life assurance market leader. In 2006, Česká pojišťovna was
declared Insurer of the Year – for the third time – in the MasterCard Bank of the Year 2006 competition.
Česká pojišťovna posted record earnings of CZK 8.3 billion in 2006.
TODAY
Česká pojišťovna lives with its clients – we understand them and know their needs and wishes, and we
can be there with solutions earlier than the others. Since we honor the value of our clients’ time, we want
to be as close as possible to them and provide them high-quality services for a good price, quicker than
the others. Maximum customer satisfaction is the mission of over 5,200 employees and 4,485 sales
representatives working in 70 agencies and over 700 sales locations throughout the Czech Republic.
Chairman’s Statement 6Description of the Company 8Company History 8Company Profile and Position in the Czech Insurance Market 8Mission and Principal Strategic Goals 8Information on the Company 8Shareholder Structure 10PPF Group and Generali Group Sign Joint Venture Deal 10Securities Issued by Česká pojišťovna 10Principal Businesses According to Current Articles of Association and Types of Insurance Written 11Shareholder Rights and Obligations 12Articles of Association 12Most Important Events and Awards Received 13Financial Highlights 19Basic Indicators 19Description of Group Structure, Position of Česká pojišťovna and Selected Group Companies 21Description of Selected Companies of Česká pojišťovna Group 24Directors and Officers 36Board of Directors 36Supervisory Board 37Executive Board 38Board of Director’s Discussion and Analysis of the Company’s Business Activities and Financial Condition 40Czech Republic Macroeconomic Performance in 2006 and Forecast for 2007 40Situation in the Czech Insurance Market 41Company Financial Performance in 2006 42Financial Performance Commentary 42Insurance Performance Commentary 44Non-life Insurance 46Reinsurance 48Nuclear Pool 48Life Assurance 49Client Services 53Investments 53Human Resources 56Principal Marketing Initiatives and Public-Benefit Activities 56Information Technologies 57Outlook 59Suplementary Information on the Financial Situation and Financial Performance 60Fees Paid to the Auditor 60Basic Elements of Manager Incentives in 2006 60Development of Česká pojišťovna’s Solvency Over Time 61Information on Loans 61Subordinated Loan from the Shareholder 61Court, Administrative, and Arbitration Proceedings 61Principal Non-financial Investments 62Present Value of Land and Buildings 63Information on Entities in Which Česká pojišťovna Holds a Participating Share Exceeding 10% of Its Own Net Current Period Earnings 63Supervisory Board’s Report 64Auditor’s Report 66
FINANCIAL SECTION 68Balance Sheet 70Income Statement 71Statement of Changes in Equity 72Statement of Cash Flows 73Notes to the Financial Statements 74
Report on Relations Among Related Parties, 2006 Accounting Period 155Organization and Contacts 162Česká pojišťovna Basic Organization Chart 162Head Office Organization Chart 162Persons Responsible for the Annual Report 164Directory of Selected Companies of the Česká pojišťovna Financial Group 165Directory of Česká pojišťovna Head Office, Regions, and Agency Offices 166
Contents
Every day something happens, every day is like a gallery full of colorful images.
Short moments and long stretches of our lives are connected with a wide variety of places and people.
Day after day, we experience new and unique things.
Each new fact gives us food for thought, a unique experience on which to build.
We become part of a specific reality that influences the direction of our lives,
our needs, ambitions, wishes, and desires.
Chairman’s StatementDear business friends,
June 2006 marked the tenth anniversary of Česká pojišťovna’s acquisition by the PPF financial group. The Česká pojišťovna of ten years ago and today’s
Česká pojišťovna are two completely different institutions – in all conceivable ways. During the past few years, we have gone from being specialized in
selling insurance to offering universal financial services. We have also joined the European elite in terms of both efficiency and service quality. Between
1996 and 2006, our premiums written per non-sales employee figure has risen from CZK 3.5 million to over CZK 8 million. And today’s Česká pojišťovna is
the insurer with the highest perceived service quality, as demonstrated by several surveys conducted by prominent, independent agencies such as
Millward Brown.
Also in the past few years, the Company has seen its market share stabilize, remaining at above 30 percent. Thanks to all the changes made so far, today’s
Česká pojišťovna is one of the most profitable companies in the Czech Republic. Česká pojišťovna manages over 10 million insurance contracts, or
approximately one half of all insurance contracts in the Czech Republic. Our Return On Equity (ROE) indicator is substantially above 20%, placing us firmly
at the very top of the insurance industry at the pan-European level.
In October 2006, after ten years, a major change was made in the management of Česká pojišťovna. Lard Friese, an internationally recognized manager who
has worked for 15 years in the international insurance groups NOG and AEGON, joined us as the company’s new CEO. In the future I will – in addition to
heading up the Board of Directors of Česká pojišťovna – play a management role in the newly created international holding structure that will encompass the
activities of Generali Group and PPF Group in the areas of insurance, pension funds, asset management, and mutual funds in the region of Central & Eastern
Europe. Česká pojišťovna will be a part of this structure.
Last year, Česká pojišťovna posted record net earnings of CZK 8.3 billion. The earnings growth was driven in particular by excellent investment returns, mostly in
the last quarter of 2006, and one-off gains on sales of certain assets such as eBanka and a stake in the Blue Pyramid (Modrá pyramida) building society. Our loss
experience was interesting, too. After sustaining nearly CZK 1.5 billion in extraordinary losses from heavy snow, floods, and high winds in the first half of the year,
the latter half of the year brought mild winter weather which helped to improve the loss experience. The company’s shareholders’ equity at year end 2006 totaled
CZK 17.1 billion. On 30 June 2006, under a decision of the sole shareholder, the company’s basic share capital was increased by CZK 1 billion to CZK 4 billion.
The total assets figure of Česká pojišťovna reached CZK 121.3 billion and technical provisions stood at CZK 88.4 billion, up nearly CZK 1 billion from the previous year.
2006 was a successful year for Česká pojišťovna, and not only in terms of net earnings. Our results in key segments of the insurance market were also
very good. Česká pojišťovna is the largest insurance company in the Czech Republic, accounting for one third of overall premiums written. Non-life
insurance premiums written totaled CZK 26.5 billion, for a market share of 36.4%. In regular-payment life assurance, which is the foundation of an insurer’s
stability, our premiums written grew by 4.6% to CZK 11.8 billion. This gave us a market share of 34.1% in this area. This growth was driven by the
insurance products DYNAMIK, DYNAMIK Plus, and SLUNÍČKO. All told, Česká pojišťovna according to Czech Insurance Association guidelines wrote
a total of CZK 39.7 billion in premiums in 2006, down CZK 1.9 billion year-on-year. The decline was caused in particular by a drop in the single-premium
life assurance segment, which was not a priority for Česká pojišťovna. Česká pojišťovna is responding to this negative development with a number
of measures and initiatives in both the product and sales areas, and their effects began to be fully felt in the first half of 2007, with new business on the
upswing and figures exceeding plan in most key areas.
The decline in demand for single-premium life assurance was also offset by considerable growth in demand for products of other companies in the group –
Penzijní fond ČP, our pension fund, and ČP INVEST, our mutual funds company. The pension fund saw its assets under management grow by 24% in 2006,
while the number of clients rose 12% during the same period, to almost 1 million. For the first time in history, the fund’s earnings exceeded CZK 1 billion.
ČP INVEST grew its assets under management by 35% year-on-year and net sales of mutual funds were up 66%. In the second half of the year 2007,
Česká pojišťovna also began selling a new single-premium life assurance product, which promises to drive future sales performance in this segment.
In 2006, Client Services continued along the path of continuously increasing productivity in all of its activities. Since the successfully completed centralization
of administrative functions from the agencies, productivity has increased by 10%. This increase has been accomplished primarily by systematically
optimizing processes, improving the system of employee incentives, and automating repetitive tasks. In addition to increasing productivity, we also met
our cost reduction targets.
2006 was a year of transition for the Communications Center, as it began to sell insurance in addition to its service provider role. In addition to selling
insurance by telephone, Client Services also sells insurance over the company website, where clients can now arrange MTPL, motor damage, travel,
accident, and liability insurance policies from the comfort of their homes. Preparations are underway to further expand the range of products and services
offered by telephone and over the Internet. Even so, Česká pojišťovna’s offering in this area is already the richest in the market.
6 ANNUAL REPORT 2006
ZPRÁVA O HOSPODAŘENÍ 2006 7
Česká pojišťovna regularly has itself evaluated by the credit rating agencies Standard & Poor’s and Moody’s. We are the only insurance company in the
Czech Republic to have ratings from two international agencies. In its latest evaluation of Česká pojišťovna’s financial and credit position, dated March 2006,
Moody’s changed the outlook on our Baa3 financial strength rating from “stable” to “positive”. According to Moody’s, the positive rating outlook for Česká
pojišťovna reflects major progress made in risk management, investments, IT, and claims handling. Our current rating is also justified by the strong market
position of Česká pojišťovna and healthy profitability despite intensifying competition in the Czech insurance market. Another important factor in the rating
is the positive impact of the Company’s ongoing restructuring process, which aims to increase the transparency of Česká pojišťovna’s owner. Standard
& Poor’s reaffirmed Česká pojišťovna’s credit rating and financial strength rating at BBB with stable outlook. Thus, in both cases, Česká pojišťovna
confirmed its position in investment grade and we are one of the highest rated financial institutions in the Czech Republic.
For the third time in a row, Česká pojišťovna was declared Insurance Company of the Year, winning over 19 competing insurers in the prestigious competition,
MasterCard Bank of the Year 2006. We also scored with our product DYNAMIK Plus, which placed second in the Life Assurance category and was the
highest-rated product in the endowment life assurance segment. Penzijní fond ČP also won in its category and was declared Pension Fund of the Year.
Česká pojišťovna also considerably reinforced its position in terms of client loyalty. Our clients declare the highest satisfaction with Česká pojišťovna
compared to other insurance companies. In addition, the largest number of insureds consider Česká pojišťovna their primary insurer. I am glad that all
surveys show that Česká pojišťovna is perceived as the company that sets new trends in the insurance industry.
Ladislav Bartoníček
Chairman of the Board of Directors
8 ANNUAL REPORT 2006
Description of the CompanyCompany History
Česká pojišťovna a.s. (also referred to as “Česká pojišťovna” or “the Company”) has a long and rich tradition. It is the oldest insurance institution in the
Czech lands and the legal successor to First Czech Mutual Insurance Company (První česká vzájemná pojišťovna), which was founded in 1827. It was part
of the original State Insurance Company (Státní pojišťovna) until 1969, when, on the basis of the territorial principle, Státní pojišťovna was broken up into
Česká státní pojišťovna and Slovenská státní pojišťovna. Česká pojišťovna was founded by the National Property Fund of the Czech Republic under a Deed
of Incorporation dated 28 April 1992 and was incorporated by registration in the Commercial Register on 1 May 1992. The Company’s shares were first listed
on the Main Market of the Prague Stock Exchange in 1993. The shares of Česká pojišťovna were withdrawn from trading both on the Exchange and on the
RM-SYSTEM in conjunction with the buy-out of minority shareholders on 31 August 2005.
Company Profile and Position in the Czech Insurance Market
Since its inception, Česká pojišťovna has been a composite insurer offering a wide range of life and non-life insurance classes and is currently the largest
insurer in the Czech Republic. We administer over 10 million insurance contracts. In 2006, the market share of Česká pojišťovna by premiums written was
33.1% overall, 28.1% in life assurance and 36.4% in non-life insurance (source: ČAP preliminary figures).
Mission and Principal Strategic Goals
The principal goal of Česká pojišťovna is to provide the best possible services to its clients while achieving maximum long-term growth in value for our
shareholders. Česká pojišťovna intends to maintain its position as the number-one insurer in the Czech Republic in terms of both market share and client
satisfaction. In terms of financial stability, management will continue to maintain a high standard of solvency and capital adequacy for which Česká pojišťovna
has garnered praise from credit rating agencies. In its business operations, Česká pojišťovna leverages the synergies inherent in the conglomerate consisting
of Česká pojišťovna companies and PPF Group and it is our intention to further expand the Group’s operations in Central & Eastern Europe.
Information on the Company
Company name: Česká pojišťovna a.s. Legal form: Joint stock companyRegistered office: Spálená 75/16, 113 04 Prague 1 ID number: 452 72 956Tax ID number: CZ 4527 2956Bankers: Komerční banka, a.s. Prague 1Account number: 174 33-021/0100Date of inception: 1 May 1992
The Company was founded for an indefinite periodLegal regulation: The Company was founded (pursuant to Section 11(3) of Act No. 92/1991 Coll. on the Conditions for
the Transfer of State Property to Other Entities, as amended) by the National Property Fund of the CzechRepublic under a Founder’s Deed dated 28 April 1992 and was incorporated by registration in theCommercial Register on 1 May 1992.
Commercial Register: Prague Municipal Courtregistered in Part B, Entry 1464
The principal goal of Česká pojišťovna is to provide
the best possible services to its clients while achieving maximum
long-term growth in value for our shareholders.
We intend to maintain our position as the number-one insurer
in the Czech Republic in terms of both market share and client satisfaction.
With after-tax earnings of CZK 8.3 billion this year, Česká pojišťovna is once again one of the most profitable
companies in the Czech Republic.
10 ANNUAL REPORT 2006
Shareholder Structure
Shareholder 31/12/2003 31/12/2004 11/10/2005 *) 31/12/2005 31/12/2006
Česká pojišťovna a.s. 12.64% x x x x
CESPO B.V. 85.35% 97.70% 100.00% x x
PPF Group N.V. x x x 100.00% x
CZI Holdings N.V. x x x x 100.00%
Others 2.01% 2.30% x x x
*) Following exercise of right to buy out minority shareholders of Česká pojišťovna by the Company’s principal shareholder (described below). In 2005, in conjunction with the merger of CESPO B.V. (100%shareholder of Česká pojišťovna) and PPF Group N.V. into the successor company PPF Group N.V., there was a change in the sole shareholder of ĆP. Today, the sole shareholder is CZI Holdings N.V. withits registered office in Amsterdam, the Netherlands.
PPF Group and Generali Group Signed Joint Venture Deal
On 26 April 2007, PPF Group and Generali Group signed a Preliminary Agreement to merge their businesses in Central & Eastern Europe and to form a joint
venture. The final agreement was signed on 10 July 2007.
The new entity, Generali PPF Holding, will be 51% owned by Generali Group and 49% owned by PPF Group. This new joint venture will be one of the
largest insurance groups in Central & Eastern Europe with total assets of EUR 5.1 billion and over nine million clients in 12 countries. Together, the two
groups wrote EUR 2.6 billion in insurance premiums in 2006.
The formation of a joint venture is an important step in the strategic expansion of both groups in one of the most attractive regions for insurance services
and will create a strong platform for further growth in surrounding areas.
Generali PPF Holding is to begin operating in late 2007 after obtaining regulatory approvals.
Securities Issued by Česká pojišťovna
Shares
The Company was founded as a joint-stock company in a single action by the National Property Fund of the Czech Republic, as sole founder, based on a decision
of the Ministry of Finance of the Czech Republic dated 13 April 1992. At inception the Company’s basic share capital was TCZK 1,749,944 and was divided
into 314,990 bearer shares and 1,434,954 registered shares, 87,497 of which were employee shares. In 1992, Česká pojišťovna was privatized using the
voucher method. On 15 December 1994 an increase in the basic share capital was recorded in the Commercial Register, adding 524,983 bearer shares to
bring the total basic share capital to TCZK 2,274,927.
Based on a decision of the General Meeting of Česká pojišťovna dated 5 September 1996, the basic share capital was increased again, this time by adding
1,137,464 booked bearer shares to bring the basic share capital to a level of TCZK 3,412,391. The shares were issued at a share premium of 400% of their
nominal value. As a result, the shareholders’ equity swelled by TCZK 5,687,320, of which the share issue premium accounted for TCZK 4,549,856. This share
issue premium was used in 1997 to settle accumulated losses.
The shares of Česká pojišťovna were listed on the Prague Stock Exchange and RM-SYSTEM from the very beginning of trading in 1993 and were traded
there until 31 August 2005.
On 25 June 2004, a resolution of the Prague Municipal Court entered into legal force, under which the new amount of Česká pojišťovna’s basic share capital was
recorded in the Commercial Register. The basic share capital of Česká pojišťovna was reduced by TCZK 431,428 from its original amount of TCZK 3,412,391 to
a new amount of TCZK 2,980,963. The reduction in Česká pojišťovna’s basic share capital was carried out using all 431,428 treasury shares held by the
Company. The reason the Company’s basic share capital was reduced was to comply with statutory requirements relating to the holding of treasury shares.
ANNUAL REPORT 2006 11
In 2005, the principal shareholder of Česká pojišťovna (at that time Cespo B.V.) exercised its right under Section 183i et seq. of the Commercial Code to buy
out the minority shareholders of Česká pojišťovna, who owned 2.3% of the company’s shares. The buy-out plan was approved by an extraordinary General
Meeting held on 25 July 2005. The price per share was set at CZK 21,288. In accordance with the law, this price was paid out within two months of passage
of ownership rights to the Company’s shares.
On 30 June 2006 the sole shareholder, acting with the powers of the Company’s General Meeting, decided to increase the basic share capital by TCZK 1,019,037
out of the Company’s equity, i.e. from retained earnings. The capital increase was recorded in the Commercial Register on 15 August 2006.
On 19 September 2006, pursuant to a decision of the sole shareholder acting with the powers of the General Meeting, the nominal value of the Company’s
shares was changed from CZK 1,000 per share to CZK 100,000 per share.
As of 31 December 2006, the approved basic share capital consisted of 40,000 booked, registered shares of common stock with a total amount of TCZK 4,000,000.
Issue (ISIN) CZ0009106043
Type of security shares of common stock
Form registered
Appearance booked
Nominal value CZK 100,000
Number of securities 40,000
Total volume CZK 4,000,000,000
Issue date 15 November 2006
Listing status Not listed
Bonds
On 16 July 2001, Česká pojišťovna issued bonds with a variable interest yield of 6M PRIBOR + 0.40% p.a. with semiannual payment of coupons on 16 January
and 16 July of each year, in arrears. The bond issue, with a total face value of TCZK 4,000,000, matured on 16 July 2006.
Issue (ISIN) CZ0003700569
Type of security bond
Form bearer
Appearance booked
Nominal value CZK 1,000,000
Number of securities 4,000
Total volume CZK 4,000,000,000
Issue date 16 July 2001
Listing status Listed
The lead manager of the bond issue was Česká spořitelna a.s.
Principal Businesses According to Current Articles of Association and Types of Insurance Written
Česká pojišťovna is a composite insurer offering a wide range of life and non-life insurance classes.
Under a decision of the Ministry of Finance acting as the body of State supervision in insurance, ref. no. 322/26694/2002, dated 11 April 2002, which entered
into legal force on 30 April 2002 and which grants the Company a license to engage in insurance, reinsurance and related activities, and under a decision of
the Ministry of Finance acting as the body of State supervision in insurance, ref. no. 32/133245/2004-322 dated 10 January 2005, which entered into legal
force on 14 January 2005 and which expands the Company’s license to engage in insurance- and reinsurance-related activities,
the Company’s principal businesses are as follows:
■ insurance activity pursuant to Section 7(3) of Act 363/1999 Coll. on insurance and amending certain related acts (the “Insurance Act”), as
amended, consisting of:
– life assurance classes 1, 2, 3, 4, 5, 6 set forth in Part A of the Annex to the Insurance Act,
– non-life insurance classes 1, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 18 set forth in Part B of the Annex to the Insurance Act,
12 ANNUAL REPORT 2006
■ reinsurance activity pursuant to Section 3(3) of the Insurance Act
– for life assurance classes 1, 2, 3, 4, 5, 6 set forth in Part A of the Annex to the Insurance Act,
– for non-life insurance classes 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 18 set forth in Part B of the Annex to the Insurance Act,
■ activities related to insurance and reinsurance activity, pursuant to Section 3(4) of the Insurance Act
– acting as an intermediary in relation to insurance and reinsurance activity under the Insurance Act,
– consulting activity associated with insurance for individuals and legal entities under the Insurance Act,
– investigating insured loss events under an agreement with an insurer under the Insurance Act,
– exercising rights and meeting obligations in the name and for the account of the Czech Insurers Bureau pursuant to Act 168/1999 Coll., as amended,
– arranging for the following financial services (items 1 through 10, below):
1. arranging the acceptance of deposits and other funds from the public, including acting as an intermediary in the areas of building savings
and supplemental pension insurance,
2. arranging loans of all kinds including, inter alia, consumer loans, mortgage loans, factoring and financing of business transactions,
3. arranging finance leases,
4. arranging all payments and money transfers, including credit and debit cards, travelers’ cheques, and bank bills of exchange,
5. arranging guarantees and promissory notes,
6. arranging for customer trading and individual customer accounts on the stock exchange or other markets, for cash or otherwise, concerning
transferable instruments and financial assets,
7. arranging for the management of assets such as cash or portfolios, all forms of management of collective assets, administration of pension funds,
escrow accounts and custodianships,
8. arranging for payment and clearing services relating to financial assets, including securities, derivatives and other transferable instruments,
9. consulting activity, acting as an intermediary, and other ancillary financial services relating to all activities set forth in items 1) through 9), including
loan references and analysis thereof, research and consulting in the area of investments and portfolios, consulting work concerning mergers &
acquisitions, corporate restructurings and corporate strategy,
10. arranging for the provision and transmission of financial information and processing of financial data (including related computer software) by
providers of ancillary financial services,
– training activity for insurance intermediaries and independent loss adjusters.
Furthermore, the Company engages in all activities related to its ownership participations in other legal entities.
Shareholder Rights and Obligations
Holders of shares of common stock are entitled to receive dividends, which are approved in individual time periods, and are entitled to one vote at Company
General Meetings for each share they hold.
The rights and obligations of Company shareholders are stipulated by the Commercial Code (Act No. 513/1991 Coll.), as amended, and by the Articles
of Association of Česká pojišťovna, which are available for inspection in the Collection of Documents at the Commercial Register. These rights include,
most importantly:
– right to a share in the Company’s earnings;
– right to participate in the General Meeting and, while at the General Meeting, to vote, to demand explanations, and to raise motions;
– pre-emptive right to subscribe new shares in any increase in the basic share capital, in proportion to the shareholder’s stake in the Company’s basic share
capital prior to the increase. The terms and conditions for changing the basic share capital amount are set forth in the Company’s Articles of Association;
– right to a share in the liquidation balance arising from dissolution of the Company.
Income from shares is subject to taxation under the applicable laws and regulations of the Czech Republic, i.e. Act No. 586/1992 Coll., on Income Tax, as
amended. Dividend income from shares is taxed at a special tax rate of 15%. Exceptions to this are possible under international double taxation treaties.
Articles of Association
The current Articles of Association of Česká pojišťovna were approved by the Board of Directors of Česká pojišťovna on 3 November 2006 based on changes
decided by the Company’s sole shareholder on 25 October 2006 (reduction in number of Supervisory Board members to three).
ANNUAL REPORT 2006 13
2006
January
Tomáš Machanec New Executive Board Member for Life Assurance
Tomáš Machanec, the erstwhile Chief Director of the Life Assurance Product Management Section, is appointed as Member of the Executive Board.
He takes over the Life Assurance portfolio from Ivo Foltýn, who has been placed in charge of the PPF financial group’s international activities and the
Group’s policymaking in the area of life assurance and pension funds.
Standard & Poor’s Reaffirms Česká pojišťovna Investment-grade Rating
Standard & Poor’s reaffirmed the credit rating and financial strength rating of Česká pojišťovna at BBB with stable outlook, confirming Česká pojišťovna’s
position in the top grade – the investment grade. A full rating has a much higher prestige and information value than a so-called “public rating,” which is
based only on publicly-disclosed information.
February
Česká pojišťovna Client Center Sets New Record
On 21 February, 17,697 clients called the Česká pojišťovna Client Center, a record number of telephone calls since the Center commenced operating in
March 2003. On most days the operators take around 10,000 calls, and about one fifth more than that number on Mondays following a weekend.
March
Česká pojišťovna Has Best Financial Advertisement of 2005
A jury of professionals in a competition organized by the financial server Měšec.cz designated the TV spot of Česká pojišťovna titled “If you need anything,
I’ll be at the insurance company” (“Kdyby něco, jsem v pojišťovně“) the best financial advertisement of the year 2005.
Moody’s Raises Česká pojišťovna’s Rating Outlook
In its latest evaluation of Česká pojišťovna’s financial and credit position, Moody’s changed the outlook of its Baa3 of the company’s financial strength from
“stable” to “positive.”
According to Moody’s, the positive rating outlook for Česká pojišťovna reflects major progress made in risk management, investments, IT, and claims
handling. The current rating is also justified by the strong market position of Česká pojišťovna and healthy profitability despite intensifying competition
in the Czech insurance market. Another important factor in the rating is the positive impact of the Company’s ongoing restructuring process.
Most Important Events and Awards Received
14 ANNUAL REPORT 2006
May
DYNAMIK Declared Most Popular Financial Product of 2006 in Golden Crown Competition
Česká pojišťovna’s DYNAMIK life assurance, launched three years ago, won the title Most Popular Financial Product of the Year 2006. This victory is all
the more valuable because it was decided by the public through voting over the Internet. In the Business Insurance category, a professional jury comprised
of financial experts and journalists gave first place to another Česká pojišťovna product: business interruption insurance.
Adding to the joint success of the Česká pojišťovna Group were three more “gold medals” that went to eBanka – then a subsidiary of ČP – in the Universal
Banking Products category (for the Personal Account), the Electronic Banking category (for Direct Banking), and the Bank Cards category (for Bank Card
Locking). Penzijní fond České pojišťovny, the largest pension fund in the Czech Republic, won in the Golden Crown competition for the first time, taking
third place in the Pension Funds category.
June
Motor Liability Insurance from Česká pojišťovna with Live Internet Guide
As of June 1st, Česká pojišťovna offers motor third party liability (MTPL) insurance via the Internet, giving clients a new, more flexible and comfortable
alternative to the standard over-the-counter method of taking out the insurance.
Česká pojišťovna Declared Insurer of the Year
Česká pojišťovna won the top prize in the category Insurance Company of the Year 2005, awarded by the Czech Insurance Brokers Association, and was
a front runner in all remaining competition categories. In this year’s sixth annual event, 37 insurance companies active on the Czech market were judged by
top brokerage firms.
July
Česká pojišťovna Counters Sell ČP INVEST Mutual Funds
After obtaining the necessary consent from the Czech National Bank, as of July 20th selected counters of Česká pojišťovna began offering mutual funds
from the subsidiary ČP INVEST. The move brought nine mutual funds managed by this investment company closer to clients.
Single-Premium Endowment Life Assurance Back in Česká pojišťovna Product Offering
Česká pojišťovna revived a product that it successfully offered several years ago. Single-premium endowment life assurance is back in an innovated
version as a product which is very simple and which enables clients to secure their loved ones in the event of the insured’s death, and at the same time
offers attractive appreciation of the invested funds.
August
Česká pojišťovna Executive Board Gets New Member
An Executive Board Member for Marketing and Client Segmentation was added to the Executive Board of Česká pojišťovna. Pavel Řehák was appointed
by the Board of Directors to fill the new position as of 11 September 2006.
ANNUAL REPORT 2006 15
September
Česká pojišťovna Motor Liability Insurance Available at Post Offices
As of September 1st, motorists can obtain motor third-party liability (MTPL) insurance from Česká pojišťovna at any of Czech Post’s 3,400 teller windows.
It was one year ago that both companies signed a 12-year commercial representation agreement. Based on this agreement, post offices already sell life
and non-life insurance products from Česká pojišťovna. In the future, this line-up will expand further with the addition of travel insurance and stand-alone
accident and liability insurance policies.
Česká pojišťovna to Sell Stake in Blue Pyramid
Česká pojišťovna and Komerční banka entered into an agreement on the sale of Česká pojišťovna’s 10% stake in Modrá pyramida stavební spořitelna, a.s.
(the Blue Pyramid Building Society). The purchase price is EUR 24 million, or approximately CZK 677 million.
October
Ladislav Bartoníček Heads Up International Expansion of PPF Insurance Arm
As of 1 October 2006, PPF Group changed the way its insurance activities are managed. Ladislav Bartoníček, in addition to his role of Chairman
of Česká pojišťovna, will assume responsibilities for leading the strategic development and formation of PPF’s newly created holding structure covering
PPF’s activities in the areas of insurance, pension funds, asset management and mutual funds.
Lard Friese coming on board as Chief Executive Officer
In October 2006, ten years on, there was a major change in ČP’s leadership, with Lard Friese coming on board as Chief Executive Officer. An internationally
recognized manager, Mr. Friese served in the international insurance groups NOG and AEGON for 15 years. His principal aim is to execute the new
development strategy of Česká pojišťovna.
Česká pojišťovna Sells Stake in Blue Pyramid
Česká pojišťovna sold its 10% stake in the Blue Pyramid building society. This occurred upon approval of the transaction by the Czech National Bank and
the Office for the Protection of Competition.
Česká pojišťovna Sells eBanka
Česká pojišťovna transferred its shares of eBanka to Raiffeisen International Bank-Holding AG. In doing so, it implemented an agreement that it signed in
late July with the new Austrian shareholder of its former subsidiary. The price for which Česká pojišťovna sold eBanka totaled EUR 130 million, or roughly
CZK 3.7 billion.
Česká pojišťovna Declared Insurer of the Year for Third Time
For the third time in a row, Česká pojišťovna won first place in the Insurance Company of the Year category in the MasterCard Bank of the Year 2006
competition. In a field of 19 competing insurance companies, it also scored with its DYNAMIK Plus product, which placed second in the Life Assurance
category. Also successful was Penzijní fond ČP, which was declared Pension Fund of the Year.
November
Česká pojišťovna Becomes Member of European Road Safety Charter
Česká pojišťovna joined the European Road Safety Charter in Brussels, becoming the only Czech financial institution to support the European Commission
initiative. The Charter aims to reduce the number of traffic accident deaths to one half its current level by 2010. Last year 1,127 people died on the Czech
Republic’s roads, while in the EU as a whole roughly 40,000 traffic deaths are reported annually.
16 ANNUAL REPORT 2006
December
Česká pojišťovna Declared Most Popular Insurer, Wins Zlatý Měšec
In the Zlatý Měšec 2006 competition, Česká pojišťovna repeated last year’s performance in the same competition, receiving the highest number of votes
from readers of the Měšec.cz server in the category Insurance Company. Its subsidiaries were also successful. The pension fund Penzijní fond ČP took
first place in the survey, and ČP INVEST was second.
Česká pojišťovna Scores Double Win at Internet Effectiveness Awards 2006
Česká pojišťovna’s on-line insurance with video guide won in the on-line banking and finance category. At the same time, Česká pojišťovna received
an award for innovation, making it the only contest participant to win in its category and also gain the innovation prize.
2007
February
One Month After the Gale, Česká pojišťovna Records Nearly 38,000 Claims for CZK 720 Million; Hundreds of Millions Already Paid Out to Clients
One month after the storm Kyrril, Česká pojišťovna has taken in 37,712 insurance claims for a total of CZK 720 million. Over one half of them have already
been completely settled, but new claims are still coming in every day. These late claims are mainly for recreational buildings whose owners have only now
got around to checking. Česká pojišťovna has already paid out hundreds of millions of Czech Crowns in Kyrril storm damages and estimates that the final
numbers will be 40,000 claims for a total of CZK 800 million. As of the Annual Report compilation date (30 March 2007), 42,000 storm claims had been
filed for a total amount of CZK 819 million. Reinsurers’ share is CZK 464 million of that figure.
Česká pojišťovna Wins Rhodos Image Prize
Česká pojišťovna placed first in the insurance companies category in the jubilee tenth annual national Rhodos Image Prize competition. The prize, which
goes to the company with the most compelling image, was awarded based on a survey conducted among managers from across the country.
March
Česká pojišťovna Internet Insurance Sales Rise 130%
The Internet market in the Czech Republic grew by 40% and this year, according to independent forecasts, the number of customers using it is to surpass
two million. Česká pojišťovna, too, has existing and new clients who wish to shop over the Internet and not only for the usual goods such as electronics and
books – as the numbers showing growth in on-line insurance would indicate, they want to take advantage of alternative channels to buy insurance as well.
Awards
Česká pojišťovna’s life assurance product DYNAMIK won the title Most Popular Financial Product of the Year 2006, based on public voting over the
Internet. An expert jury comprised of financial experts and journalists awarded first place in the Business Insurance category to another product of Česká
pojišťovna – business interruption insurance.
Česká pojišťovna was declared Insurance Company of the Year for the third time in a row in the MasterCard Bank of the Year 2006 contest. Out of a field
of 19 insurance companies, we also scored with our product DYNAMIK Plus, which ranked second in the Life Assurance category.
In the Zlatý Měšec 2006 competition, Česká pojišťovna, like last year, gained the highest number of votes from Měšec.cz server readers in the Insurance
Company category.
Česká pojišťovna won first place in the insurance companies category in the jubilee tenth annual Rhodos Image Prize national competition. The prize for
the most compelling image was awarded to us based on the results of a survey conducted among managers from across the Czech Republic.
The Česká pojišťovna Brand
An annual survey conducted by the independent marketing agency Millward Brown showed that our brand-building goals were met. Česká pojišťovna
became even more attractive for younger clients and higher income groups alike, while at the same time maintaining its position in other demographic
groups. In terms of perceived attractiveness in the Czech population, Česká pojišťovna maintains first place, and this is also confirmed by the fact that our
brand has long enjoyed the highest commercial potential rating.
Current Rating of Česká pojišťovna
Agency Rating
Standard & Poor’s Financial Strength Rating BBB/Stable/ – (since 2 April 2007)
Moody’s Baa3, outlook positive (since 10 March 2006; Baa3, outlook stable since 30 June 2003)
ANNUAL REPORT 2006 17
WE LIVE IN EXCITING TIMES. WE ARE WITNESSING MANYREVOLUTIONARY DISCOVERIES AND EVENTS. OUR LIVES AREFASTER-PACED AND WE ARE LIVING THEM TO THE FULLEST.THUS, OUR TIME IS BECOMING EVER MORE VALUABLE.
Česká pojišťovna has what is by far the most extensive internal sales network in the Czech Republic and we currently
administer over 10 million insurance contracts. At the same time, Česká pojišťovna has the broadest offering of insurance
via telephone and Internet in the Czech Republic. The clients most likely to take out insurance on-line are those in the 30–39 age
group. The Česká pojišťovna Client Center takes around 10,000 client calls per day.
ANNUAL REPORT 2006 19
Basic Indicators
Highlights from the financial statements Units 2006 3) 2005 3) 2004 3) 2003 2002 2001
Total assets CZK million 121,285 131,558 122,081 120,655 115,560 108,626
Basic share capital CZK million 4,000 2,981 2,981 3,412 3,412 3,412
Shareholders’ equity CZK million 17,077 20,863 15,965 15,455 15,684 11,108
Financial placements (investments) CZK million 104,381 113,883 106,091 106,344 102,480 93,027
Dividend per share 5) CZK 2,684 0 670 1,178 340 1,140
Retained earnings CZK million 9,202 9,147 6,947 4,669 4,227 1,269
Net earnings CZK million 8,293 4,641 1,864 3,138 4,047 4,180
Performance indicators
Total gross premiums written 3) CZK million 37,836 39,968 39,644 37,875 33,280 31,036
– non-life insurance CZK million 24,635 24,966 23,804 23,581 20,909 19,026
– life assurance CZK million 13,201 15,002 15,840 14,294 12,371 12,010
Total claims paid, gross CZK million 23,158 22,310 22,586 25,628 22,896 18,625
– non-life insurance CZK million 13,628 9,487 8,830 15,928 14,822 9,382
– life assurance CZK million 9,530 12,823 13,756 9,700 8,074 9,243
Total technical provisions CZK million 88,369 87,652 83,610 89,532 87,854 81,055
– life assurance provision CZK million 66,499 65,865 64,002 62,187 62,276 61,613
– other technical provisions CZK million 21,870 21,787 19,608 27,345 25,578 19,442
Number of claims processed thousand 1,131 1,275 1,481 1,261 1,286 1,298
Number of policies 1) thousand 10,345 12,994 13,315 13,897 14,282 11,187
Other figures
Market share in terms of premiums written % 33.1 35.9 36.7 36.2 37.2 39.2
– non-life insurance % 36.4 37.4 37.2 37.1 37.8 37.4
– life assurance % 28.1 33.4 36.0 34.8 36.2 42.3
Number of employees number 5,251 5,562 6,224 6,585 6,425 6,158
Number of agencies number 70 71 80 74 74 74
Number of regions number 7 7 8 8 8 8
Performance ratios
ROA % 6.8 3.5 1.5 2.6 3.5 3.8
ROE % 48.6 22.2 11.7 20.3 25.8 37.6
Shareholders’ equity per share CZK 4,269 6,999 5,356 4,530 4,597 3,256
Earnings per share 4) CZK 20,733 1,557 625 920 1,186 1,225
Premiums written per employee CZK million 7.2 7.1 6.4 5.8 5.2 5.0
1) In 2002, the method used to report the number of policies changed – numbers given are numbers of “principal risks”.
2) 2005 and 2006 figures are in accordance with IFRS and 2004 figures are adjusted according to IFRS for the reason of comparability; figures for all other years are in accordance with CAS.
3) Figures for 2004 – 2006 are gross earned premiums according to IFRS.
4) Change in nominal share value from CZK 1,000 to CZK 100,000 per share.
5) The General Meeting of 30 June 2006 decided to a pay a dividend of CZK 2,684 per share and on 11 December 2006 the sole shareholder decided on payment of a CZK 87,500-per-share dividend (following increase of nominal share value from
CZK 1,000 to CZK 100,000 per share).
Financial Highlights
2001
2002
2003
2004
2005
2006
0 4 8 12 16
12.0
12.4
14.3
15.8
15.0
13.2
2001
2002
2003
2004
2005
2006
0 20 40 60 80
61.6
62.3
62.2
64.0
65.9
66.5
0 5 10 15 20 25
2001
2002
2003
2004
2005
2006
19.0
20.9
23.6
23.8
25.0
24.6
0 30 60 90 120 150
2001
2002
2003
2004
2005
2006
108.6
115.6
120.7
122.1
131.6
121.3
0 5 10 15 20 25
2001
2002
2003
2004
2005
2006
11.1
15.7
15.5
16.0
21.0
17.1
0 2 4 6 8 10
2001
2002
2003
2004
2005
2006
4.2
4.0
3.1
1.9
4.6
8.3
Life Gross Premiums Written (CZK billion) *) Life Assurance Provision (CZK billion) *)
Non-life Gross Premiums Written (CZK billion) *) Total Assets (CZK billion) *)
Shareholders’ Equity (CZK billion) *) Profit for the Accounting Period (CZK billion) *)
*) Figures from 2004 and later years are according to IFRS.
20 ANNUAL REPORT 2006
ANNUAL REPORT 2006 21
Based on information obtained from publicly accessible sources and information known to the Company, Česká pojišťovna is part of a corporate group.
PPF Group N.V., whose identification information is set forth below, is the ultimate parent company of said group.
The Controlling Person of the Company is Petr Kellner, who holds a 95% stake in the voting rights associated with the shares of PPF Group N.V. (The
remaining 5% share is held by Jiří Šmejc.)
PPF Group N.V. is the sole shareholder of CZI Holdings N.V.
CZI Holdings N.V. is a legal entity that was, as at 31 December 2006, and is, as at the compilation date of this report, the sole shareholder of Česká pojišťovna.
PPF Group N. V.
Date of inception: 29 December 1994
Registered office: Herengracht 450 – 454, 1017 CA Amsterdam, Netherlands
Netherlands, World Trade Center, Tower B, Level 9, Strawinskylaan 933, 1077 XX Amsterdam
(change in registered office effective 1 April 2007)
File number at the Register of the Amsterdam
Chamber of Commerce and Industry: 33264887
Basic share capital: EUR 667,380
Principal business: holding company activities and financing thereof
CZI Holdings N.V.
Date of inception: 6 April 2006
Registered office: Herengracht 516, 1017 CC Amsterdam, Netherlands
Netherlands, World Trade Center, Tower B, Level 9, Strawinskylaan 933, 1077 XX Amsterdam
(change in registered office effective 1 April 2007)
File number at the Register of the Amsterdam
Chamber of Commerce and Industry: 34245976
Basic share capital: EUR 100,000,000
Principal business: holding company activities and financing thereof
Description of Group Structure, Position of Česká pojišťovna and Selected Group Companies
Our paths lead in an infinite number of directions.
We have places where we feel at home, places we would rather not leave – and at other times we feel
an urgent need to set off on new roads, to go farther and higher.
But there is one thing we all have in common – some times, at least,
we need to feel the security of a home base and a clear view of the future.
Česká pojišťovna joined the European Road SafetyCharter in Brussels, becoming the only Czech financialinstitution to support the European Commission initiative.The Charter aims to reduce the number of traffic accidentdeaths to one half its current level by 2010.
Starting in August 2006, Česká pojišťovna began offeringa new service – roadside assistance for all participants ina traffic accident. We offer comprehensive post-accidentservices to parties who suffer injury or property damage in an accident caused by a client of Česká pojišťovna.
Description of Selected Companies of Česká pojišťovna Group
Below we provide information on companies that form part of the Česká pojišťovna consolidated group and are of fundamental importance either for the
Company’s business or its capital position. Information on certain other companies that belong to the same group as Česká pojišťovna may also be found
in the Notes to Financial Statements for the Year Ended 31 December 2006, in the section describing subsidiaries and associates of Česká pojišťovna.
AB – CREDIT a.s.
This company ceased to be part of the Group on 13 June 2006 when its shares were transferred out of the Group.
Principal businesses: management and collection of problematic receivables, administration and management of equity stakes
Date of inception: 2 September 1991 (name at inception was AB – REAL, akciová společnost)
Basic share capital: CZK 2,800 million
Česká pojišťovna stake: indirect stake through FOX Credit Services Ltd., with its registered office at Florinis, 11, Office No. 504,
Nicosia, Republic of Cyprus, the sole shareholder of AB – CREDIT a.s. until 12 June 2006
In December 2003, the sole shareholder of AB – CREDIT a.s. (“AB – CREDIT”), which at that time was Česká pojišťovna, officially adopted a plan to merge
the company with ČP finanční služby a.s. under Section 69 of the Commercial Code. The surviving company of the merger was AB – CREDIT and
ČP finanční služby a.s. was the merged company. The merger was recorded in the Commercial Register effective from 8 January 2005. As a result
of the merger, the basic share capital of AB – CREDIT was increased to TCZK 2,081,300.
By a decision of the sole shareholder FOX Credit Services Ltd. dated 15 May 2006, the basic share capital of AB – CREDIT a.s. was increased to TCZK 2,800,000
by issuing one registered share of common stock with nominal value CZK 718,700,000, in documentary form.
AB – CREDIT manages extensive debt portfolios, which it obtains mostly through successful participation in public tenders. The receivables market is the
principal sector in which AB – CREDIT pursues its investment plans. In past years, which saw the greatest expansion of the debt portfolio, whose aggregate
face value in early 2006 exceeded CZK 82 billion, AB – CREDIT became the largest private investor and manager in this sector of the domestic market.
AB – CREDIT is equipped with high-quality expertise and financial resources. In 2006, it built on its past accomplishments by expanding its management
portfolio and by collecting debts. As at the end of the year in question, its collections exceeded by nearly one forth the amount invested and in the future
the return can be realistically expected to be double the original investment.
CP Reinsurance company Ltd.
Principal business: reinsurance services
Date of inception: 21 May 2004
Basic share capital: CYP 24 million
Česká pojišťovna stake: 100%
CP Reinsurance company Ltd. (“CP Re”) with its registered office in Nicosia, Republic of Cyprus, is a 100% subsidiary of Česká pojišťovna. It was
established in 2004 and has been in operation since the second half of that year. The objective for which this company was established is to gradually
unify the reinsurance cover of insurance companies in the Česká pojišťovna Group, bringing them under one roof, and to provide reinsurance cover to
companies outside the Group as well. CP Re was established under the laws of the Republic of Cyprus and has received a reinsurance license from the
local supervision body.
During 2006, CP Re focused its activities on members of the Česká pojišťovna Group. In the future, it plans to expand its business. For the time being,
CP Re focuses on reinsuring non-life property risks.
24 ANNUAL REPORT 2006
CP Strategic Investments B.V.
Principal business: administration of ownership interests in subsidiaries
Date of inception: 6 December 1999
Basic share capital: EUR 25 million
Česká pojišťovna stake: 100%
In 2006, CP Strategic Investments B.V. sold from its portfolio an equity stake in První Callin agentura a.s., which acts as an insurance intermediary, to
Česká pojišťovna a.s. From PPF Group N.V. the company acquired a direct stake in Česká pojišťovna Ukrajina – životní pojišťovna (Закрите акцiонерне
товариство “Чеська страхова компанiя Україна – Страхування життя“).
In addition, the company owns 100% of Česká poisťovňa - Slovensko, akciová spoločnosť as well as an indirect stake in ČP Services, s.r.o., a 100%
subsidiary of Česká poisťovňa – Slovensko, akciová spoločnosť.
Česká poisťovňa – Slovensko, akciová spoločnosť
Principal business: insurance services, reinsurance
Date of inception: 12 July 1993
Basic share capital: SKK 550 million
Česká pojišťovna stake: indirect stake through CP Strategic Investments B.V.
Česká poisťovňa – Slovensko, akciová spoločnosť (“ČPS”) is a composite insurer offering comprehensive life and non-life insurance services in the Slovak
Republic.
2006 was a successful year for the company. Life assurance premiums written surpassed SKK 1 billion. Net earnings grew to SKK 85.9 million. The estimated
market share as at 31 December 2006 increased to 6.72% in terms of premiums written and 8.98% in terms of new business.
The biggest performer in life assurance was DYNAMIK, which grew over 2.5-fold compared to the previous year. Premiums written totaled SKK 1.3 billion.
The share of endowment life assurance in the life portfolio continues to grow (driven by DYNAMIK).
In terms of the life assurance structure in the years to come, we expect to see ongoing growth in the share of overall premiums written, especially
in unit-linked assurance and pension (annuity) assurance.
In the non-life segment, motor insurance will continue to be the largest driver of premiums written. Sale of mandatory contractual insurance through
electronic distribution channels (telephone, Internet), a segment in which ČPS is the only player in the Slovak market, will receive increased support,
and the offering of insurance products available through alternative distribution channels will be gradually expanded.
The implementation of the planned changes should lead to an extended product portfolio and increased competitiveness in individual insurance classes.
In sales, ČPS will endeavor to maintain its relationships with existing partners and make contact with new partners for the purpose of expanding the sales
network.
ANNUAL REPORT 2006 25
Česká pojišťovna ZDRAVÍ a.s.
Principal business: commercial private health insurance
Date of inception: 17 June 1993
Basic share capital: CZK 100 million
Česká pojišťovna stake: 100%
Česká pojišťovna ZDRAVÍ a.s. (“ČP ZDRAVÍ”) was established by Česká pojišťovna and Vereinte Krankenversicherung, the second largest private health
insurer in Germany.
ČP ZDRAVÍ was the first insurance company to provide private health insurance products in the Czech market – before that, they were simply unavailable.
The company closely collaborates with other members of the financial group to offer private health insurance bundled together with other Česká pojišťovna
Group products.
In 2006, ČP ZDRAVÍ posted total gross premiums written of CZK 190.1 million and its net earnings for the 2006 accounting period reached CZK 47.9 million.
Major drivers of earnings were lower claims paid costs and a decline in other technical provisions.
ČP ZDRAVÍ’s strategic objectives for the next year are to maintain its position in the private health insurance market, grow the policy portfolio, and maintain
the current level of profitability.
Češskaja strachovaja kompanija o.o.o.
Principal business: insurance
Date of inception: 18 January 2002
Basic share capital: RUB 86.7 million
Česká pojišťovna stake: 100%
Češskaja strachovaja kompanija o.o.o. (“ČP Russia”) obtained an insurance license in July 2002 and starting in September 2002 it began selling its first
product – mixed life assurance. In January 2006, in accordance with new Russian legislation, the company obtained a new license as a life insurer with
a wide range of life assurance products. It is also involved in selling accident insurance to go with consumer loans from Home Credit & Finance Bank o.o.o.
In developing the distribution network, the company is emphasizing building its own network. It has 409 agents, but also works with 87 brokerage firms. It
has 12 regional branches in the Russian Federation. In addition to the existing agencies in Moscow and the Moscow metropolitan area and the 12 existing
regions, the company plans to open another 10 regional branches in 2007.
The life assurance market in the Russian Federation is developing and demand for insurance is on the rise. Insurance companies are beginning to compete
with one another in the life assurance segment. Companies with various levels of foreign ownership are becoming serious contenders for Russian companies’
positions. According to 2006 data from the Federal Service for Insurance Supervision, ČP Russia was 16th among the top 20 life assurance companies in the
RF. This makes it the fourth most successful company with foreign capital participation involved in the Russian life assurance market.
In 2006, the company further developed its collaboration with Home Credit & Finance Bank o.o.o. in providing insurance to consumer loan applicants and
also in other areas of collaboration. In early 2007 these services were launched at 11,500 sales locations of the bank and its partners.
2006 also saw the beginning of sales collaboration with the State enterprise Russian Post. By the end of the first quarter of 2007, the company plans to begin
selling insurance at over 460 post offices in 52 regions of Russia.
In implementation of the company’s strategic development plan, 2006 also saw commencement of preparations for developing other alternative sales
channels which are to be opened during 2007.
26 ANNUAL REPORT 2006
ČP DIRECT, a.s.
Principal business: acting as an insurance agent, consulting
Date of inception: 1 January 1998
Basic share capital: CZK 80 million
Česká pojišťovna stake: 100%
Based on an application dated 25 February 2005, the company was recorded in the Register of Insurance Intermediaries and Independent Loss Adjusters
under number 000561PA as an insurance agent pursuant to Section 7 of Act No. 38/2004 Coll. on Insurance Intermediaries and Independent Loss
Adjusters and amending the Trades Licensing Act. The company is contractually authorized to act as an intermediary for Česká pojišťovna a.s.
The insurance agency activity of ČP DIRECT, a.s. is focused primarily on non-life insurance – motor damage insurance and motor third party liability
insurance. To develop its business the company has built up a network of cooperating insurance intermediaries, mostly car and truck dealerships.
The company continues to develop the distribution of other insurance products such as property and casualty insurance, through real estate agencies.
ČP finanční holding a.s.
This company ceased to be part of the Group on 21 December 2006 when its shares were transferred out of the Group.
Principal business: managing subsidiaries in the field of collective investment
Date of inception: 1 October 1999
Basic share capital: CZK 180 million
Česká pojišťovna stake: 100%
The principal business of ČP finanční holding a.s. in 2005 and 2006 was the management of the subsidiary ČP INVEST investiční společnost, a.s., a mutual
funds company.
ČP finanční servis a.s. (in liquidation)
Principal business: developing projects in the field of finance
Date of inception: 1 October 1999
Basic share capital: CZK 75 million
Česká pojišťovna stake: 100%
Effective 1 August 2006, the sole shareholder acting with the powers of the General Meeting, decided to wind up the company with liquidation and
appointed a liquidator. On 11 December 2006, the company transferred its 100% stake in Finansovy servis o.o.o. to Česká pojišťovna a.s.
ANNUAL REPORT 2006 27
ČP INVEST investiční společnost, a.s.
Principal business: collective investment, management of mutual funds
Date of inception: 19 November 1991
Basic share capital: CZK 91 million
Česká pojišťovna stake: 100%
The sole shareholder of ČP INVEST investiční společnost, a.s. (“ČP INVEST“), is Česká pojišťovna a.s. ČP INVEST is one of the largest investment
companies in the domestic market with CZK 4.7 billion in net assets under management.
Net mutual fund sales in 2006 totaled CZK 1,007 million. The earnings result as at 31 December 2006 was CZK 5.879 million.
In 2006, ČP INVEST opened three new mutual funds, merged two bond funds, expanded its product range by adding products such as the Regular
Investments Program and the Equities Investment Program, and obtained additional distribution channels for selling its products.
In the Zlatý měšec 2006 survey, ČP INVEST was ranked second in the category “Most Popular Investment Company.”
eBanka, a.s.
This company ceased to be a part of the Group on 24 October 2006 when its shares were transferred out of the Group.
Principal business: banking services
Date of inception: 29 December 1990 (established as Agrobanka Olomouc, akciová společnost)
Basic share capital: CZK 1,184.5 million
Česká pojišťovna stake: 100%
eBanka is a universal bank for higher-income individuals and small and medium-sized enterprises. It offers its clients a complete range of financial products
and services with an emphasis on the use of direct banking methods. Every year, eBanka wins a number of prestigious awards and titles in a variety of
competitions, both in the Czech Republic and abroad, in recognition of the high quality and technological level of its products and services.
eBanka was formed in October 1997 as Expandia Banka, which was the first in the Czech banking market to launch a comprehensive direct banking
service. In 2000, Česká pojišťovna bought into Expandia Banka. That marked the beginning of a new expansive strategy for the bank. As part of this new
strategy, the bank changed its name and has been operating as eBanka since 2001. Thanks to the new sales and marketing strategy, eBanka started
seeing dynamic growth in both key financial indicators and number of clients. In 2003 – 2005, eBanka underwent a far-reaching reorganization, completing
its transformation from an all-Internet bank into a universal bank with a full range of services and products and with its own network of branches for
serving its two key segments, Private Individuals (PI) and Small and Medium-sized Enterprises (SME).
In October 2006, eBanka joined the Raiffeisen International financial group. Currently integration with Raiffeisenbank is ongoing, to culminate in a merger in 2008.
As at 31 October 2006 eBanka served nearly 117,000 clients, i.e. holders of Personal or Company Accounts. eBanka has 42 branches for the PI segment
and 10 Business Centers for the SME segment. eBanka recorded growth in all key financial indicators in 2006. Total assets at 31 October 2006 stood at
CZK 19.4 billion, client deposits totaled CZK 16.1 billion, and client loans (gross) showed a balance of CZK 10.6 billion. As at 31 October 2006, eBanka
posted pre-tax earnings of CZK 8.2 million. The basic share capital was CZK 1.184 billion and capital adequacy was 9.83%.
eBanka’s high-quality products and services brought it a number of highly coveted awards in 2006. The Bank of New York granted eBanka the Excellence in
Straight Through Processing Award 2005 for exceptional quality in processing international payments denominated in USD and Deutsche Bank AG gave it the
same award for exceptional quality in processing international payments denominated in EUR. In the Golden Crown 2006 competition for the best banking
products in the market, eBanka won three top placements for its Direct Banking, Personal Account, and Bank Card Locking products, respectively. In the Best
Bank of 2006 contest, the trade journal Personal Finance gave eBanka first place in the Internet Banking category and second place in the Banks category. In the
prestigious MasterCard Bank of the Year 2006 competition, eBanka won the title Account of the Year 2006 and in a public vote it won second place in the category
Most Trustworthy Bank of the Year 2006. In a similar public vote for the most popular bank in the Czech market, Zlatý měšec 2006, eBanka took bronze.
28 ANNUAL REPORT 2006
Home Credit B.V.
This company is no longer a part of ČP Group due to a split-off of Česká pojišťovna a.s. which took effect on 4 August 2006.
HC Holding a.s.
This company is no longer a part of ČP Group due to a split-off of Česká pojišťovna a.s. which took effect on 4 August 2006.
Home Credit a.s.
This company is no longer a part of ČP Group due to a split-off of Česká pojišťovna a.s. which took effect on 4 August 2006.
Home Credit International a.s.
This company is no longer a part of ČP Group due to a split-off of Česká pojišťovna a.s. which took effect on 4 August 2006.
Home Credit Slovakia, a.s.
This company is no longer a part of ČP Group due to a split-off of Česká pojišťovna a.s. which took effect on 4 August 2006.
Home Credit & Finance Bank o.o.o.
This company is no longer a part of ČP Group due to a split-off of Česká pojišťovna a.s. which took effect on 4 August 2006.
ANNUAL REPORT 2006 29
Penzijní fond České pojišťovny, a.s.
Principal business: pension fund
Date of inception: 19 September 1994
Basic share capital: CZK 214 million
Česká pojišťovna stake: 100%
Penzijní fond České pojišťovny, a.s., (“PF ČP”) has been in the pension funds market since 1994 and entered its second decade in business as the
unchallenged top pension fund in the Czech Republic.
Last year, the fund accelerated its already dynamic growth rate. High portfolio returns combined with reduction of the cost margin enabled the fund
to post record earnings in 2006, exceeding CZK 1 billion. It also substantially grew the volume of client savings, which reached CZK 30.2 billion in December.
The number of clients is also growing steadily, rising 12% in the past year to reach 974,000 people at the end of last year.
Česká pojišťovna sells PF ČP pension plans through its own network as well as through independent distribution firms. Last year, this multi-channel
distribution strategy and focus on the country’s largest employers yielded the fund 182,000 new contracts, i.e. 12,000 contracts more than in 2005. The
rising demand for private pension insurance is driven primarily by high returns, increasing involvement on the part of employers, as well as growing public
awareness of the consequences of not reforming the pension system. The corporate segment, in which our pension fund is also the market leader, also
represented a significant proportion of the business performance results. Last year the number of clients whose employers contribute to their pension
insurance plans reached 218,000.
The overall very good performance last year is underlined by awards received by the fund: in the spring the fund topped the pension funds category of the
prestigious CZECH TOP 100 listing. In October 2006, PF ČP defended its Pension Fund of the Year title by winning again in its category of the MasterCard
Bank of the Year 2006 competition. Then, in December, for the third time in a row, the fund received the highest ranking in the pension funds category
of the Zlatý Měšec 2006 survey for the most popular financial institution, organized by the Měšec.cz financial server.
PPF banka a.s.
As of 20 December 2006, this company is no longer a part of ČP Group due to transfer of its shares from Česká pojišťovna a.s. to PPF Group N.V.
Principal business: banking services
Date of inception: 31 December 1992
Basic share capital: CZK 769 million
Česká pojišťovna stake: 92.76%
PPF banka a.s. (“PPF banka”) was established under a Founders’ Agreement dated 3 December 1992 without subscription of shares, under the business
name ROYAL BANKA CS, a.s. On 14 December 1994, a general meeting of the bank decided on a change in the business name to První městská banka, a.s.
and a general meeting held on 23 June 2004 decided to change the bank’s name to PPF banka effective 1 September 2004.
The principal focuses of PPF banka are financing for large and mid-size corporations, municipal finance, consulting, and investment services, with a focus
on securities trading. The bank continues to provide high-quality client care throughout the service range.
In 2006, according to the audited financial figures, PPF banka posted net earnings of CZK 281.1 million, its total assets figure exceeded CZK 24 billion, and
return on equity (ROE) reached 20.59%.
In addition to operations in the domestic government bond market and the Prague Stock Exchange, PPF banka engaged in trading on many international
global and local debt and capital markets.
The bank’s corporate lending operations were successful. The bank focused primarily on medium-sized and large corporations with Czech capital.
On 20 December 2006, pursuant to an Agreement on Transfer of Securities for Consideration dated 19 December 2006, Česká pojišťovna a.s. transferred
all shares issued by PPF banka a.s. and held by Česká pojišťovna a.s., i.e. a 92.76% equity stake, to PPF Group N.V., with its registered office at
Herengracht 450 – 454, 1017 CA Amsterdam, Netherlands, reg. no.: 33264887.
30 ANNUAL REPORT 2006
PPF Asset Management a.s.
As of 27 September 2006, the company is no longer a part of ČP Group due to transfer of the shares from PPF banka a.s. to CZI Holdings N.V.
Principal business: investment services
Date of inception: 3 December 1997
Basic share capital: CZK 52 million
Česká pojišťovna stake: indirect stake through PPF banka a.s.
Providing professional, top-quality asset management services to institutional investors and investment consulting services continued to be the principal
focus of PPF Asset Management in 2006. PPF Asset Management is the only company in PPF Group that manages primarily portfolios of PPF Group
institutional investors (life and non-life insurance, supplemental pension insurnace, reinsurance, etc.), all under contracts with the customers. In 2006, the
company’s efforts focused on further increasing service quality. In particular, the spectrum of investment instruments used in portfolio management was
broadened further, and much emphasis was also placed on taking a highly individualized approach to each client.
2006 was a very good year for the company and a very successful one in many respects. The company posted before-tax earnings of CZK 60 million, and
assets under management at year end 2006 stood at nearly CZK 129 billion, up over 10% from the previous year. This indicator makes our company one of
the largest and most successful managers of customer assets in the Czech Republic.
Finansovy servis o.o.o.
Principal business: consulting
Date of inception: 17 December 2001
Basic share capital: RUB 100,000
Česká pojišťovna stake: 100%
The stake in Finansovy servis o.o.o. was transferred from ČP finanční servis a.s. in liquidation to Česká pojišťovna a.s. in December 2006.
FOX Credit Services Ltd.
Principal business: administration and trading in receivables and other instruments
Date of inception: 3 June 2005
Basic share capital: CYP 19.3 million
Česká pojišťovna stake: 100%
INFOBOS LLC.
This company is no longer a part of ČP Group due to a split-off of Česká pojišťovna a.s. which took effect on 4 August 2006.
ANNUAL REPORT 2006 31
LIKO – Technopolis
This company is no longer a part of ČP Group due to a split-off of Česká pojišťovna a.s. which took effect on 4 August 2006.
První Callin agentura a.s.
Principal business: insurance agent
Date of inception: 10 December 2003
Basic share capital: CZK 3 million
Česká pojišťovna stake: 100%
The company focuses on selling insurance products exclusively using direct sales methods, i.e. by telephone and over the Internet. It holds a non-exclusive
agent license. In 2006, the company commenced active operation as a licensed insurance agent (in the previous year, it acted as a bound insurance
intermediary and offered only one product of Česká pojišťovna) and expanded its offering to include products of other insurance companies. In addition
to motor third party liability insurance from Česká pojišťovna, the company began to offer the same product from the insurance companies Generali,
Kooperativa, Triglav, Wüstenrot and ČPP. Further, it also began selling travel insurance from Česká pojišťovna and Pojišťovna Uniqa and the Internet
replaced the telephone as the company’s core sales channel.
Termizo a.s.
This company ceased to be a part of the Group on 13 June 2006.
32 ANNUAL REPORT 2006
Univerzální správa majetku a.s.
Principal business: operating non-State healthcare facilities (spa, health resort)
Date of inception: 22 October 1993
Basic share capital: CZK 1 million
Česká pojišťovna stake: 100%
The company is negotiating with a strategic partner on a possible buy-in. Although the company did achieve a modest increase in the proportion of foreigners
and other individuals not covered by mandatory State health insurance in 2006, the State’s restrictive healthcare policies are reflected in the company’s
financial performance in the form of flat revenues, while costs are driven upward by inflation. Improved payment patterns in 2006 led to reduction in
outstanding receivables from CZK 22 million to CZK 11 million.
REFICOR s.r.o.
Principal business: administrative management and organizational-economic consulting services
Date of inception: 12 August 1997
Basic share capital: CZK 100,000
Česká pojišťovna stake: 100%
Part of ČP Group since 13 March 2006.
ČP Services s.r.o.
Principal business: acting as an insurance agent
Date of inception: 28 October 2006
Basic share capital: SKK 200,000
Česká pojišťovna stake: indirect stake through Česká poisťovňa – Slovensko a.s.
ANNUAL REPORT 2006 33
When we meet, we enhance one another.
We fill in the missing pieces of each other’s mosaics through our experience
and opportunities. We add to each other’s strengths.
Česká pojišťovna, which is building on 180 years of tradition
and experience in providing insurance services,
is part of PPF, the biggest financial group in the Czech Republic.
In April 2007, PPF Group and Generali announced a plan to create
a joint venture and a joint holding company.
Česká pojišťovna, which is the largest domestic insurance company,
and Generali, the third largest insurer in Europe,
will together form one of the largest insurance groups
in Central & Eastern Europe, with operations in 12 countries
in the initial phase.
They mirror new perspectives and push the present limits to beyond the boundaries of even the most ambitious goals.
New relationships and connections are reflections
of movement and development.
�
�
� �
Chairman
Ladislav Bartoníček
Term of office: since 3 June 2004
Born: in 1964
Domicile: Prague 4, Slepá II/458
Education: Czech Technical University,
Rochester Institute of Technology
Experience: ČKD Elektrotechnika,
PPF investiční společnost a.s.
Vice Chairman
Ladislav Chvátal
Term of office: since 26 September 2006
Born: in 1963
Domicile: Prague 9, Smidarská 742
Education: Prague University of Economics,
Faculty of Management
Experience: AVIA Praha, PPF investiční
společnost a.s., PPF Capital
Management a.s., PPF, a.s.
Member
Jiří Šmejc
Term of office: since 3 June 2005
Born: in 1971
Domicile: Prague 5, Jílovišťská 550
Education: Charles University, Faculty
of Mathematics and Physics
Experience: PUPP Consulting, s.r.o., Middle
Europe Finance, s.r.o., TV NOVA – Česká
produkční 2000, a.s., TV NOVA – CET 21, s.r.o.,
PPF, a.s.
Directors and Officers(as at the Financial Statements compilation date)
36 ANNUAL REPORT 2006
Board of Directors
Member
Jan Ježdík
Term of office: since 3 June 2004
Born: in 1955
Domicile: Liberec, Hálkova 1368/7
Education: Charles University, Faculty of Law
Experience: Česká státní pojišťovna
�
Vice Chairman
Milan Maděryč
Term of office: since 26 September 2006
Born: in 1955
Domicile: Zlín, Nad Vývozem 4872
Education: Secondary vocational with
school-leaving exam, Postgraduate study
at VUT Brno
Experience: IMPROMAT s.r.o.,
PPF investiční společnost a.s.
ANNUAL REPORT 2006 37
Supervisory Board
Vice Chairman
Aleš Minx
Term of office: since 19 May 2003
Born: in 1964
Domicile: Prague 5, Na Hvězdárně 429/28
Education: Prague University of Economics,
Faculty of Industrial Economics
Member
Marek Orawski
Term of office: since 1 March 2006
Born: in 1965
Domicile: Havířov, Hlavní třída 25/304
Education: Technical University of Ostrava,
Faculty of Electrical Engineering, Liverpool
John Moores University
Changes in the Supervisory Board during 2006 and 2007
On 25 October 2006, the Supervisory Board discussed the resignation of František Tlustoš as
Vice Chairman and Member of the Supervisory Board. It declared 31 October 2006 to be
Mr. Tlustoš’s last day in office as Vice Chairman and Member of the Supervisory Board.
At the same time it discussed the resignation of Petr Kellner as Member of the Supervisory
Board and declared 31 October 2006 as Mr. Kellner’s last day in office.
On 1 February 2007, the Board of Directors of Česká pojišťovna a.s. discussed a report of the
resignation of Ivan Kočárník as Chairman and Member of the Supervisory Board. Mr. Kočárník
resigned at his own request effective 31 January 2007. The request was discussed and approved
by the Supervisory Board on 24 January 2007.
Pursuant to a decision of the shareholder, changes were made in the Supervisory Board of Česká
pojišťovna effective 1 June 2007. Subsequently, the erstwhile Vice Chairman of the Board of
Directors of Česká pojišťovna, Milan Maděryč, became the new Chairman of the Supervisory Board.
As at the Annual Report compilation date, these changes had been recorded in the Commercial Register.
Changes in the Board of Directors
during 2007
Pursuant to a decision of the shareholder,
changes were made in the Board of
Directors effective 1 June 2007. Lard
Friese, CEO of Česká pojišťovna, was
newly appointed to the Board of Directors.
Milan Maděryč, Jiří Šmejc and Ladislav
Chvátal left the Board of Directors. Marcel
Dostal, who is also Executive Board Member
for Investment Policy at Česká pojišťovna,
also joined the Board of Directors.
�
Executive Board
Executive Board Member
for Financial Management
Lubomír Bušek
Term of office: since 26 June 2000
Born: in 1970
Domicile: Prague 4, Jeremenkova 14
Education: Czech Technical University,
Faculty of Civil Engineering, Rochester
Institute of Technology
Experience: Beton Lafarge s.r.o.
Executive Board Member
for Underwriting and Reinsurance
Miroslav Matocha
Term of office: since 1 April 2000
Born: in 1964
Domicile: Prague 9, Bří. Dohalských 140/5
Education: Prague University of Economics, Faculty of Commerce
Experience: INCOTEX s.r.o., Brno, Federal Ministry of Foreign Affairs
of the Czech Republic, KOOPERATIVA, družstevní pojišťovna a.s.,
Winterthur pojišťovna, a.s.
Executive Board Member for Life Assurance
and Information Technologies
Tomáš Machanec
Term of office: since 16 January 2006
Born: in 1963
Domicile: Prague 9, Bošilecká 1509
Education: Czech Technical University,
Faculty of Nuclear and Physical Engineering,
US Business School of Prague
Experience: IHE Praha, SEP Bratislava, ČSAD Nitra, SEP
Bratislava, ŽB TRUST, investiční společnost, Živnostenská
banka, Allianz penzijní fond, PPF investiční společnost, a.s.
38 ANNUAL REPORT 2006
Chief Executive Officer
Lard Friese
Term of office: since 1 October 2006
Born: in 1962
Domicile: Praha 6, Vilímovská 16
Education: University of Utrecht, Faculty of Law
Experience: ACNielsen Europe, AEGON
Nederland N.V., NOG Verzekeringen
�
�
�
�
Executive Board Member for Investment Policy
Marcel Dostal
Term of office: since 6 November 2006
Born: in 1969
Domicile: Prague 5, Högerova 1098/11
Education: VUT Brno, Faculty of Civil Engineering,
U.S. Business School of Prague
Experience: Rollins Hudig Hall Česká republika, s.r.o.,
Stratego Invest, a.s., PPF burzovní společnost a.s.,
Česká pojišťovna a.s., ČP INVEST investiční
společnost, a.s., PPF, a.s.
Executive Board Member
for Non-life Insurance
Jan Ježdík
Term of office: since 26 February 2002
Born: in 1955
Domicile: Liberec, Hálkova 1368/7
Education: Charles University, Faculty of Law
Experience: Česká státní pojišťovna
Executive Board Member for Sales
Petr Kopecký
Term of office: since 15 September 2003
Born: in 1970
Domicile: Horoměřice, Statenice 237
Education: Prague University of Economics,
Faculty of Economics & Public Affairs
Experience: Logica Consulting k.s.,
Logica CMG s.r.o., MARK/BBDO, a. s.,
McCANN-ERICKSON PRAGUE spol. s.r.o.
Executive Board Member for Marketing
and Client Segmentation
Pavel Řehák
Term of office: since 11 September 2006
Born: in 1975
Domicile: Mohelnice, Stanislavova 11
Education: Prague University of Economics, Faculty
of International Relations, Northwestern University,
Kellogg Graduate School of Management
Experience: McKinsey & Company, Inc.
Executive Board Member for Operations
and Human Resources
Marie Kovářová
Term of office: since 1 March 2005
Born: in 1972
Domicile: Liberec, Na Pískovně 648
Education: Charles University, Faculty of
Mathematics and Physics
Experience: McKinsey & Company, Inc.
ANNUAL REPORT 2006 39
�
� �
�
Czech Republic Macroeconomic Performance in 2006 and Forecast for 2007
Analysts from the New York-based research institution, the Conference Board, predict this year will bring a recovery of the global economy, whose Gross
Domestic Product should grow by approximately 5%.
According to a forecast published by the European Commission, economic growth this year is to be 2.7% EU-wide and 2.4% in the Eurozone.
That is 0.3 percentage points higher than was predicted in the autumn. Last year, the growth figures for EU-wide and Eurozone were 2.9% and 2.7%,
respectively, which in both cases is the highest since 2000. According to the Commission, 2006 was a “remarkable year,” in which growth was driven
primarily by domestic demand, swollen with three million new jobs created across the entire EU. Of those jobs, two million were created in the Eurozone.
The Czech Republic economy recorded the same Gross Domestic Product (GDP) figure in 2006 as it did in 2005, i.e. 6.1%, or 8.4% when GDP is not
adjusted for inflation. Like in the previous year, exports exceeded imports and the foreign trade balance was the best in the history of the Czech Republic
as an independent state. Both export and import were also at their highest absolute levels in Czech Republic history. For the second time since 1993,
export was higher than import for a foreign trade surplus. Foreign trade volume in 2006 was five times higher than it was in 1993, and export per capita
increased by more than fivefold, strengthening the Czech Republic’s global position as an exporting country. The nominal exchange rate in 2006
strengthened to CZK 28.343 for 1 Euro and CZK 22.609 for 1 U.S. Dollar.
The Czech Republic’s economic growth took place in a low-inflation environment: the inflation rate expressed in terms of the incremental growth in the
Consumer Price Index from the same month of the previous year was 1.7% at year end 2006, compared to 2.2% in 2005.
A relatively weak macroeconomic performance in 2002 was followed by three years of steadily accelerating GDP growth. The increase in GDP in 2005 was
the highest since the Czech Republic became an independent state, and in terms of absolute purchase prices, the 2006 GDP totaled CZK 3,204.1 billion.
This figure places the Czech Republic among the 25 EU countries with the fastest economic growth and strengthened the country’s standing in the
international community.
Employment continued to grow, causing the unemployment rate to fall. The average unemployment rate for 2006 was 7.1% (among persons 15 years and
older) for a year-on-year decrease of 0.8 percentage points, the lowest level since 1999.
The average gross monthly wage in 2006 was CZK 20,211, up CZK 1,226 (6.5%) year-on-year.
Consumer prices were up 2.5%. Real wage growth was 3.9%.
Board of Director’s Discussion and Analysisof the Company’s Business Activities and Financial Condition
40 ANNUAL REPORT 2006
Situation in the Czech Insurance Market
Since the early 1990s, the Czech insurance market has enjoyed uninterrupted growth. In 2006, the Czech insurance market continued to grow.
Overall premiums written by Czech Insurance Association (ČAP) member insurers grew 3.8% year-on-year to reach CZK 119.9 billion (ČAP figures from
29 January 2007). Life assurance premiums written totaled CZK 47.1 billion, up 4.8% year-on-year. Premiums written in non-life insurance grew 3.1% to
reach CZK 72.8 billion.
The Czech Republic’s overall insurance penetration, measured by the proportion of premiums written to GDP, has been rising every year. In the early
1990s it was only slightly above 2%, while in 2005 it reached nearly 4%. Still, compared to countries with well-developed insurance markets the Czech
Republic is lagging behind; the EU-25 average for this indicator is 9%. Thus, the Czech Republic’s insurance penetration reaches approximately half of the
average the EU-25.
Following a drop last year, life assurance’s share in overall premiums written in the Czech Republic reached 39.3% in 2006, bringing it back to the level it
had in 2003. Initial expectations that the Czech market would quickly narrow the gap between itself and Western markets, where life assurance’s share
is approximately 60%, have not been confirmed, and at the present rate of growth the indicator will most likely not reach 40% until 2008.
The sum of the market shares of the five largest insurers in overall premiums written in 2006 was 79%: 75% in life assurance and 86% in non-life
insurance. Česká pojišťovna continued to the most significant player in the Czech insurance market in 2006. Its share of overall premiums written reached
33.1%. In life assurance, we controlled 28.1% of the market, and in the regular premium segment Česká pojišťovna’s share was 34.1%. In non-life
insurance, Česká pojišťovna had a market share of 36.4%.
The most significant event of 2006 was the integration of financial market supervisory agencies into the Czech National Bank (ČNB). The Office of the
State Supervision in Insurance and Pension Funds of the Ministry of Finance (MF) closed its doors on 31 March 2006. The MF’s insurance supervision
mandate passed to the Czech National Bank. Other events with a significant impact on the Czech insurance market included the entry of several foreign
insurers into the Czech market (Skandia, Slovakia-based Wüstenrot, Austria-based Agra) and the acquisition of Pojišťovna Winterthur by the France-based
insurer AXA.
ANNUAL REPORT 2006 41
Company Financial Performance in 2006
State of the Company’s Assets
Česká pojišťovna is a long-standing, highly capitalized and stable company with assets totaling CZK 121.3 billion as at 31 December 2006. The Company’s
shareholders’ equity is nearly CZK 17.1 billion and the basic share capital is just under CZK 4 billion.
In terms of volume, the largest component in assets is financial assets, which stood at CZK 99.3 billion as at 31 December 2006, an increase of CZK 2.6 billion
over 2005. Within investments, the fastest-growing components were Financial assets available for sale (up CZK 3.4 billion) and Financial assets at fair
value through profit or loss (up CZK 2 billion). The value of Loans and receivables moved in the opposite direction (down CZK 3.1 billion).
The second largest component of assets, Subsidiaries and associates, was down year-on-year by CZK 12.8 billion to CZK 3.9 billion.
Investment property, at CZK 2.9 billion, declined by CZK 319 million year-on-year, while Reinsurance assets (i.e. reinsurers’ share in insurance liabilities), at
CZK 8.3 billion, grew by CZK 377 million.
Operating and other tangible assets totaled CZK 3.3 billion for a year-on-year decline of CZK 703 million. Prepayments and accrued income grew by
CZK 75 million to a total of CZK 752 million.
Cash and cash equivalents were up CZK 922 million to CZK 1.2 billion.
Intangible assets increased by CZK 11 million and totaled CZK 1.4 billion.
Treasury Shares
Česká pojišťovna did not hold any of its own shares during the 2006 accounting period.
Financial Performance Commentary
In this section, individual items of the Company’s assets and liabilities are indicated using terms derived from the Insurance Act, which may be different, in
form and/or content, from those used in the financial statements. This is being done as a service to users of the Annual Report who would prefer the information
from the financial statements to be presented in a structure and content comparable to that used by other insurers operating in the Czech Republic.
Earnings
In 2006 reported its financial performance in accordance with International Financial Reporting Standards (IFRS) for the second time. 2006 reaffirmed the
high profitability of Česká pojišťovna. With after-tax earnings of CZK 8.3 billion, the Company was once again one of the top-earning companies in the
Czech Republic.
The positive earnings performance was driven in particular by the operating result and investment returns, which include gains on sales of certain equity
stakes. Another accomplishment of 2006 was the handling of the snow and flood catastrophe in the spring, which affected the Company’s performance in
the first quarter in particular. The autumn, on the other hand, was quite favorable in terms of losses and in particular the last months of the year combined
with stability in life assurance for the good operating result. In 2006, the Company also continued to launch new products and optimize operating expenses.
The Company’s total assets figure reached CZK 121.3 billion.
Basic Share Capital and Reserves
In June 2006, a decision of the sole shareholder at the General Meeting approved the payment of a CZK 8 billion dividend, using Česká pojišťovna 2005
profit of CZK 4.6 billion and CZK 3.4 billion drawn from retained earnings. Subsequently, in December 2006 another dividend was approved, in an amount
of CZK 3.5 billion to be drawn from retained earnings.
The Basic share capital was also increased by CZK 1.0 billion to CZK 4.0 billion, by transferring funds from retained earnings. Under IFRS the equalization
provision is considered part of shareholders’ equity.
Overall the Company’s shareholders’ equity fell by 18.1% to CZK 17 billion.
42 ANNUAL REPORT 2006
Earnings Allocation Proposal
As at the Annual Report compilation date, the Board of Directors had not yet submitted an earnings allocation proposal.
Recent Shareholder Dividends
In June and December 2006, the sole shareholder acting with the powers of the General Meeting decided on payouts of a gross dividend for 2005 in a total
amount of CZK 11.5 billion.
As of the Annual Report compilation date, no decision had been made concerning a 2006 dividend.
Technical Provisions
Overall, technical provisions increased by CZK 0.7 billion year-on-year, to CZK 88.4 billion. Under IFRS, the equalization provision is not included in technical
provisions (see below).
Life Assurance Provision
This provision accounts for roughly three quarters of total technical provisions and includes the life assurance provision itself, the provision for unearned
life assurance premiums, provision for outstanding life assurance claims, and a provision for liabilities arising from the applied technical interest rate.
The total amount of the life assurance provision at 31 December 2006 was CZK 66.5 billion. This represents year-on-year growth of CZK 0.6 billion.
The balance of the provision for liabilities arising from the applied technical interest rate at 31 December 2006 was CZK 3.0 billion, down CZK 0.8 billion
from the previous year.
Provision for Outstanding Non-life Claims
This provision consists of the provision for claims reported but not settled (RBNS) and the provision for claims incurred but not reported (IBNR). It is the
second largest technical provision. The net amount of the provision at 31 December 2006 was CZK 15.6 billion, a year-on-year decline of CZK 0.4 billion.
Provision for Unearned Non-life Premiums
The total amount of this provision at 31 December 2006 was up approximately 9.2% year-on-year, to CZK 5.8 billion.
Equalization Provision and Other Provisions
International Accounting Standards do not acknowledge the equalization provision, which is set up under Czech Accounting Standards (specifically, Section 2
of Regulation No. 303/2004), as a provision. For this reason, the reported amount of the equalization provision as at 31 December 2006 is nil.
The provision for the liabilities of the Czech Insurers Bureau (both old and new losses) remains nearly unchanged at CZK 2.1 billion (year-on-year decrease
of CZK 7 million). This provision relates to motor third party liability insurance.
Receivables
Receivables rose to CZK 8.2 billion, up 4.6% from 2005. The growth was mainly in direct insurance receivables and was offset somewhat by a decline in
trade and other payables. The overall change in receivables was CZK 0.4 billion.
Liabilities
The Company’s total liabilities fell by roughly 6.8% in 2006 to a level of CZK 9.3 billion. The biggest drop, by CZK 0.9 billion to CZK 5.1 billion, was in
reinsurance-related liabilities. However, since this decline was partially offset by higher income tax liabilities, the overall year-on-year change is CZK 0.6 billion.
One-off Items with Impact on Earnings
In 2006, the company recorded CZK 3.4 billion in one-off items that influenced earnings. The result from financial investments was influenced by
a CZK 1.8 billion gain on the sale of certain equity participations (e-Banka a.s., Modrá Pyramida stavební spořitelna a.s., PPF Banka a.s.). In conjunction with
favorable developments in claims expenditures, loss ratio, and the current state of litigation relating to disputed claims, the IBNR and RBNS provisions were
partially reversed. This had a CZK 1.3 billion positive impact on earnings.
ANNUAL REPORT 2006 43
Insurance Performance Commentary
Internal Sales Channels
Internal distribution channels consist of the network of exclusive insurance agents and the Česká pojišťovna branch network. Exclusive insurance agents
are market-segmented so that they can fully focus on providing individualized service to private individuals and corporate clients.
The priorities in 2006 for internal distribution channels were to complete the sales tasks, improve the work quality of first-line management in the branch
network, and increase the quality of insurance consultants in the area of comprehensive service, and after-sale service in particular. 2006 saw the
completion of the process of certifying all sales personnel for the transition to the new legislative environment. The total number of persons certified was
over 4,000. We continued to train personnel to use methods for analyzing client needs, which is the basis for successful up-selling and cross-selling.
The over-the-counter network had a very successful year. A nearly 50% year-on-year performance increase based on disciplined management of the
activities and knowledge of individual workers and group managers as well as targeted regional marketing campaigns to support over-the-counter sales laid
a good foundation for further growth in 2007. A major change late in the year was the implementation of mobile service counters, which take the slogan
“Closer to customers!“ literally by offering business meetings outside Česká pojišťovna premises.
The network of exclusive insurance agents in the private individuals (PI) segment focused on campaigns aimed at increasing premiums and insurance
coverage on older policies. We implemented the “Financial Consultancy” project, which puts several hundred insurance agents in the role of consultants
offering a complete range of financial products, including mortgages and investments. Last but not least, we successfully launched mass sales of
ČP INVEST products through the Česká pojišťovna distribution network, completing the full integration of sales of Česká pojišťovna subsidiaries’ products
in the internal network. The success of this integration is demonstrated each year by the sales performance results of Penzijní fond České pojišťovny,
ČP INVEST and ČP ZDRAVÍ, as well as by their positions in their respective markets.
Insurance agents in the business segment focused on targeted campaigns for individual market sectors and on corporate business. A major qualitative
shift was also seen in recruiting of new sales personnel in this segment.
Česká pojišťovna has what is by far the most extensive internal sales network in the Czech Republic.
The principal tasks for 2007 are to achieve double-digit growth in the number of service counters and to further energize the network of insurance agents,
especially when it comes to acquiring new customers. The means for fulfilling these tasks will be sales campaigns based on continually improving the ability
of Česká pojišťovna and its sales force to offer products that meet client needs. Other initiatives are designed to further develop the performance-based
incentive scheme for insurance consultants, entitled ČP Career. The motto for insurance agents in the residential market for 2007 is “My Family,” i.e.
comprehensive service for all members of the family and adapted Česká pojišťovna value offering containing, among other things, instruments to support
retention. The motto for insurance agents in the business segment will be “My Firm,” which again means a comprehensive, individualized offering that
takes into account all the firm’s insurance needs with Česká pojišťovna there to fulfill them.
External Distribution Channels
Financial intermediaries operating on the basis of Multi Level Marketing (MLM)
In 2006, Česká pojišťovna continued to build cooperation with the major MLM partners ZFP akademie, a.s. and OVB ALLFINANZ, a.s. Based on a study of
the needs of clients in MLM networks, Česká pojišťovna prepared and in September 2006 launched a unit-linked life assurance product fully adapted for the
segment consisting of clients served by external partners. The sales performance figures confirm the high potential of this type of product. In 2007 we plan
to launch another innovative product based on unit-linked life assurance, also adapted to the needs of MLM networks. Česká pojišťovna intends to reaffirm
its position as the largest insurer in the Czech Republic in the MLM external partners segment, as well as its ability to work effectively with third parties.
44 ANNUAL REPORT 2006
Česká pošta (Czech Post)
In our collaboration with Czech Post, 2006 was a year of strengthening the perception of Czech Post offices as full-fledged Česká pojišťovna points of sale
that provide comprehensive client services. This transformation was supported by a television campaign and, most of all, by improved continual marketing
visibility of Česká pojišťovna at post offices. In September 2006 another insurance product was added to the post office portfolio – MTPL insurance. Now
the product portfolio includes all the major basic types of both life and non-life insurance products.
In conjunction with an amendment of the Act on Insurance Intermediaries, over 4,000 employees of Czech Post were recertified during 2006.
In 2007, Česká pojišťovna’s post office presence will be increased through more intensive support for sales acquisition activity and after-sale service.
In this respect, we anticipate dynamic growth in new business generated by this distribution channel, particularly in cities and towns with populations of
under 50,000. In this manner, Czech Post is shaping up to be a promising addition to Česká pojišťovna’s own branch network.
Brokers, Car Dealerships, Leasing Companies, and Tour Operators
In 2006 Česká pojišťovna continued in its sales collaboration with third parties such as brokers, car dealerships, leasing companies, and tour operators.
All of these third parties are served individually on a key account management basis. Individual partners are segmented by the total business they
generate, which also determines the scope and level of the value offering on the part of Česká pojišťovna.
In the brokers segment, Česká pojišťovna focused in particular on further improving day-to-day service, i.e. fast administrative support for individual brokers
throughout the regions. The result of the focus on service quality was appreciated by the brokers, as attested to by Česká pojišťovna’s taking first place
in the Insurance Company of the Year category in a survey conducted by the Association of Czech Insurance Brokers. The Company also received top
rankings in all other categories of the survey.
In the car dealership segment, 2006 saw another year-on-year growth in new contractual partners, with several dozen joining our ranks. Here, too, Česká
pojišťovna’s strategy is based on high quality services – especially in the areas of quality and speed of claims handling.
Among leasing companies and tour operators, Česká pojišťovna maintained its long-term position in 2006, despite heavy competition in the market.
With regard to these third parties, in 2007 we will continue to focus on the quality of our services and continual innovation.
Act on Insurance Intermediaries and Its Impact on the Network, Training of Intermediaries
The first major task of 2006 was to comply with the amendment to Act No. 38/2004 Coll. which entered into force on 1 April 2006. As of that date, all
employees of Česká pojišťovna that are involved in the process of entering into and administering insurance contracts must document absence of criminal
record and professional fitness for the job. Česká pojišťovna meets this statutory condition.
The second principal task in accordance with Act No. 38/2004 Coll. was to train all insurance intermediaries and independent loss adjusters of all VPA who
began operating before 1 January 2005 to ensure they have the basic degree of qualification.
The Sales Training Department trained over 4,000 Česká pojišťovna employees and exclusive insurance agents. Česká pojišťovna also trained up to the
basic degree of professional qualification another 4,071 persons – partners of external distribution networks and employees of Czech Post.
In 2006, we completed the centralization of commissions processing, including complaints, into a single, centralized unit of Česká pojišťovna. Central
administration and processing of commissions increases the effectiveness of processing all commissions, including complaints, for all distribution channels
and agencies of Česká pojišťovna.
Another major initiative in 2006 was the “Commissions Revitalization Project,” which developed a new system for reporting and accounting for commissions
paid to Česká pojišťovna business partners.
A related project entitled “Commissions Stabilization Project” focused on improving how commissions are processed in the product systems and the
operations system. The project made processing more transparent and put in place control and escalation mechanisms.
ANNUAL REPORT 2006 45
Non-life Insurance
Description
In 2006, Česká pojišťovna completed a key recent project entitled “Centralization of Non-life Insurance.” This project involved implementing a new
portfolio of non-life products and rolling out new technology for processing insurance contracts, thereby fully automating the processes of setting
premiums and issuing insurance contracts and making client service faster. At the same time, infrastructure was put in place for selling key non-life
insurance products by telephone and over the Internet.
In the claims handling function, which was centralized in 2003, we made further improvements in how work is organized. This allowed the Company to
declare a commitment to clients – 95% of claims are completely processed within five days of receiving the last document.
Thanks to extensive innovation and automation, the Company has built up an excellent reputation among clients, brokers, and car dealerships. In 2006
Česká pojišťovna a.s. won the prestigious Insurer of the Year competition for the third time in a row.
Thanks most importantly to excellent client services in claims handling, Česká pojišťovna is perceived as the leader in service quality. We successfully
managed the claims handling process even in the face of natural catastrophes in early 2006.
Position in Insurance Market
After several years of rapid market expansion in the non-life market, 2006 saw the market’s growth rate slow and market shares underwent a correction.
Market-wide, premiums written grew 2.8% year-on-year. Although Česká pojišťovna did see slower development in premiums written, they nearly reached
2005 levels. The Company phased out several loss-making activities in motor insurance and certain insurance contracts were not renewed upon migration
from the old systems to the new operations and sales IT system. Although both of these initiatives caused premiums written to decline, they had a major
positive impact on the Company’s loss experience.
The result is a slight drop in Česká pojišťovna’s market share (the market in this case is defined as ČAP) by 1 percentage point to 36.4%, which means we
are still the market leader.
Non-life Insurance Performance by Insurance Class
Motor Third Party Liability (MTPL) Insurance
More and more, sales of this insurance class are being impacted by pricing approaches that differ from insurer to insurer, resulting in a widening price gap
between large and small insurance companies. Price cutting by certain competitors is slowing growth in premiums written in the market as a whole.
Exacerbating the unfavorable developments was a decline in new car sales and the market was also impacted by flat or falling sales through leasing
companies and car dealers that are key partners of Česká pojišťovna.
After several years of growth, our market share underwent a correction. Česká pojišťovna abandoned certain loss-making sales policies, causing our share
of the MTPL market to fall by approximately 1.3 percentage points. Despite this, however, our market share remained above 40%. The fact that Česká
pojišťovna is holding its rates at a profitable level forms the basis for our long-term very favorable loss ratio, which was 53.3% in 2006.
Motor Damage Insurance
All of the impacts mentioned above in MTPL insurance were seen in motor damage insurance as well. Although 2006 saw our motor damage premiums
written fall by CZK 0.3 billion to CZK 6.3 billion, the loss ratio fell to 62.3%, its best level in the past six years.
Small Risks
Premiums written in small risks insurance did not reach their 2005 level. The key reason for this was portfolio work, involving migration of insurance
contracts to the new operations system, in which we succeeded in purging the policy portfolio of loss-making contracts as well as contracts where the
company had experienced difficulty in collecting premiums from clients.
Although the natural catastrophes in early 2006 had a negative impact on claims costs, the resulting gross loss ratio remained at 64%.
46 ANNUAL REPORT 2006
Agricultural Insurance
All insurance contracts in the agricultural insurance portfolio were migrated to the new system in January 2006. The process was completed successfully,
with over 90% of the existing portfolio being converted. This was followed by new acquisitions spurred by the policy conversion process. Policy conversion
and excellent loss experience in past years, which made it necessary to carry out small price corrections, caused the Company to not reach the premiums
written figures seen last year in this insurance class. Even so, we maintained an 80% market share in this segment. Lower levels of certain crops and cuts
in livestock herd sizes are also having a negative impact on premiums written.
And despite the unfavorable impact of natural hazards (frost and snow resulting in snow mold, flood and hail damage), we succeeded in achieving a very
positive loss result of 62.2%. The Company pays close attention to claims and has identified problematic claims which it subjects to priority control and
supervision.
Large Risks
Premiums written in large risks were slightly above 2005’s level. The market is seeing steadily falling rates and we were no exception. Despite the
negatives, fine-tuned risk management and underwriting helped us to very decent results in this insurance class, despite the fact that the policy portfolio
was impacted by heavy snow and flood catastrophes in the first half of 2006. In terms of claims costs, 2006 was a very good year in that there were no
large-scale claims. The gross loss ratio was 31.2%; the net loss ratio was 73.5%.
Personal Lines
In non-life personal lines, we succeeded in growing premiums written by 2.8% compared to 2005. The biggest year-on-year growth in premiums written
was in liability personal lines, where we saw the positive influence of the conversion of product 31 in 2005. As the conversion of product 51 was postponed
for technical reasons, its impact on premiums written will not appear until 2007. The conversion of the legacy portfolio in this insurance class is helping to
reduce the loss ratio, which was 55% in 2006.
In 2006 we began selling a new household insurance product, launched “pojištění v Kostce,“ and we are successfully developing sales of travel insurance
over the Internet.
Despite the snow-related catastrophes in early 2006, which had an unfavorable impact on insurance of buildings, we managed to keep the overall loss ratio
in personal lines at a profitable 60%.
Claims Paid
2006 was a successful year in terms of claims paid, in spite of the heavy snow and subsequent flood catastrophes that occurred in the winter months.
Claims from both catastrophes totaled approximately CZK 1.5 billion and had a major negative impact on results in insurance of buildings and small risks.
This negative impact was offset by very good performance in other, non-catastrophe insurance classes. Overall, the gross loss ratio in non-life insurance
was 53%.
New Products
We are readying new non-life products for launch in 2007. These include insurance of household pets in the agricultural insurance category, new products
for medium-sized enterprises, and an expansion of risks covered by travel insurance for both individuals and businesses.
Outlook
Česká pojišťovna has introduced a new strategy, entitled “Closer to customers”, which sets the tone for further improving both sales and client service.
In the claims costs area, Česká pojišťovna will implement the results of projects designed to crack down on fraudulent claims, improve customer services,
and achieve cost savings by cooperating with other partners.
In the product development area, Česká pojišťovna is preparing new products that are built on the same foundations as the existing ones, i.e. automated
underwriting, automated pricing, and automated issuing of policies.
ANNUAL REPORT 2006 47
Reinsurance
For a long time now, Česká pojišťovna has been placing risks with the world’s largest and strongest reinsurance houses. Reinsurance allows us to pass
some of the risk on to reinsurers, thereby guaranteeing the stability of Česká pojišťovna and protecting us against unexpected volatility in results of
property and casualty insurance as well as in the insurance of special risks.
Česká pojišťovna acquires reinsurance cover both directly and through prominent reinsurance brokerages. In terms of geographic distribution, our reinsurance
contracts respect ongoing changes in reinsurance markets and, in addition to the traditional areas of continental Europe and the London market, we are
turning more and more to overseas reinsurers (USA, Bermuda) as well as to the Asian market (Japan, Korea). When placing risks, the primary criteria are the
reinsurer’s stability and security, which are, to a considerable extent, guaranteed by its rating. The strict criteria we place on reinsurer ratings led to a further
increase in the quality of the reinsurer portfolio and an increase in the average rating of the entire Česká pojišťovna reinsurance program. An integral part of
reinsurance is reinsurer services including know-how transfer, for example when launching new products. Since we are the Czech market leader, our
relations with reinsurers are at the highest possible quality level and reinsurance is an integral part of Česká pojišťovna’s stability and growth.
Unlike 2005, the year 2006 was very calm and successful in terms of reinsurance: there were no major global catastrophes that had any significant negative
impact on the behavior of reinsurance markets or reinsurance rates. Still, however, reinsurers’ cost of capital, which rises with their ratings, is being
reflected more and more in reinsurance terms. In spite of this, Česká pojišťovna is successfully renewing reinsurance contracts at conditions that are just
as good as those achieved in previous years and, in many aspects, even better.
Catastrophic risks will continue to be one of the most important reinsurance areas in the future. In 2006, the Czech insurance market faced a new phenomenon
in natural hazard claims. Due to the abnormal course of last year’s winter, Česká pojišťovna registered a huge number of claims due to heavy snow, further
exacerbated by localized flooding. The high frequency of catastrophic claims and increasing numbers of small claims not covered by reinsurance represent one
of the problem areas that Česká pojišťovna is successfully addressing through its reinsurance program.
In order to optimize the structure of reinsurance cover at Česká pojišťovna we are increasingly using dynamic financial analysis instruments. In addition,
catastrophic reinsurance is modeled using in-house and independent models to determine flood exposure. The Czech Republic has one of the most
progressive insurance markets in this area and Česká pojišťovna, thanks to these instruments (among other factors), is able to manage its risks and adapt
reinsurance cover to the needs of its individual portfolios.
Česká pojišťovna provides inwards reinsurance capacity only to its subsidiaries. Some of this business is subsequently retroceded within the appropriate
reinsurance programs. Since 2004, the Group includes the Cyprus-based reinsurance house CP Re, which is a 100% subsidiary of Česká pojišťovna. The
primary task of this reinsurer is to provide captive reinsurance capacity to companies in the Česká pojišťovna Group.
Nuclear Pool
The Czech Nuclear Pool (“CNP”) is an informal consortium of non-life insurers based on co-insurance and reinsurance of nuclear risks. The CNP operates both
as an insurer of domestic risks and in the area of inwards reinsurance. Due to the unique character of nuclear risks, individual insurance companies usually do
not insure them. The insurers in the CNP each provide their own net lines, the sum of which forms the overall capacity of the CNP for individual types of insured
risks. Since the CNP’s inception, Česká pojišťovna has been the lead co-insurer based on an agreement among insurers participating in the pool. Effective
1 January 2007, the Board of Directors of Česká pojišťovna approved a 10% increase in the Company’s net line for insuring nuclear liability. The CNP’s
executive body is the CNP Office, which is a part of Česká pojišťovna’s organization.
Česká pojišťovna’s share in the overall premiums written by the CNP in 2006 was the highest in CNP history. While in domestic risks insurance there was
a slight (approximately 0.7%) decline in premiums written compared to the previous year, inwards reinsurance premiums written were up 19.9%, which in
terms of Česká pojišťovna’s share represents growth of approximately CZK 13.7 million. In the direct insurance area, the Czech Nuclear Pool provides mainly
nuclear liability insurance and property insurance for Czech nuclear power plants, as well as smaller nuclear risks. In the area of inwards reinsurance, the
CNP cooperates with all the major nuclear pools in the world.
Nuclear risks have a unique standing in the insurance market. In 2006, practically all the major insurers that operate in the Czech market were members of
the Pool. Česká pojišťovna’s share in the overall capacity of the Czech Nuclear Pool was approximately 40%.
So far in its history, the Czech Nuclear Pool has not had any direct insurance claims.
In view of the unique character of the insurance, we are endeavoring to maintain premiums written at 2006’s level.
48 ANNUAL REPORT 2006
Life Assurance
Description
The new product DYNAMIK Plus, launched by Česká pojišťovna in the second half of 2005, enriched the core offering of Česká pojišťovna by adding a modern
unit-linked life assurance product that satisfies clients’ demanding requirements not only in terms of breadth of cover, but also in terms of return on amounts
invested. In 2006, in addition to the already mentioned regular-premium product DYNAMIK Plus, Česká pojišťovna’s core life assurance range included the
regular-premium products DYNAMIK and SLUNÍČKO, KOMBI single-premium life assurance, and single-premium endowment life assurance. In addition, the
key product portfolio contains comprehensive accident insurance which in most cases is entered into by clients as part of wider life assurance cover.
Life Assurance Market
The major slowdown in the first half of 2005, which also affected the market’s overall performance in 2005 (market growth was only 1.6% for the year),
was replaced in 2006 by a recovery in the life assurance market. According to figures published by the Czech Insurance Association (ČAP), the market as
a whole grew 4.8% year-on-year, as premiums written increased from CZK 44.9 billion to CZK 47.1 billion. The pace of growth in regular premiums slowed
from 8.9% to 6.7%, while single premiums, which had slumped by 13.3% last year, remained flat in 2006 posting a year-on-year decline of 0.1%.
Key Events of the Past Year
Following the success in 2005 of initiatives focused on increasing the insurance protection of clients who have already had accident insurance cover in
their life policy for several years, in 2006 Česká pojišťovna expanded the initiative to increase insurance protection not only in accident insurance, but in life
assurance itself as well.
This activity marked the beginning of a new sales model for communicating with clients. The previous model of focusing on the “Client” is being replaced
by a new model of focusing on the “Family.” The new approach made it simpler to gain access to the family by creating a space for providing maximum
family service, including the opportunity of comprehensive insurance for all family members, within the context of a single sales meeting with the client.
In response to high market demand, 2006 saw the renewal of the single-premium endowment life assurance product, with certain revisions. Nationwide
sales of the product commenced in July and by year end CZK 135 million in premiums had been written for an average premium of CZK 110,000 per policy.
The return of this product filled a gap in the single-premium segment of the life portfolio and mitigated the decline in our share of the single-premium
endowment life assurance market.
Česká pojišťovna also focused on cross-selling activities last year. Following the proven and successful correspondence initiative, throughout the year selected
clients of Penzijní fond ČP and Home Credit were contacted. The total number of clients contacted was 250,000, in several waves, and they were offered
a price discount on accident insurance.
During all of last year, we continued to provide strong support to the sales force in selling DYNAMIK Plus, the flexible life assurance with an optional unit-linked
investment component. The number of certified insurance consultants grew, and they successfully concluded 24,000 insurance contracts last year. In terms of
premiums written on new policies, this product outpaced its more traditional sister product DYNAMIK in the second half of the year. By the end of 2006, its
share in new business had climbed to 18.4%.
Position in the Insurance Market
Premiums written and collected by Česká pojišťovna in 2006 from clients reached a level of CZK 13.2 billion and overall market share counted 28.1%.
In regular-premium insurance, we succeeded in growing premiums written by 4.6% year-on-year, to CZK 11.8 billion, enabling Česká pojišťovna to maintain
its position as market leader with a share of 34.1%.
ANNUAL REPORT 2006 49
Česká pojišťovna is the Czech life
assurance market leader.
Based on a public vote in the Golden Crown 2006
survey, our product DYNAMIK life assurance
was found to be the most popular insurance
product in the Czech Republic.
The number of clients with DYNAMIK life
assurance and its unit-linked version,
DYNAMIK Plus, has reached nearly one million.
Good times with our loved ones,
fleeting everyday experiences,
little joys and big plans – all these
make up the many-colored
caleidoscope of life.
Harmony of relationships
and environment, coupled
with traditional values, give us
a feeling of security and comfort.
Life Assurance Performance by Insurance Class
The growth in premiums written achieved by the new unit-linked life assurance product DYNAMIK Plus in 2005 continued in this year as well. As a category,
insurance linked to investment funds saw premiums written rise by 220% compared to 2005 and DYNAMIK Plus was the third best-selling product of
Česká pojišťovna in 2006.
The best-selling product in the Czech insurance market, DYNAMIK, continued to enjoy strong demand in 2006 on the part of clients who appreciate this
modern product primarily for its flexibility.
Česká pojišťovna achieved positive performance in selling the SLUNÍČKO product - life assurance for children. Compared with 2005, we grew the number
of policies in the portfolio by over 4%.
The decline in premiums written in the pension (annuity) insurance category is the result of attrition in legacy contracts, as no product in this category is
currently offered to clients.
A long-term excellent performer for Česká pojišťovna is the category of supplemental accident insurance, and 2006 was no exception, with premiums
written increasing by 5.5%.
Development of the Life Assurance Policy Portfolio
Regular life assurance premiums in 2006 totaled CZK 11.6 billion for growth of 1% over the same period of last year. The number of contracts in the life
assurance portfolio in 2006 (3.1 million) was down 5% compared to 2005. This development is related to changes in the Česká pojišťovna product offering.
The biggest growth in the portfolio took place in Insurance linked to investment fund (regular life assurance premiums up 175%, number of policies up
120%). The biggest decline, on the other hand, was in Pension (annuity) insurance (regular life assurance premiums down 10%, number of policies down
11%). In order to eliminate longevity risk, Česká pojišťovna is not currently offering any regular-premium pension (annuity) insurance products.
New Products
Effective 1 September 2006, Česká pojišťovna added the modified unit-linked life assurance product PROFI Invest to its line-up. The product was designed
for the external partner OVB with the aim of increasing our share in new business intermediated by OVB. PROFI Invest allows clients to allocate premiums
to portfolios actively managed by the external asset manager Conseq Investment Management as well as to funds managed by ČP INVEST. The launch of
PROFI Invest met the expectations and sales targets of Česká pojišťovna and we look forward to further developing our business relationship with OVB in
the future.
The DYNAMIK Plus product was expanded to include new ČP INVEST funds – the Oil and Energy Industry Fund, the Real Estate Equities Fund, and the
Golden Fund.
Claims Paid
In 2006, claims paid fell by 23% compared to the previous year, to CZK 8.8 billion. This was achieved by completion of the process of converting legacy life
assurance policies to new products in 2005. The total number of claims processed was 526,000.
Like in previous years, the greatest number of claims was in Insurance on survival or death or survival. In terms of monetary volume, the most claims in
2006 (CZK 4.4 billion) were paid on life assurance contracts due to survival of policyholder to policy term.
Outlook
The growth in the insurance market last year sets the stage for another successful year in life assurance. The relatively fast pace of wage growth accompanied
by low inflation and growing public awareness of the advantages and features of life assurance form a firm foundation for the anticipated growth in the life
assurance market in the years to come. We expect that the ratio of life assurance premiums written to GDP will continue to grow, converging to the level
commonly seen in more advanced countries.
52 ANNUAL REPORT 2006
Client Services
Česká pojišťovna Client Services encompass all administrative activities related to insurance policies, such as entering policies in the system, making
changes in policies, and processing premium payments. They play an important role in claims handling, from initial reporting to payout. Through the
Communications Center and the Central Mailroom, Client Services handle all written and telephone communications with clients, insurance dealers, and
business partners.
Upon successful completion of centralization of administrative activities from the agencies, Client Services continued in the path of continuously increasing
productivity in all its activities. In 2006, this productivity increased by 10%. This increase was achieved primarily through systematic optimalization of
processes, improvements to the system of employee incentives, and process automation. In addition to increasing productivity, our attention also focused
on achieving cost savings in other areas. For example, 2006 saw the completion of the process of moving the Communications Center from Prague to
Pardubice. More advantageous payment terms were negotiated, and supplier management was improved.
2006 was a breakthrough year for our Communications Center, which in addition to providing services also began to sell insurance to clients who contact
Client Services. In addition to telephone sales, Client Services also prepared sales of insurance over the Internet for MTPL, motor damage, travel insurance,
accident insurance, and liability insurance. Currently, Česká pojišťovna is preparing to further expand the range of products and services offered over the
Internet, so as to continue in future to have the most comprehensive offering of products for sale in this channel and to give clients something extra as well.
In addition to developing direct communication channels (telephone and the Internet), in 2007 Client Services will focus on further processes optimizing.
One of the goals is to train more workers to optimize using the “lean” method.
Investments
Investment Activities
After insurance and reinsurance, Česká pojišťovna’s most important activity area is investments (also sometimes called “financial placements”), which
in financial terms make up the bulk of the Company’s assets. These investments serve to cover both the technical provisions and the Company’s own
equity. That portion of investments that covers the technical provisions is regulated by Regulation No. 303/2004 Coll., implementing certain provisions
of the Insurance Act, which, by placing limits on individual types of investments, regulates the overall structure of the company’s investment portfolio.
Where these regulatory limits leave off, Česká pojišťovna picks up with a number of internal regulations designed to ensure the security, returns, and
liquidity of the investments as well as to ensure that, under all circumstances, Česká pojišťovna is able to meet its obligations to clients in both life and
non-life insurance.
In 2006, Česká pojišťovna posted a profit of CZK 5.292 billion on investments financed by technical provisions. The main driver of this favorable result was
positive development in domestic and international equity markets and our prudent strategy in managing assets and liabilities in fixed-rate interest-bearing
instruments.
Our investments in fixed-rate interest-bearing instruments (particularly bonds) reached 3.51% p.a. in portfolios financed by life assurance provisions,
and 2.84% p.a. on assets covering non-life provisions. In 2006, the yield curve shifted higher and reduced its slope, meaning that prices on bond markets
moved downward. That caused the fair value of bonds, which comprise a significant portion of investments, to decline. On the other hand, however, it also
reduced the fair value of life assurance obligations. Unlike bonds, equity instruments put in a strong performance with returns of 15.68% p.a. in the life
segment and 15.40% for assets financed by non-life insurance provisions. The global equity markets underwent a major correction in the middle of 2006,
but in the second half they made a complete recovery and powered to new record-high levels.
ANNUAL REPORT 2006 53
Total investments of life and non-life technical provisions in 2006 are shown in the following graph, entitled “Structure of Investments by Source of
Financing, IFRS Book Value“.
Investments Financed by Life Provisions
As at December 31st, the bulk (73.2%, CZK 50.551 billion) of life technical provision funds was invested in fixed-rate interest-bearing instruments.
Mostly these are financial assets at fair value through profit or loss not held for trading (debt securities, CZK 35.682 billion) and fixed-term bank deposits
(CZK 7.511 billion). This portion of the portfolio consists mainly of domestic and foreign government securities and securities of top-rated issuers, as well
as deposits with highly capitalized domestic and foreign banks. Life assurance provisions are characteristically long in duration and therefore these provisions
are allocated mostly to conservative instruments with longer times-to-maturity, which assure stable returns over the long term.
The second group of assets financed by life provisions, in terms of volume, is equity securities (shares and other securities with variable returns). Their
volume was CZK 15.460 billion, or 22.4% of the total. Shares and unit certificates are investments that give the portfolio long-term growth potential and
constitute an appropriate supplemental component in a portfolio dominated by fixed-income investments, as they optimize returns and diversify risk.
The share of other assets in overall assets at the end of 2006 was 4.4%. This category consisted of trade and other payables, and fixed assets.
Its total monetary value is CZK 3.008 billion and it comprises the remainder of the life assurance portfolio structure as shown in the graph “Structure of
Investments Financed by Life Assurance Provisions, IFRS Book Value”.
The total return on investments financed by life assurance provisions in 2006 was CZK 4.218 billion. Interest and similar revenues totaled CZK 2.061 billion.
A return of CZK 1.628 billion was achieved on securities trading. The difference between revenues and costs related to fixed assets was CZK 35 million.
54 ANNUAL REPORT 2006
■ Life technical provisions■ Non-life technical provisions■ Other sources
■ Fixed-income interest-bearing instruments■ Equity securities■ Other assets
■ Fixed-income interest-bearing instruments■ Equity securities■ Other assets
74%
24%
2%
73.2%
22.4%
4.4%
75.6%
0.3%
Structure of Investments by Source Structure of Investments Financed by Structure of Investments Financed by
of Financing, Life Assurance Provisions, Non-life Insurance Provisions,
IFRS Book Value IFRS Book Value IFRS Book Value
24.1%
Investments Financed by Non-life Provisions
As at 31 December 2006, the entire non-life portfolio (CZK 22.390 billion) consisted primarily of fixed-income interest-bearing instruments (75.6%
weighting). Most of these were financial assets at fair value through profit or loss not held for trading (debt securities) totaling CZK 12.562 billion.
Fixed-term bank deposits totaled CZK 2.893 billion.
Of the total amount of non-life insurance provisions, equity securities account for 24.1% (CZK 5.401 billion). This is also shown in the graph: “Structure
of Investments Financed by Non-life Insurance Provisions, IFRS Book Value.” These funds continue to be invested with short investment terms and in
instruments that, in the case of catastrophic loss events, can be converted in a very short time into liquidity to meet obligations toward insurance beneficiaries.
The total return on investments financed by non-life technical provisions in 2006 was CZK 1.074 billion. The biggest driver of this result was investment
and similar income, at CZK 414 million. Trading in foreign currency instruments contributed another CZK 341 million to the overall return.
Structure of Investments by Source of Financing, IFRS Book Value
2006
IFRS line Description – IFRS line Life provisions (CZK) % Non-life provisions (CZK) %
1.03.02.00 Financial assets at fair value through profit or loss 51,804,449,453.51 75.06 18,044,905,398.95 80.59
1.03.02.10 Financial assets held for trading 10,185,308 641.28 14.76 4,047,874,916.90 18.08
1.03.02.11 Debt securities 124,866,666.67 0.18 0.00 0.00
1.03.02.12 Equities and other securities with variable return 9,523,372,264.87 13.80 3,965,737,274.49 17.71
1.03.02.13 Positive market value of derivatives 537,069,709.74 0.78 82,137,642.41 0.37
1.03.02.20 Financial assets at fair value through profit or loss not
held for trading 41,619,140,812.23 60.30 13,997,030,482.05 62.51
1.03.02.21 Debt securities 35,682,241,598.63 51.70 12,561,561,871.74 56.10
1.03.02.22 Equities and other securities with variable return 5,936,899,213.60 8.60 1,435,468,610.31 6.41
1.03.02.24 Other 0.00 0.00 0.00 0.00
1.03.03.00 Available-for-sale financial assets 4,021,899,430.66 5.83 242,552,417.11 1.08
1.03.03.10 Debt securities 4,021,899,430.66 5.83 242,552,417.11 1.08
1.03.03.20 Equities and other securities with variable return 0.00 0.00 0.00 0.00
1.03.04.00 Held-to-maturity investments 1,886,610,183.10 2.73 0.00 0.00
1.03.04.10 Debt securities 1,886,610,183.10 2.73 0.00 0.00
1.03.05.00 Loans and receivables 8,394,266,238.62 12.16 4,102,991,944.23 18.32
1.03.05.10 Credits and loans to banks 8,298,001,137.41 12.02 4,044,617,245.88 18.06
1.03.05.11 Fixed-term bank deposits 7,511,410,327.41 10.88 2,892,696,657.74 12.92
1.03.05.12 Credits and loans 0.00 0.00 168,316,043.14 0.75
1.03.05.14 Receivables under repos 786,590,810.00 1.14 983,604,545.00 4.39
1.03.05.15 Other 0.00 0.00 0.00 0,00
1.03.05.20 Credits and loans to non-bank entities 0.00 0.00 0.00 0.00
1.03.05.21 Loans to non-bank entities, including loans to insureds 0.00 0.00 0.00 0.00
1.03.05.30 Receivables 96,265,101.21 0.14 58,374,698.35 0.26
1.03.05.35 Trade and other receivables 96,265,101.21 0.14 58,374,698.35 0.26
1.04.00.00 Fixed assets 2,911,593,997.07 4.22 0.00 0.00
Total 69,018,819,302.96 100.00 22,390,449,760.29 100.00
ANNUAL REPORT 2006 55
Human Resources
Česká pojišťovna strives to acquire and keep the best employees, providing client services at the highest level. In 2006, programs focused in particular on
employee professional and career growth helped to stabilize the Company’s work force. The ongoing trend toward more efficient processes resulted in 2006
in another reduction in the number of employees. The employee head count at year end 2006 was 5,270. This equates to an overall work force reduction of
147 employees compared to 2005. The average number of employees was 5,251, down 311 compared to 2005.
In order to develop management skills, we launched the KOMPAKT program for newly hired managers and Cafeterie Soft Professional Seminars. Additional cycles
of the Experts and Professions Pool development programs were launched and, at the same time, we continued with our series of specialized afternoon seminars
for employees on selected themes. In accordance with Act No. 38/2004 Coll. on Insurance Intermediaries and Independent Loss Adjusters, we organized training
for exclusive insurance consultants, concluding with certification, and in conjunction with an amendment to that Act, we required all employees whose activities
are covered by the amendment to undergo an examination to determine their professional fitness level. Other factors contributing to work force stability included
our internal internship exchange and excursion system and increased standards of behavior and improved service processes.
Česká pojišťovna was declared “Employer of the Year 2006” in recognition of having the best regional HR project. Steadily increasing use of performance-based
compensation and more emphasis on staffing key positions from within the company made Česká pojišťovna more attractive not just for job applicants,
but for existing employees as well. Under the Collective Agreement, company employees receive a range of standard benefits: life assurance contributions,
supplementary pension insurance contributions, meal plan contributions, and health benefits including a health program for managers as well as preventive
care and awareness events for all employees.
The overall trend towards more in-depth knowledge of insurance processes is leading not just to better cooperation between individual Company departments,
but also, and more importantly, to better services for clients of Česká pojišťovna.
Principal Marketing Initiatives and Public-Benefit Activity
In 2006, Česká pojišťovna’s marketing work focused primarily on year-long support for the best-selling life assurance product DYNAMIK, SLUNÍČKO life
assurance for children, Supplementary Pension Insurance, and motor insurance. Product campaigns were designed to further the building of a strong brand
with the highest degree of attractiveness and sales potential in relation to the offerings of individual insurance companies. We supported the communication
of the Company’s key attributes: speed of claims handling and high-quality, modern services with specific, concrete benefits for clients – claims processed
within five days, the option of taking out insurance over the Internet or by telephone, and our ability to adapt insurance policies to meet customer needs.
In addition, the Company focused on communication toward small and medium-sized enterprises and the speed of handling their insurance claims.
In 2006, the Company continued not only in acquiring new customers but also in laying the groundwork for ensuring their long-term loyalty to the brand.
Česká pojišťovna further expanded the product portfolio available through the Czech Post distribution channel by adding sales of MTPL insurance and also
began selling DYNAMIK Plus life assurance through MLM networks.
In 2006 the Company continued in the tradition of supporting long-term and proven sponsorship platforms: ice hockey, the Česká pojišťovna Velká
pardubická Steeplechase, the Škoda Octavia Cup, the CZECH TOP 100, and the Summer Shakespeare Festival.
Also in 2006, Česká pojišťovna continued in its long-standing initiatives in the area of safety, including our long-term sponsorship of the “Česká pojišťovna
Blue Wave” traffic reports. 2004 saw the launch of a Ministry of Transport – BESIP and Česká pojišťovna public-private partnership entitled “Welcome to
Our Town.” Nearly 50 cities and town are now participating in the project and more are signing up all the time. In another project – the ČP Safety Index,
launched last year – a ranking of the safest district and regional capital cities of the Czech Republic is periodically released.
In cooperation with the Police of the Czech Republic, Česká pojišťovna continued in the “Gentleman of the Roads” project – an award for saving lives after
a serious traffic accident, quick reactions, and courage. Another joint traffic safety project of Česká pojišťovna and the Police of the Czech Republic is
“Drive with a smile,” in which from mid-May to the end of October police officers throughout the Czech Republic perform traffic controls together with
school children dressed in special reflective vests from Česká pojišťovna. Offenders receive a child’s drawing of a frowning car and those who follow traffic
rules are presented with a sticker showing a smiling car. Famous race-car drivers such as Karel Loprais, Roman Kresta, and Jarek Janiš also come out to
show their support. All told, over three thousand school children participated in the project in several dozen locations.
In November 2006, Česká pojišťovna joined the European Road Safety Charter, becoming the only Czech financial institution to support this European
Commission initiative. Its aim is to reduce the number of traffic accident deaths to one half its current level by 2010.
56 ANNUAL REPORT 2006
Information Technologies
Results of 2006
During 2006, Česká pojišťovna completed the process of building out a strong, centralized IT organization. The specific steps taken to this end were, most
importantly, centrally managed IT support (administration and requests from management) and a strong central IT management function. Other important
factors that also contributed substantially to improving the IT organization included separating the IT operations function from IT development, together
with the IT architecture function which has been separate since 2004. The number of supported distribution channels grew and we made significant
progress in differentiating IT specialists by developing specific professional knowledge and skills. We also increased monitoring by rolling out business
continuity management.
In the IT development area, 2006 saw the Company complete the process of separating operations from development in the last two key systems (the life
assurance system and the commissions processing system) while at the same time significantly speeding up their regular batch processes. Also in 2006
we completed the long-term non-life insurance centralization project by implementing the new TIA system. Last but not least, Česká pojišťovna launched
a new solution for Internet and telephone sales of selected insurance classes.
In the IT operations area, we completed the restructuring of the metropolitan data network as well as implementing and successfully testing Disaster
Recovery for the critical applications TIA and JOK.
Also in 2006, we put into routine operation the major business applications TIA, KDP, and Commissions.
The operations section laid the groundwork for rolling out the ITIL, Service Desk and Migration Management processes. We also completed, to a considerable
extent, the standardization of PCs and notebook computers assigned to end users.
Key security activities of 2006 included a revision of IT security policies, partial revision of internal IT guidelines, involvement of security functions in IT
processes – primarily the Help Desk and Change Management, an independent assessment of the state of IT security, an update of our Business Impact
Analysis (BIA) with an emphasis on drawing up crisis plans for business units and developing workstation configuration standards.
IT Outlook and Strategy
Česká pojišťovna IT will support the segmentation-driven strategy. In terms of new information system functionality, we expect to see strong development
of new life and non-life insurance products. We are preparing an improvement of the data warehouse and simplified reporting. Last but not least, emphasis
is being placed on developing CRM activities at Česká pojišťovna (Contact and Campaign Management).
The IT strategy is also focused on maximizing IT transparency, primarily through SLAs, and complete accountability for IT development. So, in the future
one of the principal IT objectives is for the internal IT functions to take full responsibility for all IT supplies called for by projects. The new IT strategy also
focuses heavily on process optimizing in general, and in particular the implementation of additional processes in accordance with the ITIL methodology.
In addition, the Company is focusing on increasing the efficiency, availability, and operational security of our information systems (optimizing the extensive
systems for managing non-life insurance contracts and processing payments, further improving the JOK application, completing the migration of TIA,
increasing process automation, and completing the separation of IT development from IT operations).
In the finance area, IT strategy is focused primarily on improving the planning process, cost transparency (optimizing the costs of operating and maintaining
information systems), as well as on reducing the number of suppliers.
In the IT architecture and security area, 2007 will see completions of an update of internal IT guidelines with emphasis on ensuring that company
employees receive security training. We will conduct security audits of technologies and processes, revise Company employees’ access to information
assets, and make changes to how information system users are monitored.
The primary goal for the near future is intensive development of products for life assurance (unit-linked life assurance, flexible life assurance), as well as
non-life insurance, supported by the segmented approach and multichannel distribution.
We are planning to conclude the process of migrating the non-life KOS system to TIA; monitor, optimize, and improve batch processes in the TIA, CZP, and
APH systems; improve DWH architecture; further improve the front-end infrastructure of the JOK system; and, last but not least, standardize and
streamline the commissions system.
ANNUAL REPORT 2006 57
In the claims handling function, we made
further improvements in how work is
organized. This allowed Česká pojišťovna to
declare a commitment to clients –
95%of the claims are completely
processed within 5 days of receiving
the last document.
MODERN TECHNOLOGIESARE TURNING OUR LIFE INTOA NEVER-ENDING STREAMOF INFORMATION ANDSTIMULI. THE DISTANCESBETWEEN PEOPLE AREGETTING SHORTER,ENABLING THE SHARING OF THOUGHTS, IDEAS, ANDEXPERIENCES. THE WORLDIS GETTING SMALLER, BUT AT THE SAME TIME THE HORIZON OF OURPOSSIBILITIES ANDPOTENTIAL IS EXPANDINGEVEN FURTHER.
Outlook
The Company’s principal short- and mid-term goal continues to be to maintain its existing position in the Czech life and non-life insurance market segments
and at the same time to grow the Company’s value. Česká pojišťovna intends to continue to build its identity as an insurance institution offering insurance
as well as financial products and services to the widest possible clientele.
The Company entered the year 2007 with stabilized non-life insurance portfolios and well established business procedures. We are working hard to
implement new products and internal corporate processes to ensure that investments in new technologies not only increase our potential for success in
business, but also bring savings in administrative overhead costs.
ANNUAL REPORT 2006 59
Fees Paid to the Auditor
Type of service For Česká pojišťovna For the Česká pojišťovna Consolidated Group
Paid Of which, Paid Of which,
in 2006 relating to 2006 in 2006 relating to 2006
CZK ’000 accounting period accounting period
Audit-related services 7,735 7,735 5,153 5,153
Other services 22,084 21,918 11,471 10,816
Total 29,819 29,653 16,624 15,969
Basic Elements of Manager Incentives in 2006
Pursuant to the Articles of Association and a decision of the General Meeting, members of the Board of Directors (Supervisory Board), who are also
employees of Česká pojišťovna under a labor contract or appointment, are entitled to Board of Directors (Supervisory Board) member remuneration.
Base Wage
For managers and other employees alike, the base wage is governed by the wage rules set forth in the Collective Agreement. The specific base wage amount
for managerial positions is stipulated individually in the manager’s contract, or by a wage order, and is in line with usual practice in the Czech Republic.
Bonus and Other Variable Wage Components
The annual bonus and possible other variable wage components (performance pay, project pay, etc.) are governed by unified rules. Eligibility for the bonus is
given in written form during the calendar year. The written document in question defines the tasks and targets of the manager, the amount of the bonus, and
rules for payout. The average bonus amount, provided the stipulated tasks are fulfilled, is 4.5 times the base monthly wage and essentially reflects the usual
market level.
Supplementary Information on the FinancialSituation and Financial Performance
60 ANNUAL REPORT 2006
Development of Česká pojišťovna’s Solvency Over Time
The table below shows the results of the solvency calculation for 2004 and 2005 pursuant to Regulation No. 303/2004 Coll., and for 2006 pursuant to
Regulation No. 96/2006 Coll. implementing Act No. 363/1999 Coll. on Insurance, as amended.
The long-term development of Česká pojišťovna’s solvency is quite favorable. The drop in Available Solvency Margin in 2006 was caused by a change
in capital in conjunction with payment of a dividend in 2006. Nonetheless, Česká pojišťovna meets solvency requirements by a large margin in both life
and non-life insurance.
CZK billion 2006 2005 2004
Life assurance
Required Solvency Margin 3.4 3.2 3.1
Available Solvency Margin 13.2 14.5 14.2
Non-life insurance
Required Solvency Margin 2.6 2.5 2.6
Available Solvency Margin 6.5 8.4 5.3
Note: Under Regulation No. 303/2004 Coll., reinsurance is included in non-life insurance.
Information on Loans
In 2006 and 2005, the Company did not have any records of loans extended to members of the Board of Directors and/or Supervisory Board.
Subordinated Loan from the Shareholder
Under a Subordinated Loan Agreement, the Company accepted a CZK 2,500,000,000 loan from PPF Group N.V. on 10 June 2003. The loan matures in 2018.
In conjunction with the split-off transaction, this subordinated loan was repaid in 2006 and as of 31 December 2006 Česká pojišťovna had no subordinated
debt – see Note F.15 to the financial statements.
Court, Administrative and Arbitration Proceedings
The Company is party to litigation with the National Property Fund of the Czech Republic (the “NPF”), in which the NPF is seeking consideration under an
Agreement to Agree, which was entered into between the Company and the NPF on 8 October 1997. The Company’s position on the dispute is that the
NPF’s alleged claim does not exist. Based on filings made, information known, and a legal analysis conducted, company management is of the opinion that
the complainant’s claim should not be granted.
ANNUAL REPORT 2006 61
Principal Non-financial Investments
The non-financial investments set forth below went mainly on building construction and renovation, furnishings, and information technology.
Year/category Construction Furniture Office equipment Other Total
and renovation and fittings and information
technology
2000 581,906 6,544 195,423 85,981 869,854
1st quarter 2001 10,181 – 40,192 11,929 62,302
2001 536,674 17,310 211,367 75,884 841,235
1st quarter 2002 23,716 2,644 13,499 11,885 51,744
2002 406,452 16,971 385,117 79,489 888,029
1st quarter 2003 67,505 1,446 142,845 7,557 219,352
2003 467,688 10,914 936,667 75,357 1,490,626
1st quarter 2004 78,820 1,487 62,339 6,707 149,353
2004 725,076 12,536 955,269 26,096 1,718,978
1st quarter 2005 226,616 2,250 157,475 4,176 390,517
2005 416,090 17,117 1,116,103 9,291 1,558,601
1st quarter 2006 52,571 607 64,819 72 118,069
2006 357,758 8,933 698,153 9,986 1,074,830
1st quarter 2007 121,848 1,658 73,219 154 196,879
Česká pojišťovna makes non-financial investments only in the Czech Republic and finances them from equity. In future years, Česká pojišťovna expects to
make non-financial investments at a level of roughly CZK 1.2 billion.
62 ANNUAL REPORT 2006
Present Value of Land and Buildings
In view of the quantity of the real estate owned by the Company (see, e.g., the number of structures given in the table below), only aggregate figures
are given. Due to excessive size, an item-by-item list could only be included at the expense of reduced ease of orientation in the Annual Report.
None of the real estate owned by Česká pojišťovna is encumbered by mortgage.
Year Land Buildings In process and Total
advance payments
Value at 31 December 2000 TCZK 781,266 6,861,931 333,351 7,976,548
Number number – 225 – 225
Total area m2 1,235,809 – – 1,235,809
Present value at 31 December 2001 TCZK 743,117 7,351,795 435,909 8,530,821
Number number – 205 – 205
Total area m2 1,221,554 – – 1,221,554
Present value at 31 December 2002 TCZK 818,975 7,656,385 838,138 9,313,498
Number number – 198 – 198
Total area m2 1,082,620 – – 1,082,620
Present value at 31 December 2003 TCZK 797,312 5,740,121 1,074,434 7,611,867
Number number – 161 – 161
Total area m2 853,298 – – 853,298
Present value at 31 December 2004 TCZK 749,049 6,261,612 729,385 7,740,046
Number number – 159 – 159
Total area m2 830,425 – – 830,425
Present value at 31 December 2005 TCZK 328,702 5,810,655 353,419 6,492,776
Number number – 150 – 150
Total area m2 792,647 – – 792,647
Present value at 31 December 2006 TCZK 419,756 5,051,123 349,805 5,820,684
Number number – 91 – 91
Total area m2 696,018 – – 696,018
Information on Entities in Which Česká pojišťovna Holds a Participating Share Exceeding 10% of Its Own Net Current Period Earnings (as at 31 December 2006; based on figures known to the Company as at the Annual Report compilation date)
Name Registered office ID No. Principal Basic share Stake in basic Acquisition cost
business capital (TCZK) share capital (TCZK)
CP Reinsurance Florinis 11, Nicosia, n/a Reinsurance services 1,141,176 100.00% 1,305,096
company Ltd. Republic of Cyprus
Penzijní fond České
pojišťovny Truhlářská 1106/9, Prague 1 61858692 Pension fund 213,700 100.00% 1,559,137
RAO UES (GDR) Moscow n/a Energy n/a n/a 852,403
ZENTIVA B.V. Fred. Roeskestraat 123, n/a Manufacture 10,486 10.92% 4,753,262
1076 EE Amsterdam of pharmaceuticals
ANNUAL REPORT 2006 63
During 2006 the Supervisory Board discharged the tasks required by law and the Company’s Articles of Association. During the year 11 meetings were
held. The Supervisory Board monitored the Board of Directors’ performance and the implementation of the Company’s business activities. It verified
whether the Company conducted its business in compliance with applicable law, the Articles of Association and instructions given by the General Meeting
and decisions of the sole shareholder. The Supervisory Board also dealt with complaints made by the Company’s clients and business partners, which
were delivered to the Supervisory Board.
The four-year terms of the following Supervisory Board members expired in 2006: Eva Dytrychová and Marie Kortová. Marek Orawski was elected to the
Supervisory Board. Jaromír Prokš resigned from the Supervisory Board and František Tlustoš was elected in his place.
On 25 October 2006, the Supervisory Board discussed the resignation of František Tlustoš as Vice Chairman and Member of the Supervisory Board.
It declared 31 October 2006 to be Mr. Tlustoš’s last day in office as Vice Chairman and Member of the Supervisory Board. At the same time it discussed
the resignation of Petr Kellner as Member of the Supervisory Board and declared 31 October 2006 as Mr. Kellner’s last day in office.
On 1 February 2007, the Board of Directors of Česká pojišťovna a.s. discussed a report of the resignation of Ivan Kočárník as Chairman and Member of the
Supervisory Board. Mr. Kočárník resigned at his own request effective 31 January 2007. The request was discussed and approved by the Supervisory
Board on 24 January 2007. Subsequently the Supervisory Board operated in the following configuration: Aleš Minx (Vice Chairman) and Marek Orawski.
During its meetings, the Supervisory Board discussed the Company’s financial performance, the fulfillment of the financial and commercial plan, the
investment policy, and the financial performance of the Company’s subsidiaries. The Supervisory Board monitored the company’s strategic objectives as
well as those of its financial group.
The Board of Directors submitted to the Supervisory Board the financial performance results for 2006, which are part of the audited year-end financial
statements. The Board of Directors also submitted its proposal for distribution of the Company’s earnings, including distribution of the earnings from the
2006 accounting period, which was discussed by the Board of Directors and which the Board of Directors intends to recommend for approval to the sole
shareholder acting in the capacity of the General Meeting, as well as the consolidated financial performance results for the 2006 accounting period. The
Supervisory Board also received for its review the Report on Relations Between the Company and Related Entities in 2006 (compiled in accordance with
Section 66a(9) of Act No. 513/1991 Coll., the Commercial Code).
The Supervisory Board has reviewed the year-end financial statements for 2006, the consolidated financial statements for 2006, the Board of Directors’
proposed distribution of the company’s earnings, including the distribution of the earnings from the 2006 accounting period, and the Report on Relations
Among Related Parties, 2006 Accounting Period, and has found nothing therein that would constitute grounds to pronounce a negative Supervisory Board
opinion on the contents of the above mentioned documents. Within its review, the Supervisory Board further found that the proposed earnings distribution
will not have a negative impact on the company’s financial situation, with regard for the company’s current business position. In light of these facts,
the Supervisory Board recommends that the sole shareholder exercise the power of the General Meeting to approve the Company’s year-end financial
statements for the 2006 accounting period, the consolidated financial statements for the 2006 accounting period, and the earnings distribution according
to the proposals submitted.
Prague, 19 April 2007
Aleš Minx Marek Orawski
Vice Chairman of the Supervisory Board Member of the Supervisory Board
64 ANNUAL REPORT 2006
Supervisory Board’s Report
Standard & Poor’s reaffirmed the creditrating and financial strength rating ofČeská pojišťovna at BBB with stableoutlook, confirming Česká pojišťovna’sposition in the top grade – the investmentgrade.
In its latest evaluation of Českápojišťovna’s financial and credit position,Moody’s changed the outlook of Českápojišťovna’s Baa3 financial strength ratingfrom “stable” to “positive.”
History gives us unrepeatable experiences.
The most valuable things about the past are
reflected in the present. The only limit
on future possibilities is the variety
of our own ambitions and plans.
Auditor’s Report
Auditor’s report to the shareholders of Česká pojišťovna a.s.
Financial statements
On the basis of our audit, on 30 March 2007 we issued an auditor’s report on the Company’s statutory financial statements, which are included in this
annual report, and our report was as follows:
"We have audited the accompanying separate financial statements of Česká pojišťovna a.s., which comprise the balance sheet as of 31 December 2006,
and the income statement, the statement of changes in equity and the cash flow statement for the year then ended and the notes to these separate
financial statements including a summary of significant accounting policiess and other explanatory notes. Information about the company is stated in point
A.1. of the notes to these separate financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these separate financial statements of Česká pojišťovna a.s. in accordance with the
Act on Accounting and relevant legislation of the Czech Republic and in accordance with International Financial Reporting Standards as adopted by the EU.
This responsibility includes: designing, implementing and maintaining internal controls relevant to the preparation and fair presentation of separate 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 separate financial statements based on our audit. We conducted our audit in accordance with the Act
on Auditors and International Standards on Auditing and the relevant guidance of the Chamber of Auditors of the Czech Republic. 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 separate financial statements. The procedures
selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the separate financial statements, whether
due to fraud or error. In making those risk assessments, the auditor considers internal controls relevant to the entity’s preparation and fair presentation of
the separate financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the entity’s internal controls. An audit also includes evaluating the appropriateness of accounting policies used and the
reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the separate 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 separate financial statements present fairly in all material respects the assets, liabilities and the financial position of Česká pojišťovna a.s.
as of 31 December 2006, and of its expenses, revenues and financial performance and its cash flows for the year then ended in accordance with the Act on
Accounting and relevant legislation of the Czech Republic and in accordance with International Financial Reporting Standards as adopted by the EU.“
KPMG Česká republika Audit, s.r.o. Tel.: +420 222 123 111Pobřežní 648/1a Fax: +420 222 123 100186 00 Praha 8 Internet: www.kpmg.czČeská republika
KPMG Česká republika Audit, s.r.o., a Czech limited liability IČ 49619187 Obchodní rejstřík Živnostenská banka, Praha 1company and a member firm of KPMG network DIČ CZ49619187 vedený Městským soudem v Praze č.ú./account no. of independent member firms affilated oddíl C, vložka 24185. 466016004/0400with KPMG International, a Swiss cooperative.
66 ANNUAL REPORT 2006
Report on relations between related parties
We have also reviewed the factual accuracy of the information disclosed in the report on relations between related parties of Česká pojišťovna a.s. for the
year ended 31 December 2006. This report on relations between the related parties is the responsibility of the Company’s management. Our responsibility
is to express our view on the report on relations based on our review.
We conducted our review in accordance with International Standards on Auditing and the relevant guidance of the Chamber of Auditors of the Czech
Republic. Those standards require that we plan and perform the review to obtain moderate assurance that report on relations is free of material factual
misstatement. A review is limited primarily to inquiries of Company personnel and analytical procedures and examination, on a test basis, of the factual
accuracy of information, and thus provides less assurance than an audit. We have not conducted an audit of the report on relations and, accordingly, we do
not express an audit opinion.
Nothing has come to our attention based on our review that indicates that the information disclosed in the report on relations between related parties of
Česká pojišťovna a.s. for the year ended 31 December 2006 contains material factual misstatements.
Annual report
We have audited the consistency of the annual report with the audited financial statements. This annual report is the responsibility of
Company’s management. Our responsibility is to express our opinion on the consistency of the annual report with the audited financial statements based
on our audit.
We conducted our audit in accordance with the Act on Auditors and International Standards on Auditing and the relevant guidance of the Chamber of
Auditors of the Czech Republic. Those standards require that we plan and perform the audit to obtain reasonable assurance that the information disclosed
in the annual report describing matters that all also presented in the financial statements is, in all material respects, consistent with the audited financial
statements. We believe that our audit provides a reasonable basis for the auditor’s opinion.
In our opinion, the information disclosed in the annual report is, in all material respects, consistent with the audited financial statements.
Prague, 31 August 2007
KPMG Česká republika Audit, s.r.o. František Dostálek
Licence numer 71 Partner
Licence number 176
ANNUAL REPORT 2006 67
68 ANNUAL REPORT 2006
Balance Sheet 70
Income Statement 71
Statement of Changes in Equity 72
Statement of Cash Flows 73
Notes to the Financial Statements 74
A. GENERAL 74
A.1. Description of the Company 74
A.2. Statutory Bodies 74
A.3. Statement of compliance 75
A.4. Basis of preparation 75
B. SEGMENT REPORTING 76
C. SUBSIDIARIES AND ASSOCIATES 80
D. SIGNIFICANT ACCOUNTING POLICIES
AND ASSUMPTIONS 83
D.1. Significant accounting policies 83
D.2. Principal assumptions 92
D.3. Terms and conditiions of insurance
and investment contracts that have a material effect on
the amount, timing and uncertainty of future cash flows 96
D.4. Changes in accounting policy and accounting
pronouncements adopted since 1 January 2006 99
E. RISK EXPOSURES, RISK MANAGEMENT
OBJECTIVES AND PROCEDURES 100
E.1. Derivate financial instruments 100
E.2. Company’s risk management 101
E.3. Hedging 113
E.4. Risk management and control 113
F. NOTES TO THE BALANCE SHEET AND
INCOME STATEMENT 115
F.1. Intangible assets 115
F.2. Property, plant and equipment 117
F.3. Investment property 118
F.4. Financial assets 118
F.5. Non-current assets held for sale 122
F.6. Reinsurance assets 123
F.7. Deferred tax 123
F.8. Other assets 124
F.9. Prepayments and accured income 124
F.10. Cash and cash equivalents 125
F.11. Impairment losses on loans and advances to banks
and customers, receivables, non-current assets held
for sale, inventories and other assets recognised 125
Financial Part
ANNUAL REPORT 69
F.12. Capital and reserves 126
F.13. Insurance liabilities 127
F.14. Financial liabilities for investment contracts with DPF 131
F.15. Subordinated liabilites 132
F.16. Other liabilites evidenced by paper 132
F.17. Financial liabilities at fair value through profit or loss 133
F.18. Liabilities to banks 133
F.19. Provisions 133
F.20. Payables 134
F.21. Accruals and deferred income 135
F.22. Net insurance premium revenue 135
F.23. Interest income and similar income 137
F.24. Other income from financial assets 138
F.25. Income from investment property 139
F.26. Net fee and commission income, and income
from service activities 139
F.27. Other income 140
F.28. Net insurance claims and benefits 140
F.29. Investment contract benefits 141
F.30. Interest and similar expense 141
F.31. Other expense from financial assets 141
F.32. Expense from investment property 142
F.33. Acquisition costs and other operating expenses 142
F.34. Other expenses 143
F.35. Net income from investments in subsidiaries
and associates 144
F.36. Income tax expense 144
F.37. Repurchase and resale agreements 145
F.38. Off balance sheet items 145
F.39. Related parties 146
F.40. Earnings per share 151
F.41. Fair value of assets and liabilities 152
F.42. Critical accounting estimates and judgements 153
G. SUBSEQUENT EVENTS 154
G.1. Merger of CP Reinsurance company Ltd. and
FOX Credit Services Ltd. 154
G.2. The Project for the sale of significant land and buildings 154
G.3. Hurricane Kyrril 154
G.4. âSOB squeeze-out 154
70 ANNUAL REPORT 2006
Balance Sheetas at 31 December
TCZK Note 2006 2005
Intangible assets F.1 1,436,102 1,425,055
Subsidiaries and associates C 3,950,694 16,728,599
Property, plant and equipment F.2 3,267,516 3,970,050
Investment property F.3 2,911,611 3,230,699
Financial assets available for sale F.4 5,174,571 1,779,769
Financial assets held to maturity F.4 1,886,610 1,870,728
Financial assets at fair value through profit or loss F.4 69,855,005 67,897,066
Loans and receivables F.4 22,343,190 25,357,831
Non-current Assets Held for Sale F.5 214,964 –
Reinsurance assets F.6 8,266,244 7,888,762
Other assets F.8 55,912 56,670
Prepayments and accrued income F.9 751,926 676,888
Cash and cash equivalents F.10 1,171,098 249,087
Total assets 121,285,443 131,131,204
Issued capital F.12 4,000,000 2,980,963
Reserves F.12 3,874,961 4,094,378
Retained earnings F.12 9,202,536 13,787,834
Total equity 17,077,497 20,863,175
Insurance liabilities F.13 88,368,875 87,652,105
Financial liabilities for investment contracts with DPF F.14 1,308,480 1,065,924
Subordinated liabilities F.15 – 2,500,000
Other liabilities evidenced by paper F.16 – 4,068,190
Financial liabilities at fair value through profit or loss F.17 392,236 511,817
Liabilities to banks F.18 277,129 264,910
Provisions F.19 2,292,848 2,275,839
Payables F.20 9,297,336 9,971,765
Deferred tax liabilities F.7 711,423 603,699
Other liabilities 46,971 38,635
Accruals and deferred income F.21 1,512,648 1,315,145
Total liabilities 104,207,946 110,268,029
Total equity and liabilities 121,285,443 131,131,204
ANNUAL REPORT 71
Income Statementfor the year ended 31 December
TCZK Note 2006 2005
Insurance premium revenue 37,836,087 39,967,689
Insurance premium ceded to reinsurers -11,056,134 -12,422,952
Net insurance premium revenue F.22 26,779,953 27,544,737
Net income from investments in subsidiaries and associates F.35 2,863,487 1,524,364
Interest and similar income F.23 2,541,356 2,641,998
Other income from financial assets F.24 4,040,822 4,482,584
Income from investment property F.25 341,024 297,525
Fee and commission income F.26 258,654 244,623
Other income F.27 703,509 891,251
Total revenue 37,528,805 37,627,082
Insurance claims and benefits incurred -23,158,302 -28,850,782
Insurance claims and benefits recoverable from reinsurers 5,364,393 6,540,514
Net insurance claims and benefits F.28 -17,793,909 -22,310,268
Investment contracts benefits F.29 -242,556 -312,666
Interest and similar expenses F.30 -208,720 -345,209
Other expenses from financial assets F.31 -159,745 -220,856
Expenses from investment property F.32 -305,939 -650,763
Acquisition costs and other operating expenses F.33 -6,299,003 -6,007,583
Fee and commission expenses F.26 -375,088 -341,107
Other expenses F.34 -1,790,671 -1,601,141
Total expenses -27,175,631 -31,789,593
Profit before tax 10,353,174 5,837,489
Income tax expense F.36 -2,059,974 -1,196,213
Profit after tax F.12 8,293,200 4,641,276
Net profit for the year 8,293,200 4,641,276
Weighted average number of shares 40,000 40,000
Basic and Diluted earning per share (CZK) F.40 207.330 116.032
72 ANNUAL REPORT 2006
Statement of Changes in Equityfor the year ended 31 December
2006 Issued Revaluation Revaluation Legal and Catastrophe Retained Total
capital financial – Land and statutory and earnings
assets AFS buildings reserves equalisation
TCZK reserves
Balance as at 1 January 2,980,963 899,648 166,131 682,478 2,346,121 13,787,834 20,863,175
Total gains and losses recognized
in equity – -364,359 -14,581 – – 19,184 -359,756
Profit for the year – – – – – 8,293,200 8,293,200
Total recognized income (expense)
for the period – -364,359 -14,581 – – 8,312,384 7,933,444
Net allocation to legal and statutory
reserves (other than from Net profit) – – – – – – –
Dividends to shareholders – – – – – -11,500,904 -11,500,904
Increase of the share capital 1,019,037 – – – – -1,019,037 –
Other movements 1) – – – – – -218,218 -218,218
Changes in catastrophe
and equalisation reserves – – – – 159,523 -159,523 –
Balance as at 31 December 4,000,000 535,289 151,550 682,478 2,505,644 9,202,536 17,077,497
1) Includes an impact of the split-off of Home Credit in amount of TCZK 218,892. See also note C.
2005 Issued Revaluation Revaluation Legal and Catastrophe Retained Total
capital financial – Land and statutory and earnings
assets AFS buildings reserves equalisation
TCZK reserves
Balance as at 1 January 2,980,963 686,055 122,971 682,478 2,680,919 8,811,539 15,964,925
Total gains and losses recognized
in equity – 213,593 43,160 – – – 256,753
Profit for the year – – – – – 4,641,276 4,641,276
Total recognized income (expense)
for the period – 213,593 43,160 – – 4,641,276 4,898,029
Net allocation to legal
and statutory reserves
(other than from Net profit) – – – – – – –
Dividends to shareholders – – – – – – –
Increase of the share capital – – – – – – –
Other movements – – – – – 221 221
Changes in catastrophe
and equalisation reserves – – – – -334,798 334,798 –
Balance as at 31 December 2,980,963 899,648 166,131 682,478 2,346,121 13,787,834 20,863,175
ANNUAL REPORT 73
Statement of Cash Flows for the year ended 31 December
TCZK 2006 2005Cash flows from operating activitiesProfit before tax 10,353,174 5,837,489Adjustments for:Depreciation and amortisation 970,017 880,328Impairment and reversal of impairment of current and non current assets 171,112 245,041Profit/Loss on disposal of PPE, intangible assets and investment property 27,627 336,227Profit/Loss on sale of Financial Assets -2,580,644 -3,268,858Gains/losses on disposal of consolidated subsidiaries and associates -3,013,630 -1,525,529Interest expense 208,720 345,209Interest income -2,541,356 -2,641,998Income/expenses not involving movements of cash 62,230 180,849Purchase of financial assets at FVPL held for trading -15,448,095 -18,572,594Proceeds from financial assets at FVPL held for trading 14,923,719 21,519,638Change in loans and advances to banks 3,029,351 -2,558,062Change in loans and advances to customers 327,955 594,431Change in receivables -517,381 -2,901,787Change in reinsurance assets -377,482 -2,364,872Change in other assets, prepayments and accrued income -75,038 274,125Change in payables -1,008,712 2,690,395Change in financial liabilities for investment contract with DPF 242,556 312,665Change in financial liabilities at FVPL held for trading -119,581 -1,120,192Change in liabilities to banks 10,715 27,669Change in insurance liabilities 716,770 4,042,439Change in other liabilities, accruals and deferred income 197,503 -552,980Change in other provisions 17,009 -11,076Cash flows arising from taxes on income -1,569,237 -2,041,349Net cash from operating activities 4,007,302 -272,792Cash flows from investing activitiesInterest received 2,475,250 2,570,654Dividends received 2,212,696 1,888,091Purchase of tangible assets and intangible assets -1,120,961 -1,225,665Purchase of financial assets at FVPL not held for trading -27,685,936 -40,989,970Purchase of financial assets available for sale -4,260,346 –Purchase of investment property -62,218 -268,637Acquisition of subsidiaries and associates, net of cash acquired -350,545 -6,014,000Proceeds from disposals of tang. and intang. assets 623,856 66,759Proceeds from financial assets at FVPL not held for trading 28,033,616 42,367,962Proceeds from financial assets held to maturity – 310,217Proceeds from financial assets available for sale 1,074,364 –Proceeds from sale of investment property 259,330 437,888Proceeds from disposal of subsidiaries and associates and other proceeds from subsidiaries and associates 7,441,245 1,587,031Other investing activities -43,570 –Net cash from investing activities 8,596,781 730,330Cash flows from financing activitiesDrawing of other loans 4,054,895 –Proceeds from the issue of other liabilities evidenced by paper – 60,000Payment of other liabilities evidenced by paper -3,989,955 -32,000Interest paid -235,232 -360,737Dividends paid to shareholders -11,500,904 –Net cash from financing activities -11,671,196 -332,737Net increase (decrease) in cash and cash equivalents 932,887 124,801Cash and cash equivalents as at 1 January 249,087 119,569Effect of exchange rate changes on cash and cash equivalents -10,876 4,717Cash and cash equivalents as at 31 December 1,171,098 249,087
74 ANNUAL REPORT 2006
Notes to the Financial Statements
A. GENERAL
A.1. DESCRIPTION OF THE COMPANY
âeská poji‰Èovna a.s. (”âeská poji‰Èovna” or “âP” or “the Company”) is a composite insurer offering a wide range of life and non-life insurance products
and is domiciled in the Czech Republic. The Company was incorporated on 1 May 1992, as a joint stock company and is the successor to the former
state-owned insurance company âeská státní poji‰Èovna.
Structure of Shareholders
Till 22 December 2006 100% shares of âeská poji‰Èovna a.s. were owned by PPF Group N.V. domiciled in the Netherlands.
On 22 December 2006 100% shares of âeská poji‰Èovna a.s. were transferred from PPF Group N.V. to a holding company CZI Holdings N.V., domiciled in the
Netherlands, which was established by PPF Group N.V. to manage its insurance activities. The effective change of control occurred on 31 December 2006.
The PPF Group N.V. continues to be the Company’s ultimate parent company.
Registered Office:
Spálená 75/16
113 04 Prague 1
Czech Republic
ID number: 45 27 29 56
The Directors authorised the financial statements for issue on 30 March 2007.
A.2. STATUTORY BODIES
The Board of Directors as at the Balance Sheet Date:
Chairman: Ladislav Bartoníãek, Prague
Vice Chairman: Milan Madûryã, Zlín
Ladislav Chvátal, Prague
Members: Jifií ·mejc, Prague
Jan JeÏdík, Liberec
Ladislav Chvátal has accepted a position of the Vice Chairman of the Board of Directors on 26 September 2006.
At least two members of the Board of Directors, of whom one must be the Chairman or the Vice-Chairman, must act together in the name of the Company
in relation to third parties, courts and other bodies. When signing on behalf of the Company, the signatures and positions of at least two members of the
Board of Directors, one of which one must be the Chairman or the Vice-Chairman, must be appended to the designated business name of the Company.
The Supervisory Board as at the Balance Sheet Date:
Chairman: Ivan Koãárník, Prague
Vice Chairman: Ale‰ Minx, Prague
Members: Marek Orawski, Havífiov
ANNUAL REPORT 75
On 21 and 22 February 2006, the election of the Supervisory Board members was held where, in accordance with the Commercial Code, one new member
was elected by the Company’s employees. The newly elected member is Marek Orawski, with effect from 1 March 2006. He replaced former employee
elected Marie Kortová and Eva Dytrychová. On 22 March 2006, the Supervisory Board discussed the resignation of Jaromír Prok‰ from the Supervisory
Board and co-opted Franti‰ek Tlusto‰ to the vacated position, based on the recommendation of the Board of Directors. In October 2006 Franti‰ek Tlusto‰
and Petr Kellner resigned from their positions and subsequently the sole shareholder acting decided that starting 1 November 2006 the Supervisory Board
would consist of 3 members only. Accordingly Franti‰ek Tlusto‰ and Petr Kellner resigned from their positions in October 2006.
On 31 January 2007 Ivan Koãárník resigned from his position as chairman and a member of the Supervisory Board.
A.3. STATEMENT OF COMPLIANCE
The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) and their interpretations as adopted by
the International Accounting Standards Board (IASB) and International Financial Reporting Standards as adopted by the European Union (EU) in accordance
with the IAS Regulation (EC 1606/2002). None were adopted prior to their effective date.
The management has reviewed those standards and interpretations adopted by the EU at the date of issue of the financial statements but which were not
effective at that date. An assessment of the expected impact of these standards and interpretations on the Company is shown in note D.4.
A.4. BASIS OF PREPARATION
The local accounting legislation requires the Company to prepare these separate financial statements in accordance with IFRS (as adopted by EU – see
note A.3.). The Company also prepares consolidated financial statements for the same period in accordance with IFRS.
The financial statements are presented in Czech Crowns (“CZK”), rounded to the nearest thousand.
The financial statements have been prepared on the historical cost basis except that the following assets and liabilities which are stated at their fair value:
derivative financial instruments, financial instruments held for trading, financial instruments designated upon initial recognition as valued at fair value
through profit or loss, financial instruments classified as available-for-sale and investment properties.
Non-current assets and disposal groups held for sale are stated at the lower of carrying amount and fair value less costs to sell.
The preparation of the financial statements in accordance with IFRS requires management to make judgements, estimates and assumptions that affect the
application of policies and the reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on
historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making
the judgements about carrying values of assets and liabilities that cannot readily be determined from other sources. The actual values may differ from
these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the
estimate is revised if the revision affects only that period or in both the period of the revision and future periods if the revision affects both the current and
future periods.
76 ANNUAL REPORT 2006
B. SEGMENT REPORTING
BALANCE SHEET BY BUSINESS SEGMENT as at 31 December
2006 Non-life Life Non-allocated Total
TCZK
Assets
Intangible assets 1,035,722 400,380 – 1,436,102
Subsidiaries and associates 1,255,749 2,694,945 – 3,950,694
Property, plant and equipment 1,261,504 2,006,012 – 3,267,516
Investment property – 2,911,611 – 2,911,611
Financial assets available-for-sale 242,552 4,932,019 – 5,174,571
Financial assets held-to-maturity – 1,886,610 – 1,886,610
Financial assets at fair value through profit or loss 18,050,380 51,804,625 – 69,855,005
Loans and receivables 12,417,502 9,898,432 27,256 22,343,190
Non-current asset held for sale – 214,964 – 214,964
Reinsurance assets 7,437,017 829,227 – 8,266,244
Other assets – – 55,912 55,912
Prepayments and accrued income 657,697 94,229 – 751,926
Cash and cash equivalents 278,522 892,576 – 1,171,098
Total assets 42,636,645 78,565,630 83,168 121,285,443
Liabilities
Insurance liabilities 21,869,457 66,499,418 – 88,368,875
Financial liabilities for investment contracts with DPF – 1,308,480 – 1,308,480
Financial liabilities at fair value through profit or loss 21,788 370,448 – 392,236
Liabilities to banks – 277,129 – 277,129
Provisions 2,216,129 76,719 – 2,292,848
Payables 7,300,317 1,358,040 638,979 9,297,336
Deferred tax liabilities – – 711,423 711,423
Other liabilities – – 46,971 46,971
Accruals and deferred income 1,093,080 419,568 – 1,512,648
Total liabilities 32,500,771 70,309,802 1,397,373 104,207,946
Shareholders’ equity – – – 17,077,497
Total shareholders’ equity and liabilities – – – 121,285,443
ANNUAL REPORT 77
2005 Non-life Life Non-allocated Total
TCZK
Assets
Intangible assets 993,263 431,792 – 1,425,055
Subsidiaries and associates 1,308,408 15,420,191 – 16,728,599
Property, plant and equipment 353,986 3,616,064 – 3,970,050
Investment property – 3,230,699 – 3,230,699
Financial assets available-for-sale – 1,779,769 – 1,779,769
Financial assets held to maturity – 1,870,728 – 1,870,728
Financial assets at fair value through profit or loss 11,210,927 56,686,139 – 67,897,066
Loans and receivables 15,516,153 9,814,441 27,237 25,357,831
Reinsurance assets 7,106,207 782,555 – 7,888,762
Other assets – – 56,670 56,670
Prepayments and accrued income 582,230 94,658 – 676,888
Cash and cash equivalents 39,030 210,057 – 249,087
Total assets 37,110,204 93,937,093 83,907 131,131,204
Liabilities
Insurance liabilities 21,786,557 65,865,548 – 87,652,105
Financial liabilities for investment contracts with DPF – 1,065,924 – 1,065,924
Subordinated liabilities – – 2,500,000 2,500,000
Other liabilities evidenced by paper 318,189 3,750,001 – 4,068,190
Financial liabilities at fair value through profit or loss 136,389 375,428 – 511,817
Liabilities to banks 109,797 155,113 – 264,910
Provisions 2,211,294 64,545 – 2,275,839
Payables 8,318,340 1,398,109 255,316 9,971,765
Deferred tax liabilities – – 603,699 603,699
Other liabilities – – 38,635 38,635
Accruals and deferred income 902,170 412,975 – 1,315,145
Total liabilities 33,782,736 73,087,643 3,397,650 110,268,029
Shareholders’ equity – – – 20,863,175
Total shareholders’ equity and liabilities – – – 131,131,204
78 ANNUAL REPORT 2006
INCOME STATEMENT BY BUSINESS SEGMENT for the year ended 31 December
2006 Non-life Life Non-allocated Total
TCZK
Net insurance premium revenue 14,620,906 12,159,047 – 26,779,953
Net income from investments in subsidiaries and associates 1,392,845 1,470,642 – 2,863,487
Interest and similar income 479,390 2,061,966 – 2,541,356
Other income from financial assets 1,114,515 2,926,307 – 4,040,822
Income from investment property – 341,024 – 341,024
Fee and commission income 246,171 12,483 – 258,654
Other income 178,898 524,611 – 703,509
Total revenue 18,032,725 19,496,080 – 37,528,805
Net insurance claims and benefits -8,586,513 -9,207,396 – -17,793,909
Investment contracts benefits – -242,556 – -242,556
Interest and similar expenses -25,002 -53,808 -129,910 -208,720
Other expenses from financial assets -79,974 -79,771 – -159,745
Expenses from investment property – -305,939 – -305,939
Acquisition costs and other operating expenses -3,661,690 -2,637,313 – -6,299,003
Fee and commission expenses -189,006 -186,082 – -375,088
Other expenses -816,929 -973,742 – -1,790,671
Total expenses -13,359,114 -13,686,607 -129,910 -27,175,631
Profit before tax 4,673,611 5,809,473 -129,910 10,353,174
Income tax expense – – -1,929,493 -1,929,493
Deferred tax – – -130,481 -130,481
Net profit for the year 4,673,611 5,809,473 -2,189,884 8,293,200
Profit attributable to equity holders 4,673,611 5,809,473 -2,189,884 8,293,200
2005 Non-life Life Non-allocated Total
TCZK
Net insurance premium revenue 13,709,515 13,835,222 – 27,544,737
Net income from investments in subsidiaries and associates 678,467 845,897 – 1,524,364
Interest and similar income 566,360 2,075,638 – 2,641,998
Other income from financial assets 386,407 4,096,177 – 4,482,584
Income from investment property – 297,525 – 297,525
Fee and commission income 231,196 13,427 – 244,623
Other income 135,822 755,429 – 891,251
Total revenue 15,707,767 21,919,315 – 37,627,082
Net insurance claims and benefits -9,486,707 -12,823,561 – -22,310,268
Investment contracts benefits – -312,666 – -312,666
Interest and similar expenses -45,459 -112,020 -187,730 -345,209
Other expenses from financial assets -203,689 -17,167 – -220,856
Expenses from investment property – -650,763 – -650,763
Acquisition costs and other operating expenses -3,107,851 -2,899,732 – -6,007,583
Fee and commission expenses -100,545 -240,562 – -341,107
Other expenses -505,686 -1,095,455 – -1,601,141
Total expenses -13,449,937 -18,151,926 -187,730 -31,789,593
Profit before tax 2,257,830 3,767,389 -187,730 5,837,489
Income tax expense – – -1,488,251 -1,488,251
Deferred tax – – 292,038 292,038
Net profit for the year 2,257,830 3,767,839 -1,383,943 4,641,276
Profit attributable to equity holders 2,257,830 3,767,839 -1,383,943 4,641,276
ANNUAL REPORT 79
The following table shows key figures per business segment:
2006 Non-life Life Total
TCZK
Capital expenditure -432,764 -722,904 -1,155,668
Depreciation and amortisation -635,838 -334,179 -970,017
Impairment losses recognised -79,974 -108,297 -188,271
Reversal of impairment losses 72,794 4,695 77,489
2005 Non-life Life Total
TCZK
Capital expenditure -543,464 -739,412 -1,282,876
Depreciation and amortisation -491,216 -389,112 -880,328
Impairment losses recognised -203,689 -164,085 -367,774
Reversal of impairment losses 16,612 156,579 173,191
Inter – segment pricing is determined on an arm’s length basis.
Measurement of segment assets and liabilities and segment revenues and results is based on the accounting policies set out in the accounting policy
notes.
The Company comprises Non-life insurance and Life insurance as the main business segments. Note D.3. of the financial statements provides further
information about significant terms and conditions of insurance products.
Products offered by reported business segments include:
Non-life:
Property and liability
Motor third party liability
Life:
Traditional life
Unit linked
Health
GEOGRAPHICAL SEGMENTThe Company operates mainly in the Czech Republic and in EU countries. More than 99% of the income from insurance contracts comes from clients in
the Czech Republic.
80 ANNUAL REPORT 2006
C. SUBSIDIARIES AND ASSOCIATES
The following table provides details about the Company’s subsidiaries and associates:
2006 Country Cost of Inpairment Net Proportion Proportion Accounting Note
investment loses cost of of of voting treatment
investment ownership power
TCZK interest
CP Reinsurance company Ltd. Cyprus 1,305,096 – 1,305,096 100.0 100.0
CP Strategic Investments B.V. Netherlands 391,530 – 391,530 100.0 100.0
âeská poji‰Èovna, a.s.
v Ruské federaci Russia 291,667 – 291,667 100.0 100.0
âP DIRECT, a.s. Czech Republic 80,000 – 80,000 100.0 100.0
âP finanãní servis a.s. v likvidaci Czech Republic 75,000 – 75,000 100.0 100.0
âeská poji‰Èovna ZDRAVÍ a.s. Czech Republic 191,250 – 191,250 100.0 100.0
Penzijní fond
âeské poji‰Èovny, a.s. Czech Republic 1,559,137 – 1,559,137 100.0 100.0
FOX Credit Services Ltd. Cyprus 0 – 0 100.0 100.0 3)
Univerzální správa majetku a.s. Czech Republic 1,103 – 1,103 100.0 100.0
Contractual Digital Floor, a.s. Czech Republic 510 – 510 51.0 51.0
Nadaãní fond KarlÛv most Czech Republic 5,000 – 5,000 100.0 100.0
První Callin agentura a.s. Czech Republic 153,004 -150,000 3,004 100.0 100.0 11)
âP INVEST
investiãní spoleãnost, a.s. Czech Republic 45,758 – 45,758 100.0 100.0 10)
Finanãní servis o.o.o. Russia 1,566 – 1,566 100.0 100.0 13)
REFICOR s.r.o. Czech Republic 73 – 73 100.0 100.0 14)
Total 4,100,694 -150,000 3,950,694 – – –
Detailed information about transactions with subsidiaries of the Company is provided below. Unless disclosed otherwise, the sales were made outside the
PPF Group.
1) Split-off of HC Holding a.s. and Home Credit B.V.
At a shareholders meeting held on 19 July 2006 (the split-off effective day) the sole shareholder approved a transformation of the Company via a split-off
with the incorporation of a new company Home Credit Grand Holding a.s. The transformation has been performed in accordance with the article 220, note
(r), paragraph (2) and note (zb), paragraph (2) of the Commercial code. PPF Group N.V. is the sole shareholder of the Home Credit Grand Holding a.s.
The Company designated certain assets and liabilities for a split-off. The following assets and liabilities were transferred to the newly incorporated company
at their carrying amounts: Ownership rights to the shares of HC Holding a.s. and Home Credit B.V. with a book value of TCZK 6,780,021 as at the split-off
day, liabilities from the loan from PPF Group N.V. in the amount of TCZK 4,054,895 and from the subordinated loan from PPF Group N.V. and PPF a.s. in the
amount of TCZK 2,509,259. Cash in the amount of TCZK 43,570 and the, remaining liabilities from matured debentures issued by the Company in the
amount of TCZK 40,545. Finally retained earnings of the Company in the amount of TCZK 218,892 of retained earnings of the Company passed
to HC Grand Holding a.s. on the split-off day.
The main reason for this reorganisation is to merge different lines of business not related directly to the insurance business; this move will support the
development of a clear-cut business profile and improvements in the management of both âP and the companies whose shares were transferred to the
newly incorporated company as part of the split-off.
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ANNUAL REPORT 81
2) Sale of eBanka, a.s.
âeská poji‰Èovna has sold its interest in eBanka a.s. to Raiffeisen International Bank-Holding AG. The Company sold the subsidiary based on a sale contract
signed on 24 July 2006 with the new Austrian shareholder. The ownership interest was sold for TCZK 3,686,801 (EUR 130 million). The net book value of
the interest was TCZK 2,740,225.
3) Fox Credit Services Ltd.
On 14 June 2006 the Company, as the sole shareholder, decided to decrease the share capital and pay back the share premium of Fox Credit Services Ltd.
In accordance with this decision the Company has received TCZK 2,070,311. The cost of the investment has been decreased by this amount.
4) âesk˘ porcelán, akciová spoleãnost
According to a contract signed on 10 April 2006 the whole interest of the Company in âesk˘ porcelán, akciová spoleãnost was sold for TCZK 20,000. The
net book value of the interest was 48,687 TCZK.
5) âP PARTNER, a.s
âP PARTNER, a.s. in liquidation has finalised its liquidation and was deleted from the Trade Register on 18 January 2006.
6) PPF Banka a.s.
In accordance with a contract signed on 8 February 2006 shares of PPF Banka a.s. with an acquisition cost of TCZK 2,125 were sold for TCZK 2,125. The
remaining interest in PPF Banka a.s. with a net book value of TCZK 1,281,348 was sold to PPF Group N.V. for fair value TZCK 1,574,936 in accordance with
the contract of sale. The transaction was agreed between two parties and the fair value was determined by an independent valuator. This sale contract was
signed on 19 December 2006.
7) AZ Stavební a.s.
Based on a contract signed on 5 September 2006 the Company sold its interest in AZ Stavební a.s. for CZK 85.50. The net book value of the interest was nil.
8) âP finanãní holding a.s.
Based on the decision of the Company, as the sole shareholder, the share capital of âP finanãní holding a.s. was decreased by TCZK 80,000 on
30 June 2006. The decrease has been paid back to the Company.
Subsequently, âP finanãní holding a.s. was sold for TCZK 127 in accordance with a contract signed on 21 December 2006. The net book value of the
interest in the company was TCZK 118,000.
9) Limeno CSLM Ltd.
In 2006, the Company paid an additional amount of TCZK 144 to Limeno CSLM Ltd in order to cover its losses. An impairment has been recorded in the
same amount. On 5 October 2006 the liquidation of the company was finalised and the company was deleted from the Trade Register on 5 December 2006.
10) âP INVEST investiãní spoleãnost, a.s.
As part of the process of restructuring of the PPF Group, the Company acquired the whole interest in âP INVEST investment company a.s. based on
a contract signed on 29 September 2006. The Company acquired the interest from its subsidiary âP finanãní holding a.s. for TCZK 45,758.
11) První Callin agentura a.s.
In accordance with a contract signed on 8 August 2006 the Company became the sole shareholder of První Callin agentura a.s. The interest in the share
capital in the amount of TCZK 2,000 was acquired for TCZK 3,004 from its subsidiary CP Strategic Investments B.V. The Company has subsequently
increased its investment in První Callin agentura a.s. by TCZK 150,000 in the form of a debt capitalisation. The share capital has been increased by
TCZK 1,000 to the total amount of TCZK 3,000 as registered in the Trade Register on 25 October 2006. The remaining investment has increased the share
premium account by TCZK 149,000. An impairment has been recorded in the amount of the additional investment.
82 ANNUAL REPORT 2006
12) Sale of KabelCorp, a.s.
The Company sold its whole interest in KabelCorp, a.s. with a net book value of TCZK 4,280 for TCZK 3,643 in accordance with a contract signed
on 21 December 2006.
13) Acquisition of Finanãní servis o.o.o.
As part of the process of restructuring of the PPF Group the Company has acquired a one hundred percent interest in Finanãní servis o.o.o in the Russian
Federation for TCZK 1,566. The Company has acquired the interest from its subsidiary âP Finanãní servis a.s. v likvidaci based on a contract signed on
11 December 2006.
14) Acquisition of REFICOR s.r.o.
In accordance with a contract signed on 9 March 2006 the Company has acquired the whole interest in REFICOR s.r.o. for TCZK 73.
2005 Country Cost of Inpairment Net Proportion Proportion Accounting Note
investment loses cost of of of voting treatment
investment ownership power
TCZK interest
CP Reinsurance company Ltd. Cyprus 1,305,096 – 1,305,096 100.0 100.0
CP Strategic Investments B.V. Netherlands 391,530 – 391,530 100.0 100.0
âeská poji‰Èovna, a.s. in Russia Russia 291,666 – 291,666 100.0 100.0
âP DIRECT, a.s. Czech Republic 80,000 – 80,000 100.0 100.0
âP finanãní holding a.s. Czech Republic 300,000 -102,000 198,000 100.0 100.0
âP finanãní servis a.s. Czech Republic 75,000 – 75,000 100.0 100.0
âeská poji‰Èovna ZDRAVÍ a.s. Czech Republic 191,250 – 191,250 100.0 100.0
eBanka, a.s. Czech Republic 2,740,225 – 2,740 225 100.0 100.0
FOX Credit Services Ltd. Cyprus 2,070,311 – 2,070,311 100.0 100.0
HC Holding a.s.* Czech Republic 1,590,815 – 1,590,815 100.0 100.0
Home Credit B.V. Netherlands 4,889,206 – 4,889,206 11.4 11.4
Penzijní fond
âeské poji‰Èovny, a.s. Czech Republic 1,559,137 – 1,559,137 100.0 100.0
PPF banka a.s. Czech Republic 1,283,473 – 1,283,473 92.9 92.9
Univerzální správa majetku a.s. Czech Republic 1,103 – 1,103 100.0 100.0
AZ stavební a.s. Czech Republic 8,550 -8,550 – 57.0 52.0
Contractual Digital Floor, a.s. Czech Republic 510 – 510 51.0 51.0
âesk˘ porcelán,
akciová spoleãnost Czech Republic 65,387 -16,700 48,687 23.8 26.7
âP PARTNER, a.s. Czech Republic 25,000 -21,690 3,310 100.0 100.0
KabelCorp, a.s. Slovak Republic 58,480 -54,200 4,280 100.0 100.0
Limeno CSLM Ltd. Hungary 785 -785 – 100.0 100.0
Nadaãní fond KarlÛv most Czech Republic 5,000 – 5,000 100.0 100.0
Total investments
in enterprises 16,932,524 -203,925 16,728,599 – –*C
ontr
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.
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ANNUAL REPORT 83
D. SIGNIFICANT ACCOUNTING POLICIES AND ASSUMPTIONS
D.1. SIGNIFICANT ACCOUNTING POLICIES
D.1.1. FOREIGN CURRENCY TRANSLATION
A foreign currency transaction is a transaction, which is denominated in or requires settlement in other than functional currency. Functional currency is the
currency of the primary economic environment in which entity operates. A foreign currency transaction is recorded, on initial recognition in the functional
currency, by applying to the foreign currency amount the exchange rate effective at the date of the transaction.
At each balance sheet date:
a) foreign currency monetary items are translated using the closing foreign exchange rate;
b) non-monetary items denominated in a foreign currency which are carried at historical cost are translated using the foreign exchange rate at the date of
the original transaction;
c) and non-monetary items denominated in a foreign currency, which are carried at fair value, are translated using the foreign exchange rates ruling at the
dates the fair values were determined.
Exchange differences arising from the settlement of monetary items or from translation of the Company’s monetary items at rates different from those at
which they were initially recorded or reported in previous financial statements are recognised as Other income or as Other expenses in the period in which
they arise.
D.1.2. IMPAIRMENT
The carrying amounts of the Company’s assets, other than investment property (see note D.1.6.), deferred acquisition costs (D.1.13.), inventories
(D.1.12.1.) and deferred tax assets (D.1.34.), are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any
such indication exists, the asset’s recoverable amount is estimated. The recoverable amount is measured annually regardless of any indication of
impairment for intangible assets with an indefinite useful life and for intangible assets not yet available for use.
An impairment loss is recognised to the extent that the carrying amount of an asset exceeds its recoverable amount. Impairment losses are recognised in
the income statement.
Individual impairment losses are losses which are specifically identified. General impairment losses are losses which are present in a portfolio of loans or
receivables but not specifically identified.
The carrying amount of subsidiaries and associates is tested for impairment annually. The Company observes if events or changes in subsidiaries or
associates business indicate that it there might be impaired. The Company considers the fact, that the equity of subsidiary or associate is decreasing, as
a key indicator of potential impairment.
The recoverable amount of the Company’s investments in held-to-maturity securities, loans and receivables is calculated as the present value of expected
future cash flows, discounted at the original effective interest rate inherent in the asset. Receivables with a short duration are not discounted.
Loans and advances are reported net of allowances for loan losses to reflect the estimated recoverable amounts. Receivables are stated at their cost less
impairment losses.
The recoverable amount of an available-for-sale asset is current fair value. When there is an objective evidence that it is impaired, the decline in fair value
that had been recognized directly in equity is recognized into the income statement.
The recoverable amount of other assets is the greater of their fair value less cost to sell and value in use. In assessing value in use, the estimated future
cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the
risks specific to the asset.
An impairment loss in respect of subsidiary or associates is not reversed in a subsequent period.
An impairment loss in respect of a held-to-maturity security, loan, advance or receivable, available-for-sale debt instrument is reversed through the income
statement (up to the amount of the amortised cost) if the subsequent increase in recoverable amount can be attributed objectively to an event occurring
after the impairment loss was recognised.
An impairment loss in respect of available-for-sale equity instruments is not reversed through the income statement and any subsequent increase in fair
value is recognized in the equity.
84 ANNUAL REPORT 2006
In respect of other assets, an impairment loss is reversed through the income statement if there has been an increase in the recoverable amount and the
increase can be objectively related to an event occurring after the date of the impairment. An impairment loss is reversed only to the extent that the
asset’s carrying amount does not exceed the carrying amount of the asset that would have been determined, net of depreciation or amortisation, if no
impairment loss had been recognised.
D.1.3. DISCRETIONARY PARTICIPATION FEATURES (DPF)
A discretionary participation feature (DPF) represents a contractual right to receive, as a supplement to guaranteed benefits, additional benefits that
constitute significant portion of the total contractual benefits, whose amount or timing is at the discretion of the Company and are based on the
performance of pool of assets, profit or loss of Company or investment returns.
As the amount of bonus to be allocated to policyholders has been irrevocably fixed at the balance sheet date, the amount is presented as a guaranteed
liability in the financial statements, i.e. within the life assurance provision in the case of insurance contracts or within the Guaranteed liability for investment
contracts with DPF in case of investment contracts.
D.1.4. INTANGIBLE ASSETS
Intangible assets that are acquired by the Company are stated at cost less accumulated amortisation and impairment losses.
Intangible assets with a finite useful lives are amortised on a straight-line basis over an average period of 3 – 5 years. The depreciation methods, useful
lives and residual values, if not insignificant, are reassessed annually. If a material technical improvement is made to an asset during the year, its useful life
and a residual value is reassessed at the time the technical improvement is recognised.
Intangible assets with an indefinite useful life are not amortized but are tested for impairment annually, or whenever there is an indication that the
intangible asset may be impaired.
D.1.5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are valued at purchase price or production cost, less accumulated depreciation and any accumulated impairment losses.
Depreciation is provided on a straight-line basis using the following rates:
Item Depreciation rate (%)
Land –
Buildings 1.00 – 10.00
Other tangible assets and equipment 6.67 – 33.33
Component parts of an asset which have different useful lives or provide benefits in a different pattern are recognised as separate assets with different
depreciation rates.
The depreciation methods, useful lives and residual values, if not insignificant, are reassessed annually. If a material technical improvement is made to an
asset during the year, its useful life and residual value is reassessed at the time a technical improvement is recognised.
Property that is being constructed or developed for future use as investment property is classified as property, plant and equipment and stated at cost until
construction or development is complete, at which time it is reclassified as investment property.
Leases in terms of which the Company assumes substantially all the risks and rewards of ownership are classified as finance leases. Property, plant and
equipment acquired by way of finance lease is stated at an amount equal to the lower of its fair value and the present value of the minimum lease
payments at the inception of the lease, less accumulated deprecation and impairment losses.
D.1.6. INVESTMENT PROPERTY
Investment properties are properties which are held either to earn rental income or for capital appreciation or for both. A property owned by the Company
is treated as an investment property if it is not occupied by a Company or if only an insignificant portion of the property is occupied by a Company.
ANNUAL REPORT 85
Subsequent to initial recognition all investment properties are measured at fair value. Fair value is determined annually. Valuation is based on reliable
estimates of future cash flows, discounted at rates that reflect current market assessments of the uncertainty in the amount and timing of the cash flows,
and supported by evidence of current prices or rents for similar properties in the same location and condition. Any gain or loss arising from a change in fair
value is recognised in the income statement. Rental income from investment property is accounted for over the term of the lease.
When an item of property, plant and equipment becomes an investment property following a change in its use, any difference arising at the date of transfer
between the carrying amount of the item and its fair value, and related deferred tax thereon, is recognised directly in equity if it is a gain. Upon disposal of
the item, the gain is transferred to retained earnings. Any loss is recognised in the income statement immediately.
Subsequent expenditures relating to investment properties are capitalised if they extend the useful life of the assets, otherwise they are recognised as an
expense.
D.1.7. SUBSIDIARIES AND ASSOCIATES
All subsidiaries and associates are valued at cost less any impairment losses (see D.1.2.).
Derecognition of subsidiaries and associates follows the contractual arrangements or law conditions.
D.1.8. FINANCIAL ASSETS
Financial assets include financial assets at fair value through profit or loss, financial assets available for sale, financial assets held to maturity, loans and
receivables, cash and cash equivalents.
Financial assets are recognised on the balance sheet when the Company becomes a party to the contractual provisions of the instrument. For regular way
purchases and sales of financial assets, the Company’s policy is to recognise them using settlement date accounting. Any change in the fair value of an
asset to be received during the period between the trade date and the settlement date is accounted for in the same way as could be accounted for had the
Company used trade date accounting. Financial instruments are measured initially at fair value plus, with the exception of financial instruments at fair value
through profit or loss, transaction costs directly attributable to the acquisition or issue of the financial instrument.
The fair value of financial instruments is based on their quoted market price at the balance sheet date without any deduction for transaction costs. If
a quoted market price is not available or if the market for an investment is not active, the fair value of the instrument is estimated using pricing models or
discounted cash flow techniques.
Where discounted cash flow techniques are used, estimated future cash flows are based on management’s estimates and the discount rate is a market
related rate at the balance sheet date for an instrument with similar terms and conditions. Where pricing models are used, inputs are based on market
related measures at the balance sheet date.
The fair value of derivatives that are not exchange-traded is estimated at the amount that the Company would receive or pay to terminate the contract at
the balance sheet date taking into account current market conditions and the current creditworthiness of the counterparties.
A financial asset is derecognised when the Company transfers the risk and rewards of ownership of the financial assets or loses control over the
contractual rights that comprise that asset. This occurs when the rights are realised, expired or surrendered.
D.1.8.1. Financial assets available for sale
Available-for-sale financial assets are those non-derivative financial assets that are not classified as loans and receivables, held to maturity investments, or
financial assets at fair value through profit or loss. Available-for-sale financial assets include equity securities whose fair value can not be reliably measured
and selected bonds.
After initial recognition, the Company measures financial assets available for sale at their fair values, without any deduction for transaction costs that it may
incur upon sale or other disposal, with the exception of instruments that do not have a quoted market price on an active market and whose fair value
cannot be reliably measured which are stated at cost, including transaction costs, less impairment losses.
Any revaluation gain or loss on a financial asset available for sale is recognized directly in equity with the exception of impairment losses and, in the case of
monetary items such as debt securities, foreign exchange gains and losses. When available-for-sale assets are derecognized, the cumulative gain or loss
previously recognized in equity is recognized in the income statement. Where these instruments are interest-bearing, interest calculated using the effective
interest rate method is recognized in the income statement.
86 ANNUAL REPORT 2006
D.1.8.2. Financial assets held to maturity
Held-to-maturity assets are financial assets with fixed or determinable payments and fixed maturity where the Company has the positive intent and ability
to hold to maturity.
Financial assets held to maturity are valued at amortised cost less any impairment losses. Premiums and discounts are amortised over the life of the
instrument using the effective interest method. The amortisation of premiums and discounts is recorded as interest income or expense.
The fair value of an individual security within the held to maturity portfolio can fall temporarily below its carrying value, but, provided there is no risk
resulting from a change in financial standing, the security would not be written down in value.
D.1.8.3. Financial assets at fair value through profit or loss
Financial assets at fair value through profit or loss are financial assets, other than financial assets held to maturity or held for trading, loans and receivables,
and non-trading financial assets which are designated upon initial recognition as at fair value through profit or loss.
Financial assets held for trading are acquired or incurred principally for the purpose of generating a profit from short-term fluctuations in the price or
dealer’s margin. Financial assets are classified as held for trading if, regardless of the reason they were acquired, they are part of a portfolio for which there
is evidence of a recent actual pattern of short-term profit taking.
Financial assets held for trading include investments and certain purchased loans and derivative contracts that are not designated as effective hedging
instruments. All trading derivatives in a net receivable position (positive fair value), as well as options purchased, are reported as trading assets. All trading
derivatives in a net payable position (negative fair value), as well as options written, are reported as financial liabilities at fair value through profit or loss.
The Company designates non-trading financial assets as at fair value through profit or loss, if there is an active market and the fair value can be reliably
measured and it reduces the accounting mismatch.
An accounting mismatch arises in particular in respect of insurance liabilities which are revaluated through profit and loss if the liability adequacy test
indicates a deficiency.
The Company designates as non-trading financial assets as at fair value through profit and loss equity securities whose fair value can be reliably measured
and selected bonds not held for trading.
Subsequent to initial recognition all financial assets at fair value through profit or loss, except for derivative instruments that are not exchange traded and
financial assets which are not quoted on an active market, are measured at fair value based on the quoted market price on an active market. Gains and
losses arising from changes in the fair values of financial assets at fair value through profit or loss are recognised in the income statement.
D.1.8.4. 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 classified
as at fair value through profit or loss or classified as available for sale.
Loans and receivables are measured at amortised cost using the effective interest method and are reported net of allowances for loan losses to reflect the
estimated recoverable amounts.
The Company enters into purchases (sales) of investments under agreements to resell (repurchase) substantially identical investments at a certain date in
the future at a fixed price. Investments purchased subject to commitments to resell them at future dates are not recognised. The amounts paid are
recognised in loans to either banks or non-banks. The receivables are shown as collateralised by the underlying security. Investments sold under
repurchase agreements continue to be recognised in the balance sheet and are measured in accordance with the accounting policy for either assets held
for trading or available-for-sale, as appropriate. The proceeds from the sale of the investments are reported as liabilities to either banks or non-banks.
The difference between the sale and repurchase considerations is recognised on an accrual basis over the period of the transaction and is included
in interest.
ANNUAL REPORT 87
D.1.9. NON-CURRENT ASSETS HELD FOR SALE
Non-current assets (or disposal groups comprising assets and liabilities) that are expected to be recovered primarily through sale rather than through
continuing use are classified as held for sale. Immediately before being classified as held for sale, the assets (or components of a disposal group) are
measured in accordance with the applicable IFRS. Thereafter generally the assets (or disposal group) are measured at the lower of their carrying amount
and fair value less cost to sell. Any impairment loss on a disposal group is allocated to assets and liabilities on a pro rata basis, except that no loss is
allocated to inventories, financial assets, deferred tax assets, employee benefit assets, investment property and biological assets, which continue to be
measured in accordance with the Company’s accounting policies. Impairment losses on initial classification as held for sale and subsequent gains or losses
on remeasurement are recognised in profit or loss. Gains are not recognised in excess of any cumulative impairment loss.
D.1.10. LEASE TRANSACTIONS
Property and equipment holdings used by the Company under operating leases, whereby the risks and benefits relating to ownership of the assets remain
with the lessor, are not recorded on the Company’s balance sheet. Payments made under operating leases to the lessor are charged to income statement
over the period of the lease.
D.1.11. REINSURANCE ASSETS
Reinsurance assets comprise the actual or estimated amounts, which, under contractual reinsurance arrangements, are recoverable from reinsurers in
respect of technical provisions.
Reinsurance assets relating to technical provisions are established based on the terms of reinsurance contracts and valued on the same basis as the
related reinsured liabilities. The Company records an allowance for estimated irrecoverable reinsurance assets, if any.
D.1.12. OTHER ASSETS
D.1.12.1. Inventory
Inventories are stated at the lower of cost and net realisable value (being the estimated selling price in the ordinary course of business less the estimated
costs of completion and the estimated costs necessary to make the sale). Where the net realisable value is below cost, inventories are written down to the
lower value, and the impairment loss is recorded in the income statement.
D.1.12.2. Works of art
Works of art which were acquired in order to support the art are disclosed under Other assets. Works of art are initially recognized at acquisition cost.
Subsequently, they are not depreciated but rather tested for impairment at each reporting date.
D.1.13. DEFERRED ACQUISITION COSTS
Acquisition costs are costs that are incurred in connection with the acquisition of new insurance contracts and the renewal of existing contracts. Only
certain (“deferrable”) acquisition costs are deferred, such as agents’ commissions and other variable underwriting and policy issue costs. General selling
expenses and line of business costs as well as commissions for servicing a portfolio are not deferred unless they are primarily related to the acquisition of
new business.
In non-life insurance a proportion of the related acquisition costs are deferred commensurate with the unearned premiums provision. The amount of any
deferred acquisition costs is established on a similar basis as that used for unearned premiums for a relevant line of business (product).
The recoverable amount of deferred acquisition costs is assessed at each balance sheet date as part of the liability adequacy test.
Acquisition costs in respect of life insurance contracts and investment contracts with DPF are charged directly to the income statement as incurred and are
not deferred.
In case of investment contracts incremental transaction costs directly attributable to the issue of a financial liability carried at amortised cost are deducted
from the fair value of the consideration received and included within the effective interest rate calculation.
88 ANNUAL REPORT 2006
D.1.14. CASH AND CASH EQUIVALENTS
Cash consists of cash on hand and demand deposits with banks and other financial institutions. Cash equivalents are short-term, highly liquid investments
that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.
D.1.15. EQUITY
D.1.15.1. Repurchase of share capital
When share capital recognised as equity is repurchased, the amount of the consideration paid, including directly attributable costs, is recognised as
a change in equity. Repurchased shares are classified as treasury shares and are presented as a deduction from total equity.
D.1.15.2. Dividends
Dividends on share capital are recognised as a liability provided they are declared before the balance sheet date. Dividends declared after the balance sheet
date are not recognized as liability but disclosed in the notes.
D.1.16. INSURANCE LIABILITIES
D.1.16.1. Provision for unearned premiums
The provision for unearned premiums comprises that part of gross premiums written attributable to the following financial year or to subsequent financial
years, computed separately for each insurance contract using the pro rata temporis method, adjusted to reflect any variation in the incidence of risk during
the period covered by the contract. The provision for unearned premiums is created for both life insurance and non-life insurance.
D.1.16.2. Life insurance provision
The life insurance provision (the provision for outstanding claims and the other life insurance technical provision) comprises the actuarially estimated value
of the Company’s liabilities under life insurance contracts. The amount of the life insurance provision is calculated by a prospective net premium valuation,
taking account of all future liabilities as determined by the policy conditions for each existing contract and including all guaranteed benefits, bonuses already
declared and proposed, expenses and after deducting the actuarial value of future premiums.
The provision for outstanding claims is initially measured using the assumptions used for calculating the corresponding premiums and remain unchanged
except where liability inadequacy occurs. A liability adequacy test (LAT) is performed at each reporting date by the Company’s actuaries using current
estimates of future cash flows under its insurance contracts (see D.2.3.). If those estimates show that the carrying amount of the provision is insufficient in
the light of the estimated future cash flows, the difference is recognised in the income statement with corresponding increase to the other life insurance
technical provision.
D.1.16.3. Provision for outstanding claims – non life insurance
The provision for outstanding claims represents the total estimated ultimate cost of settling all claims arising from events which have occurred up to the
end of the financial year, whether reported or not, less amounts already paid in respect of such claims, including the related internal and external claims
settlement expenses as estimated based on historical experience and specific assumptions about future economic conditions.
The provision includes claims reported by policyholders but not settled (RBNS) and claims incurred but not reported (IBNR).
Where benefits resulting from a claim are paid in the form of an annuity, the provision is calculated by recognised actuarial methods.
With the exception of annuities, the Company does not discount its provisions for outstanding claims.
Where applicable, provisions are disclosed net of the prudent estimates for salvage and subrogation recoveries.
The provision for outstanding claims in respect of life insurance policies is included within the life insurance provision.
Whilst the Board of Directors considers that the gross provision for claims and the related reinsurance recoveries are fairly stated, the ultimate liability may
differ as a result of subsequent information and events and may result in significant adjustments to the amounts provided. Adjustments to the amounts of
the provisions are reflected in the financial statements for the period in which the adjustments are made. The methods used and the estimates made are
reviewed regularly.
ANNUAL REPORT 89
D.1.16.4. DPF liability for insurance contracts
DPF (Discretionary Participation Feature) liability represents contractual liability to provide significant benefits in addition to the guaranteed benefits which
are at the discretion of the issuer over the timing and amount of benefits and which are based on performance of defined contracts, investment returns or
profit or loss of the issuer. For more details see D.1.3.
D.1.16.5. Other insurance provisions
Other insurance provisions contain any other insurance technical provision which is not mentioned above, such as the provision for unexpired risks (also
referred to as “premium deficiency”) in non-life insurance the ageing provision in health insurance, provision for contractual non-discretionary bonuses in
non-life business and other similar provisions.
The provision for contractual non-discretionary bonuses in non-life business covers future benefits in the form of additional payments to policyholders or
reduction of policyholders’ payments, which are a result of the past performance. This provision is not recognised for those contracts, where future
premium is reduced by bonuses resulting from favourable past policy claim experience and such bonus is granted irrespectively of whether the past claim
experience was with the reporting entity. In such situation, the reduction of the premium reflects the expected lower future claims, rather than distribution
of past surpluses.
D.1.16.6. Financial liabilities for investment contracts with DPF
Financial liabilities for investment contracts with DPF represents liabilities for contracts which do not meet the definition of insurance contracts, because
they do not lead to the transfer of significant insurance risk from the policyholder to the Company, but which contain DPF (as defined in D.1.3.). Financial
liabilities arising from investment contracts with DPF are accounted for in the same way as insurance contracts.
D.1.17. SUBORDINATED LIABILITIES
Subordinated liabilities are financial liabilities, for which it has been contracted that in the case of liquidation, bankruptcy, forced settlement or other
settlement, will be settled only after claims of other creditors have been discharged.
Subordinated liabilities are recognised initially at fair value, net of transaction costs incurred, and subsequently carried at amortised cost. Amortised cost of
subordinated debt is the amount at which the financial liability was measured at initial recognition minus principal repayments, plus or minus the cumulative
amortisation of any difference between that initial amount and the maturity amount. Amortisation/accretion of discounts or premiums and interest are
recognised in interest expense and similar charges.
D.1.18. OTHER LIABILITIES EVIDENCED BY PAPER
Liabilities evidenced by paper are recognised initially at fair value, net of transaction costs incurred, and subsequently carried at amortised cost.
Amortisation of discount or premium and interest are recognized in interest expense and similar charges using the effective interest method.
D.1.19. FINANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS
Financial liabilities at fair value through profit or loss are liabilities classified as held for trading, which include derivative liabilities that are not hedging
instruments, and obligations to deliver securities borrowed by a short seller. Financial liabilities at fair value through profit or loss are measured at fair value
and the relevant gains and losses from this revaluation are included in the income statement.
D.1.20. LIABILITIES TO BANKS AND NON-BANKS
Liabilities to banks and non-banks are recognised initially at fair value, net of transaction costs incurred, and subsequently valued at their amortised cost.
Amortised cost of a financial liability is the amount at which the financial liability was measured upon initial recognition minus principal repayments, plus or
minus the cumulative amortisation of any difference between that initial amount and the maturity amount.
D.1.21. PROVISIONS
A provision is recognized in the balance sheet when the Company has a legal or constructive obligation as a result of a past event, it is probable that an
outflow of economic benefits will be required to settle the obligation and a reasonable estimate can be made of the amount of the obligation. If the effect
is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time
value of money and, where appropriate, the risks specific to the liability.
90 ANNUAL REPORT 2006
D.1.22. PAYABLES
Accounts payable are when the Company has a contractual obligation to deliver cash or another financial asset. Accounts payable are measured at
amortised cost, which will normally equal their nominal or repayment value.
D.1.23. NET INSURANCE PREMIUM REVENUE
Net insurance premium revenue includes gross premiums written from direct insurance business and assumed (inwards) reinsurance business, net of
premiums ceded to reinsurers.
Gross premiums comprise all amounts due during the financial year in respect of insurance contracts regardless of the fact that such amounts may relate in
whole or in part to a later financial year. Gross premiums are recognized in respect of contracts meeting the definition of an insurance contract or an
investment contract with DPF.
The above amounts do not include the amounts of taxes or charges levied with premiums.
Premiums are recognized when an unrestricted legal entitlement is established. For contracts where premiums are payable in instalments such premiums
are recognized as written when the instalment becomes due.
Premiums are recognized as earned on a pro-rata basis over the term of the related policy coverage via the provision for unearned premiums. For those
contracts for which the period of risk differs significantly from the contract period, premiums are recognized over the period of risk in proportion to the
amount of insurance protection provided.
The change in the unearned premium provision is represented by the difference in balance of the provision for unearned premium at the beginning of the
year and the balance at the year-end.
D.1.24. NET INSURANCE CLAIMS AND BENEFITS
Insurance technical charges include claims (benefit) expenses, the change in technical provisions and rebates and profit sharing.
Claims (benefits) expenses are represented by benefits and surrenders, net of reinsurance (life) and claims paid net of reinsurance (non-life). Benefits and
claims comprise all payments made in respect of the financial year. These amounts include annuities, surrenders, entries and withdrawals of loss provisions
to and from ceding insurance enterprises and reinsurers, and external and internal claims management costs. Sums recovered on the basis of subrogation
or salvage are deducted. Claims paid are recognised at the moment that the claim is approved for settlement.
The change in technical provisions represents change in provisions for claims reported by policyholders, change in provision for IBNR and change in other
technical provisions.
Bonuses comprise all amounts chargeable for the financial year representing an allocation of surplus or profit arising on business as a whole or from
a section of business, after deduction of amounts provided in previous years which are no longer required. Rebates comprise such amounts to the extent
that they represent a partial refund of premiums resulting from the experience of individual contracts.
D.1.25. INVESTMENT CONTRACTS BENEFITS
Investment contracts benefits represent changes in financial liabilities resulting from investment contracts.
The change in financial liabilities from investment contracts with DPF (for definition see D.1.16.4.) involves guaranteed benefits credited, change in DPF
liabilities from investment contracts and change in liability resulting from liability adequacy test of investment contracts with DPF.
D.1.26. INTEREST AND SIMILAR INCOME AND INTEREST AND SIMILAR EXPENSE
Interest income and interest expense are recognised in the income statement on accrual basis, taking into account the effective yield of the asset or
liability, or an applicable floating rate. Interest income and interest expense includes the amortisation of any discount or premium or other differences
between the initial carrying amount of an interest bearing instrument and its amount at maturity calculated using the effective interest method.
D.1.27. OTHER INCOME AND EXPENSE FROM FINANCIAL ASSETS
Other income and expenses from financial assets comprise realized and unrealized gains/losses, dividends, impairment loss and net trading income.
A realised gain/loss arises on derecognition of financial assets other than financial assets at fair value through profit or loss. The amount of the realised
gain/loss represents the difference between the carrying value of financial asset and the sale price adjusted for any cumulative gain or loss that had been
recognized directly in the equity.
ANNUAL REPORT 91
Net fair value gains on financial assets and liabilities at fair value through profit or loss not held for trading represents the amount of the subsequent
measurement of financial assets and liabilities designated at fair value through profit or loss to their fair value or the gain/loss from their disposal.
Dividends from investments are recorded in “Dividends from investment” when declared and approved by the shareholder’s meeting of the respective company.
Net trading income represents the subsequent measurement of the “Trading assets” and “Trading liabilities” to fair value or the gain/loss from disposal of
the “Trading assets” or “Trading liabilities”. The amount of the trading income to be recorded represents the difference between the latest carrying value
and the fair value as at the financial statements date or the sale price.
D.1.28. INCOME AND EXPENSE FROM INVESTMENT PROPERTE
Income and expense from investment property comprise realised gains/losses triggered by derecognition, unrealised gains/losses from subsequent
measurement at fair value, rental income and other income and expense related to investment property.
D.1.29. NET FEE AND COMMISSION INCOME AND INCOME FROM SERVICES ACTIVITIES
The main part of fee and commission income and income from services activities arise from administration services relating to the Employer’s liability
provided by the Company for the state. The Company bears for this type of insurance no insurance risk; it only administrate the fee collection and claims
settlement. The revenue is recognised in the accounting period when services are provided an in the amount stated by law.
D.1.30. OTHER INCOME AND OTHER EXPENSE
D.1.30.1. Rental income
Rental income from investment properties and other operating leases is recognised in the income statement on a straight-line basis over the term of the
lease. Lease incentives granted are recognised as an integral part of the total rental income.
D.1.30.2. Operating lease payments
Payments made under operating leases are recognised in the income statement on a straight-line basis over the term of the lease. Lease incentives
granted are recognised as an integral part of the total lease expense.
D.1.31. ACQUISITION COSTS
Acquisition costs are costs arising from the conclusion of insurance or investment contracts and include direct costs, such as acquisition commissions or
the cost of drawing up the insurance document or including the insurance contract in the portfolio, and indirect costs, such as advertising costs or the
administrative expenses connected with the processing of proposals and the issuing of policies.
In non-life insurance, acquisition costs that vary with and are directly related to the acquisition of new policies or the renewal of existing policies are
deferred. Deferred acquisition costs represent the proportion of acquisition costs incurred that corresponds to the provision for unearned premiums.
Deferred acquisition costs are subject to recoverability testing at the time of policy issue and at the end of each accounting period. Deferred acquisition
costs which are not deemed to be recoverable are charged to the income statement.
For life insurance policies and investment contracts with DPF, acquisition costs are charged to the income statement as incurred.
D.1.32. ADMINISTRATIVE EXPENSE
Administrative expenses include expenses relating to the administration of the Company. This includes personnel costs, office rental expenses and other
operating expenses. Staff costs include expenses arising from employee benefits, such as salaries and wages, management remuneration and bonuses,
social insurance and costs of premium collection, portfolio administration and the processing of inwards and outwards reinsurance.
92 ANNUAL REPORT 2006
D.1.33. REINSURANCE COMMISSIONS AND PROFIT PARTICIPATIONS
Reinsurance commissions and profit participations include commissions received or receivable from reinsurers and profit participations based on
reinsurance contracts. Non-life reinsurance commissions are deferred in a manner consistent with the deferral of acquisition costs in non-life insurance.
D.1.34. INCOME TAX
Income tax on the profit or loss for the year comprises current and deferred tax. Income tax is recognised in the income statement except to the extent
that it relates to items recognised directly to equity, in which case it is recognised in equity.
Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the balance sheet date, and
any adjustment to tax payable in respect of previous years.
Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: the initial
recognition of assets or liabilities that affect neither accounting nor taxable profit and differences relating to investments in subsidiaries to the extent that
they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realization or settlement
of the carrying amount of assets and liabilities, using tax rates enacted or substantially enacted at the balance sheet date.
A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised.
Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised.
D.1.35. SEGMENT REPORTING
A segment is a distinguishable component of the Company that is engaged either in providing insurance (business segment), or in providing insurance
within a particular economic environment (geographic segment), which is subject to risk and rewards that are different from other segments. The Company
regards business segments as its primary segments for the purposes of applying IAS 14.
D.2. PRINCIPAL ASSUMPTIONS
D.2.1. LIFE ASSURANCE LIABILITIES
Actuarial assumptions and their sensitivities underlie the calculation of insurance. The life insurance provision is calculated by a prospective net premium
valuation (see D.1.16.2.) using the same statistical data and interest rates used to calculate premium rates (in accordance with relevant national legislation).
The assumptions used are locked-in at policy inception and remain in-force until expiry of the liability. The adequacy of insurance liabilities is tested in
liability adequacy test (see D.2.3.).
The guaranteed technical rate of interest included in policies varies from 2% to 7.5% according to the actual technical rate used in determining the premium.
As a part of the life insurance provision an additional provision is established in respect of bonuses payable under certain conditions, referred to as “special
bonuses”. This provision corresponds to the value of special bonuses calculated using the prospective method and using the same interest rate and
mortality assumptions as used to calculate the basic life insurance provision. No allowance is made for lapses.
D.2.2. NON-LIFE INSURANCE
Provision is made at the balance sheet date for the expected ultimate cost of settlement of all claims incurred in respect of events up to that date, whether
reported or not, together with related claims handling expenses, less amounts already paid.
The liability for reported claims (RBNS) is assessed on a separate case-by-case basis with due regard to the claim circumstances, information available from
loss adjusters and historical evidence of the size of similar claims. Case reserves are reviewed regularly and are updated as and when new information arises.
The estimation of claims incurred but not reported (IBNR) is generally subject to a greater degree of uncertainty than reported claims. IBNR provisions are
predominantly assessed by the Company’s actuaries using statistical techniques such as chain ladder methods, whereby historical data is extrapolated in
order to estimate ultimate claims costs.
ANNUAL REPORT 93
To the extent that these methods use historical claims development information they assume that the historical claims development pattern will occur
again in the future. There are reasons why this may not be the case, which, insofar as they can be identified, have been allowed for by modifying the
methods. Such reasons include:
a) economic, legal, political and social trends (resulting in different than expected levels of inflation);
b) changes in the mix of insurance contracts incepted;
c) random fluctuations, including the impact of large losses.
IBNR provisions are initially estimated at a gross level and a separate calculation is carried out to estimate the size of reinsurance recoveries.
The assumptions which have the greatest effect on the measurement of non-life insurance liabilities insurance are follows:
Expected claims ratio
The expected claims ratio represents the ratio of expected claims incurred to premiums earned.
For determining total liability are in projection of future cash flows considered estimated values of parameters, which can influence amount of separate
claim (according to type of insurance it is frequency of claims, risks connected with insurance contract – death during accident, persistent effects, minimal
time of curing, different time delay between date of occurrence of insured event and date of termination of liquidation in each risks).
Tail factors
For long-tail business, the level of provision is significantly influenced by the estimate of the development of claims from the latest development year for
which historical data is available to ultimate settlement. These tail factors are estimated prudently using mathematical curves, which project observed
development factors.
Discounting
With the exception of annuities, non-life claims provisions are not discounted.
Annuities
In MTPL insurance and other third party liability lines, part of the claims payment may be in the form of an annuity. The provision for such claims is
established as the present value of expected future claims payments.
The key assumptions involved in the calculation are the discount rate, the expected increase in wages and disability pensions which influence the amount
of annuities to be paid. The Company follows guidance issued by the Czech Bureau of Insurers in setting these assumptions.
Under current legislation future increases of disability pensions are set by governmental decree and may be subject to social and political factors beyond
the Company’s control. The same applies to the real future development of annuity inflation (it is also dependent on governmental decrees).
Compensation of loss of The annuities which are not the compensation
earnings during the period of and after of loss of earnings during the period of and after
ends of incapability of work ends of incapability of work
2007 – 2013 2014 onwards
Discount rate 2% p.a. 2% p.a. 2% p.a.
Annuity inflation 6,1% p.a. (6,3% p.a. for old legal MTPL) – –
Wage inflation – 8% p.a. 4.5% p.a.
Increase of the disability rents pensions – 8% p.a. 4.5% p.a.
In addition, the Company takes account of mortality through the use of mortality tables recommended by National Motor Insurance Bureau.
D.2.3. LIABILITY ADEQUACY TEST
D.2.3.1. Life assurance
The life assurance provision is tested at each reporting date against a calculation of future cash flows using explicit and consistent assumptions of all
factors – future premiums, mortality, morbidity, investment returns, lapses, surrenders, guarantees, policyholder bonuses, expenses and exercise of
policyholder options.
94 ANNUAL REPORT 2006
Where reliable market data is available, assumptions are derived from observable market prices.
However, in the absence of market transactions in the economies in which the Company operates, there remain significant difficulties in calibrating the
assumptions used by the Company in the liability adequacy test to observable market conditions in most cases.
Assumptions which can not be reliably derived from market values are based on current estimates calculated by reference to the Company’s own internal
models, on guidance notes issued by the Czech Society of Actuaries and publicly available resources (e.g. demographic information published by national
Statistical Bureaux).
Due to the levels of uncertainty in the future development of the insurance markets and the Company’s portfolio, the Company uses conservative margins
for risk and uncertainty within liability adequacy test.
Input assumptions are updated annually based on recent experience.
The methodology of testing considers current estimates of all future contractual cash flows including cash flows from embedded options and guarantees.
This methodology enables quantification of correlation between all risks factors.
The principal assumptions used are:
Segmentation
The Company segments the products into several homogenous groups according to the characteristics of individual products (type of product and
guaranteed interest rates). Each group is tested separately for liability adequacy. Liability inadequacies of individual groups are not offset against surpluses
arising on other groups in determining the additional liability to be established.
The net present value of future cash flows calculated using the assumptions described below is compared with the insurance liabilities, for each product
group separately. If that comparison shows that the carrying amount of the insurance liabilities is inadequate in the light of the estimated cash flows, the
entire deficiency is recognised in profit or loss, by establishing an additional provision.
Mortality and morbidity
Mortality and morbidity are usually based on data supplied by the Czech Statistical Offices as amended by the Company based on a statistical investigation
of the Company’s mortality experience over the last 15 years. For pension insurance the Company uses generation mortality tables, developed in
co-operation with Munich Re, which allow for future mortality improvements.
Morbidity tables are made as an aggregation of Czech probabilities of death and German probabilities of Dread Disease diagnose.
Assumptions for mortality and morbidity are adjusted by margins for risk and uncertainty.
Persistency
Future contractual premiums are included without any allowance for premium indexation. Estimates for lapses and surrenders are estimated based on the
Company’s past experience with insurance policies (split by type and policy durations). The Company regularly investigates its actual persistency rates by
product type and duration and amends its assumptions accordingly.
The assumptions as derived above are adjusted by a margin for risk and uncertainty.
Expense
Estimates for future renewal and maintenance expenses included in the liability adequacy test are derived from the Company’s business plan for the period
2007 – 2009, increased by a factor of 15%. For periods after 2009 cash flows for expenses have been increased by a factor equal to the Company’s
estimate of annual inflation for individual expense items increased by a further 15%. The resulting annual expense inflation (including the 15% margin) is
in the range of 3.78 – 5.99% (in 2005 it was 3.4 – 5.82%).
Expected investment return and discount rate
Future investment returns are calculated using the risk free interest rate derived from market swap rates reduced by 0.25%. As a reference point, the
15 year swap rate was 3.92% at 31 December 2006 compared to 3.68% at 31 December 2005.
ANNUAL REPORT 95
Interest rate guarantee
As noted above, the Company discounts all expected cash flows at a rate equal to the risk-free rate less 0.25%.
The Company makes an additional allowance for the potential volatility of actual investment returns compared to the risk-free rate. The interest rate
guarantee is calculated using stochastic option pricing techniques (Ornstein-Uhlenbeck processes), whereby the Company treats divides the policy duration
into a series of one year put options. The interest rate guarantee is mainly influenced by volatility of investment returns.
Profit sharing
Whilst, for most life assurance policies, the amount and timing of the bonus to policyholders is at the discretion of the Company, the assessment of liability
adequacy takes into account of future discretionary bonuses, calculated as a fixed percentage of the excess of the risk-free rate over the guaranteed
technical interest rate on individual policies. The percentage applied is consistent with the Company’s current business practice and expectations for bonus
allocation.
Annuitisation option
The option to choose between a lump sum payment and an annuity is available to policyholders under pension insurance. For insurance products the
Company assumes, for the purposes of the liability adequacy test, an annuity option take-up rate of 20% of all eligible policyholders.
D.2.3.2. Investment contracts with Discretionary Participation Features (DPF)
Investments contracts with DPF are included within the liability adequacy test for life insurance as described above.
D.2.3.3. Non-life insurance
Contrary to life insurance, insurance liabilities connected with non-life insurance are calculated by using current (not historical) assumptions and therefore
no additional liabilities are established for outstanding claims as a result of a liability adequacy test.
The liability adequacy test for non-life insurance is therefore limited to the unexpired portion of existing contracts. It is performed by comparing the
expected value of claims and expenses attributable to the unexpired periods of policies in force at the balance sheet date with the amount of unearned
premiums in relation to such policies after deduction of deferred acquisition costs. Expected cash flows relating to claims and expenses are estimated by
reference to the experience during the expired portion of the contract, adjusted for significant individual losses which are not expected to recur.
The test is performed by product groups which comprise insurance contracts with a similar risk profile.
For annuities, the assumptions used to establish the balance sheet provision include all future cash flows with changes being recognized immediately in
the income statement. As such no separate liability adequacy test is required to be performed.
D.2.4. SIGNIFICANT VARIABLES
Profit or loss and insurance liabilities are mainly sensitive to changes in mortality, lapse rate, expense rate, discount rates and annuitisation which are
estimated for calculating adequate value of insurance liabilities during the LAT.
The Company has estimated the impact on profit for the year and equity at the end of the year of changes in key variables that have a material effect on
them.
96 ANNUAL REPORT 2006
D.2.4.1. Life insurance
2006 Change in Change Change in
TCZK variable in P/L insurance
Variable liabilities
Mortality 10% -88,216 88,216
Lapse rate -10% -59,774 59,774
Expense rate 10% -196,263 196,263
Discount rate 100 bp 1,604,457 -1,604,457
-100 bp -3,271,876 3,271,876
Annuitisation 10% -387,629 387,629
2005 Change in Change Change in
TCZK variable in P/L insurance
Variable liabilities
Mortality 10% -128,933 128,933
Lapse rate -10% -89,192 89,192
Expense rate 10% -381,635 381,635
Discount rate 100 bp 2,062,413 -2,062,413
-100 bp -4,470,678 4,470,678
Annuitisation 10% -565,499 565,499
Changes in variables represent reasonable possible changes in mentioned variables which could have occurred and would have lead to significant changes
in insurance liabilities at the balance sheet date. The reasonable possible changes represent neither expected changes in variables nor worst case
scenarios.
The analysis has been prepared for a change in variable with all other assumptions remaining constant and ignores changes in values of the related assets.
Sensitivity was calculated always for worse direction of movement, therefore the sensitivity to changes in mortality was calculated for decrease of
mortality for pension products by 10% and increase of mortality for other types of products by 10%, sensitivity to changes in lapse rate was calculated for
decrease by 10%, sensitivity to changes in expense rate and annuitisation was calculated for increase by 10%.
P/L and insurance liabilities are mostly influenced by a change in the discount rate in both directions. Hence changes in discount rates are stated in
100 basis points for both directions.
D.2.4.2. Non-life insurance
In non-life insurance variables which would have the greatest impact on the insurance liabilities relate to MTPL annuities.
The key variable in the calculation of the provision for the MTPL annuities is a discount rate. A 1% decrease in the discount rate would lead to an increase
of the liability by CZK 690 million (2005: CZK 640 million).
D.3. TERMS AND CONDITIONS OF INSURANCE AND INVESTMENT CONTRACTS THAT HAVE A MATERIAL EFFECT ON THE AMOUNT, TIMING AND UNCERTAINTY OF FUTURE CASH FLOWS
D.3.1. NON-LIFE INSURANCE CONTRACTS
The Company offers many forms of general insurance, mainly motor insurance, property insurance and liability insurance. Contracts may be concluded for
a fixed term of one year or on a continuous basis with either party having the option to cancel at 8 weeks’ notice. The Company is therefore generally able
to re-price the risk by revising the premium at intervals of not more than one year. It also has the ability to impose deductibles and reject fraudulent claims.
Future insurance claims are the main source of uncertainty which influences the amount and the timing of future cash flows.
ANNUAL REPORT 97
The amount of particular claim payments is limited by the sum insured which is established in the insurance policy.
The other significant source of uncertainty connected with non-life insurance arises from legislative regulations which entitle the policyholder to report
a claim before the time of expiration, which usually lasts 3 – 4 years from the date, when the policyholder becomes aware of the claim. This feature is
particularly significant in case of permanent disability arising from accident insurance, because of the difficulty in estimating the period between occurrence
and confirmation of permanent effects.
Following parts describe characteristics of particular types of insurance contracts if they are significantly different from the above mentioned features.
Motor insurance
The Company motor portfolio comprises both motor third party liability insurance (MTPL) and motor (casco) insurance. MTPL insurance covers bodily injury
claims and property claims in the Czech Republic as well as claims caused abroad by insured motorists under the Green Card system.
Property damage under MTPL and casco claims are generally reported and settled within a short period of the accident occurring. Payments relating to
bodily injury claims, however, take longer to finalise and are more difficult to estimate. Such claims may be settled in the form of a lump-sum settlement or
an annuity.
Claims relating to bodily injury and related losses of earnings, the amount of the related claim payments is derived from governmental decree. This
requirement may have a retrospective effect on claims incurred before effective date of this requirement.
Policyholders are entitled to a no-claims-bonus on renewal of their policy where the conditions are fulfilled.
The amount of claim payment for damage of property and compensation of losses of earnings does not exceed CZK 100 million per claim, as well as
compensation of damage to health.
Casco insurance represents standard insurance against damage; claim payment is limited by the sum insured and the amount of coinsurance.
Property insurance
This is broadly split into Industrial and Personal lines. For Industrial lines the Company uses risk management techniques to identify risks and analyse
losses and hazards and also cooperates with reinsurers. Personal property insurance consists of the standard buildings and contents insurance.
Claims are normally notified promptly and can be settled without delay.
Liability insurance
This covers all types of liability and includes commercial liability, directors and officers and professional indemnity as well as personal liability.
While the majority of general liability coverages are written on an “claims-made” basis, certain general liability coverages are typically insured on
a “occurrence basis” basis.
Accident insurance
Accident insurance is traditionally sold as add on to the life products offered by the Company and belongs to life insurance account. Only a small part of
accident insurance is sold without life insurance.
D.3.2. LIFE INSURANCE CONTRACTS
Bonuses
Over 90% of the Company’s life insurance contracts include an entitlement to receive a bonus. Bonuses to policyholders are granted at the discretion of
the Company and are recognized when proposed and approved by the Board of Directors in accordance with the relevant legal requirements. Once
allocated to policyholders bonuses are guaranteed (see D.1.3.).
Premiums
Premiums may be payable in regular instalments or as a single premium at inception of the policy. Most endowment-type insurance contracts contain
a premium indexation option which may be exercised at the discretion of the policyholder annually. Where the option is not exercised premiums are not
increased with inflation.
98 ANNUAL REPORT 2006
Term life insurance products
Traditional term life insurance products comprise risks of death, waiver of premium in case of permanent disability and accident rider. Premium is paid
regularly or as single premium. Policies offer fixed or decreasing sum insured of death. The policies offer protection from a few years up to medium
long-term. Death benefits are paid only if the policyholder dies during the term of insurance. Waiver of premium arises only in case of approved disability
pension of policyholder.
Period of disability is a main source of uncertainty connected with life insurance products. It is limited by contractual minimum duration of insurance policy
and by the end of insurance period.
Endowment products
These are also traditional term life insurance products providing life-long financial protection. Many long-term policies have tax advantages and give the
insured the possibility to finance their needs in retirement. Capital life insurance products for regular or single premium offer covering for risks of death,
endowment, dread diseases, waiver of premium in case of disability and accident rider. Insurance benefits are usually paid in lump-sum.
Variable capital life insurance products
Variable capital life insurance products offer all types of insurance risk as traditional capital life insurance products. In addition, they have possibility for
policyholder to pay extra single premium during the term of insurance. Policyholder can ask to interrupt payment for regular premium, to withdraw a part of
extra single premium, to change term of insurance, risks, sums insured and premium.
Children’s insurance products
These products are based on traditional life risk: death or endowment of assured, waiver of premium in case of disability and accident rider. They are paid
regularly. The term of insurance is usually limited by the 18th birthday of the child for which the policy is negotiated. Benefits may be in the form of
a lump-sum or annuity payment.
Unit-linked life insurance
Products for account of policyholders are those where the policyholders carry the investment risk.
The Company earns management and administration fees and mortality results on these products.
Unit-linked life insurance combines traditional term life insurance, with risks of death or dread diseases together with waiver of premium in case of
permanent disability, and possibility to invest regular premium or extra single premium to some investment funds. The policyholder defines funds and ratio
of premium where payments are invested and can change the funds and ratio during the contract. He can also change sums assured, regular premium, and
insurance risks. He can pay an additional single premium or withdraw a part of extra single premium.
Retirement insurance for regular payments (with interest rate)
Lifelong retirement program, products include all known types of offered pensions paid off in case of death, dread diseases or maturity of agreed age of
assured, options for variable combination of component. Policyholder can pay premium regularly or single. Basic types of pension are short-term pension
and lifetime pension.
D.3.3. INVESTMENT CONTRACTS WITH DPF
Adult deposit life or accident insurance with returnable lump-sum principal.
These types of life or accident products allow policyholders to pay a single returnable deposit at the beginning of the policy. The interest earned on the
deposit is used to pay the annual premiums. The deposit is returned at the end of assurance or on death. These contracts also entitle the policyholder to
a discretionary bonus, determined as under life insurance contracts.
ANNUAL REPORT 99
D.4. CHANGES IN ACCOUNTING POLICIES AND ACCOUNTING PRONOUNCEMENTS ADOPTED SINCE 1 JANUARY 2006
D.4.1. STANDARDS, AMMENDMENTS AND INTERPRETATIONS TO EXISTING STANDARDS RELEVANT FOR THE COMPANY AND APPLIED IN THE ACCOUNTING PERIOD
The following published amendments and interpretations to existing standards are mandatory and relevant for the Company and have been applied by the
Company since 1 January 2006:
Amendment to IAS 21 The Effects of Changes in Foreign Exchange Rates – Net Investment in a Foreign Operation (1 January 2006)
Amendments to IAS 39 Financial Instruments: Recognition and Measurement – Cash Flow Hedge Accounting of Forecast Intra-group Transactions
(1 January 2006)
Amendments to IAS 39 Financial Instruments: Recognition and Measurement – The Fair Value Option (1 January 2006)
Amendments to IAS 39 and IFRS 4 Financial Guarantee Contracts (1 January 2006)
IFRIC 4 Determining whether an Arrangement contains a Lease (1 January 2006)
IFRIC 8 Scope of IFRS 2 Share-based Payment (1 May 2006)
IFRIC 9 Reassessment of Embedded Derivatives (1 June 2006)
IFRIC 10 Interim Financial Reporting and Impairment (20 July 2006)
IFRIC 11 Group and Treasury Share Transactions (2 November 2006).
The following amendments and interpretations have the most significant potential impact on the Company:
IAS 39 (Amendment), The Fair Value Option
This amendment reduces the option to designate any financial asset or financial liability at fair value through profit or loss.
The amendment permits use of the fair value option only in the following situations:
If use of the fair value option results in more relevant information, because either:
– It eliminates or significantly reduces a measurement or recognition inconsistency (“accounting mismatch”) that would otherwise arise from measuring
assets or liabilities, or recognising the gains and losses on them on different bases;
– A group of financial assets and/or financial liabilities are managed on a fair value basis, in accordance with a documented risk management or investment
strategy, with information being provided to key management personnel on this basis;
– When a contract contains one or more substantive embedded derivatives, unless the embedded derivative does not significantly modify the cash flows
that otherwise would be required by the contract or it is clear that separation of the embedded derivative is prohibited.
The Company designate non-trading financial assets as at fair value through profit or loss so that it reduces accounting mismatch. The Company designate
non-trading financial assets as at fair value through profit and loss in case of equity securities with reliably measurable fair value and in exceptional cases of
selected bonds not held for trading.
The Company considers that the amendment does not impact the previous classification of assets recognised at fair vale through profit or loss because
classification was always made in order to reduce measurement inconsistency of asset and relating liabilities.
IFRIC 10 Interim Financial Reporting and Impairment
IFRIC 10 states that an entity stall not reverse any impairment loss recognized in a previous interim period on goodwill or on an investment in either an
equity instrument or a financial asset carried at cost. IFRIC 10 is in compliance with currently used accounting policy of the Company.
D.4.2. STANDARDS, INTERPRETATIONS AND AMENDMENTS TO PUBLISHED STANDARDS THAT ARE NOT YETEFFECTIVE AND ARE RELEVANT FOR THE COMPANY’S FINANCIAL STATEMENTS
The following new standards, amendments and interpretations to existing standards have been published and are mandatory and relevant for the
Company’s accounting periods beginning on or after 1 January 2007 but have not been applied earlier by the Company:
IFRS 7 – Financial Instruments: Disclosures, and a complementary amendment to IAS 1, Presentation of Financial Statements – Capital Disclosures
(effective from 1 January 2007).
IFRS 7 introduces new disclosures to improve the information about the financial instruments. It requires the disclosure of qualitative and quantitative
information about exposure to risks arising from financial instruments, including specified minimum disclosures about credit risk, liquidity risk and market risk,
including a sensitivity analysis to market risk. It replaces IAS 30, Disclosures in the Financial Statements of Banks and Similar Financial Institutions, and the
disclosure requirements in IAS 32, Financial Instruments: Disclosure and Presentation. It is applicable to all entities that report under IFRS. The amendment
to IAS 1 introduces disclosures about the level of an entity’s capital and how it manages capital. Management is currently assessing the impact of IFRS 7 and
the amendment to IAS 1. The Company will apply IFRS 7 and the amendment to IAS 1 from the annual period beginning 1 January 2007.
100 ANNUAL REPORT 2006
IFRS 8 – Operating segments (effective from 1 January 2009)
This standard requires an entity to adopt the “management approach” to reporting on the financial performance of its operating segments. Generally, the
information to be reported would be that which management uses internally for evaluating segment performance and deciding how to allocate resources to
operating segments. Such information may be different from what is used to prepare the income statement and balance sheet. The standard therefore
requires explanations of the basis on which the segment information is prepared and reconciliations to the amounts recognised in the income statement
and balance sheet. This standard replaces IAS 14 Segment reporting and applies only to listed entities. The Company will apply IFRS 8 from the annual
period beginning 1 January 2009.
E. RISK EXPOSURES, RISK MANAGEMENT OBJECTIVES AND PROCEDURES
This section provides details of the Company’s exposure to risk and describes the methods used by the management to control risk. The most important
types of financial risk to which the Company is exposed are credit risk, liquidity risk, actuarial risk and market risk. Market risk includes currency risk,
interest rate risk and equity price risk.
E.1. DERIVATIVE FINANCIAL INSTRUMENTS
The Company holds a variety of derivative financial instruments for trading and for risk management purposes. This note describes the derivatives used by
the Company. Further details of the Company’s objectives and strategies in the use of derivatives are set out in the following sections. The nature of the
derivative instruments outstanding at the balance sheet date is described in the following sections of this note and in note F.4.
Derivative financial instruments used by the Company include swaps, futures, forwards, options and other similar types of contracts whose value changes
in response to changes in interest rates, foreign exchange rates, security prices or price indices. Derivatives are either standardised contracts transacted
through regulated exchanges (referred to as exchange-traded products) or individually negotiated over-the-counter contracts (referred to as
OTC-products). The main types of derivative instruments used by the Company are described below.
E.1.1. SWAPS
Swaps are over-the-counter agreements between the Company and other parties to exchange future cash flows based upon agreed notional amounts.
Swaps most commonly used by the Company are interest rate and cross-currency interest rate swaps. Under interest rate swaps, the Company agrees
with other parties to exchange, at specified intervals, the difference between fixed-rate and floating-rate interest amounts calculated by reference to an
agreed notional amount. Cross-currency interest rate swaps require an exchange of interest payment flows and capital amounts in different currencies.
The Company is subject to credit risk arising from default of the respective counter parties. Market risk arises from potentially unfavourable movements in
interest rates relative to the contractual rates of the contract, or from movements in foreign exchange rates.
E.1.2. FUTURES AND FORWARDS
Forward contracts are commitments to either purchase or sell a designated financial instrument, currency, commodity or an index at a specified future date
for a specified price and may be settled in cash or another financial asset. Forward contracts result in credit exposure to the counter party and exposure to
market risk based on changes in market prices relative to the contracted amounts.
E.1.3. OPTIONS
Options are derivative financial instruments that give the buyer, in exchange for a premium payment, the right, but not the obligation, to either purchase
from (call option) or sell to (put option) the writer a specified underlying instrument at a specified price on or before a specified date. The Company enters
into interest rate options, foreign exchange options, equity and index options and credit failure options (swaps). Interest rate options, including caps and
floors, may be used as hedges against a rise or fall in interest rates. They provide protection against changes in interest rates of floating rate instruments
above or below a specified level. Foreign currency options may also be used (commensurate with the type of option) to hedge against rising or falling
currency rates. The Company as a buyer of over-the-counter options is subject to market risk and credit risk since the counter party is obliged to make
payments under the terms of the contract if the Company exercises the option. As the writer of over-the-counter options, the Company is subject to
market or credit risk, as it is obliged to make payments if the option is exercised by the counterparty.
ANNUAL REPORT 101
E.2. COMPANY’S RISK MANAGEMENT
The Company carries an inventory of capital market instruments. Positions are open in the money market, foreign exchange markets, debt and credit
markets and equity markets based on expectations of future market conditions.
Below is a description of the various risks the Company is exposed to as a result of its activities and the approach taken to manage those risks. Further
details of the steps taken to measure and control risk are set out in the “Risk measurement and control” section.
E.2.1. LIQUIDITY RISK
Liquidity risk arises in the general funding of the Company’s activities and in the management of its positions. It includes both the risk of being unable to
fund assets using instruments with appropriate maturities and rates and the risk of being unable to liquidate an asset sufficiently quickly and in the
appropriate amount, and the risk of being unable to meet obligations as they become due.
The Company has access to a diverse funding base. Apart from insurance provisions, which serve as a main source of financing, funds are raised using
a broad range of instruments including deposits, other liabilities evidenced by paper, reinsurance policy, subordinated liabilities and shareholder equity. This
enhances funding flexibility, limits dependence on any one source of funds and generally lowers the cost of funds. The Company strives to maintain
a balance between continuity of funding and flexibility through the use of liabilities with a range of maturities. In addition the Company holds a portfolio of
liquid assets as part of its liquidity risk management strategy. Special attention is paid to the liquidity management of non-life insurance business requiring
sufficient funding to meet all the potential obligations in the event of a natural disaster. The Company continually assesses its liquidity risk by identifying
and monitoring changes in the funding required to meet business goals and the targets set in terms of the overall Company strategy.
102 ANNUAL REPORT 2006
The following tables show an analysis of the Company’s financial assets and liabilities broken down into their relevant maturity bands based on the
remaining period to repayment.
Residual maturities of financial assets and financial liabilities:
2006 Less than Between Between Between More Non- Total
1 month 1 and 3 months 1 and than specified
TCZK 3 months and 1 year 5 years 5 years
Subsidiaries and associates – – – – – 3,950,694 3,950,694
Financial assets 16,693,011 2,897,640 6,911,290 22,648,921 28,166,131 23,113,481 100,430,474
Financial assets available for sale – – – 135,960 4,128,492 910,119 5,174,571
Equity securities – – – – – 910,119 910,119
Debt securities – – – 135,960 4,128,492 – 4,264,452
Financial assets held to maturity – – – 1,049,506 837,104 – 1,886,610
Debt securities – – – 1,049,506 837,104 – 1,886,610
Financial assets at fair value through
profit or loss held for trading 122,696 23,097 151,868 338,802 113,086 13,489,110 14,238,659
Equity securities held for trading – – – – – 13,489,110 13,489,110
Debt securities held for trading – – 124,867 – – – 124,867
Positive market values of derivatives 122,696 23,097 27,001 338,802 113,086 – 624,682
Financial assets at fair value through
profit or loss not held for trading – 1,190,030 5,115,926 19,074,435 22,863,412 7,372,543 55,616,346
Debt securities not held for trading – 1,190,030 5,115,926 19,074,435 22,863,412 – 48,243,803
Equity securities not held for trading – – – – – 7,372,368 7,372,368
Other not held for trading – – – – – 175 175
Loans and receivables 16,570,315 1,684,513 1,643,496 2,050,218 224,037 170,611 22,343,190
Loans and advances to banks 13,730,492 – – 267,499 – 163,838 14,161,829
Loans and advances to non-banks 1,182 – – 179 7,364 – 8,725
Receivables 2,838,641 1,684,513 1,643,496 1,782,540 216,673 6,773 8,172,636
Cash and cash equivalents 1,171,098 – – – – – 1,171,098
Total financial assets 16,693,011 2,897,640 6,911,290 22,648,921 28,166,131 27,064,175 104,381,168
ANNUAL REPORT 103
2005 Less than Between Between Between More Non- Total
1 month 1 and 3 months 1 and than specified
TCZK 3 months and 1 year 5 years 5 years
Subsidiaries and associates – – – – – 16,728,599 16,728,599
Financial assets 18,342,694 1,803,890 4,976,803 21,243,024 24,222,296 26,565,774 97,154,481
Financial assets available for sale – – – – – 1,779,769 1,779,769
Equity securities – – – – – 1,779,769 1,779,769
Financial assets held to maturity – – – 1,049,487 821,241 – 1,870,728
Debt securities – – – 1,049,487 821,241 – 1,870,728
Financial assets at fair value through profit
or loss held for trading 48,108 5,061 219,711 154,345 467,257 11,160,391 12,054,873
Equity securities held for trading – – – – – 11,160,391 11,160,391
Positive market values of derivatives 48,108 5,061 219,711 154,345 467,257 – 894,482
Financial assets at fair value through profit
or loss not held for trading 125,471 – 1,974,728 18,564,158 22,150,442 13,027,394 55,842,193
Debt securities not held for trading 125,471 – 1,974,728 18,564,158 22,150,442 – 42,814,799
Equity securities not held for trading – – – – – 13,027,219 13,027,219
Other not held for trading – – – – – 175 175
Loans and receivables 18,169,115 1,798,829 2,782,364 1,475,034 783,356 349,133 25,357,831
Loans and advances to banks 15,921,060 – – 670,101 620,113 – 17,211,274
Loans and advances to non-banks 1,843 – 319,714 – 8,591 – 330,148
Receivables 2,246,212 1,798,829 2,462,650 804,933 154,652 349,133 7,816,409
Cash and cash equivalents – – – – – 249,087 249,087
Total financial assets 18,342,694 1,803,890 4,976,803 21,243,024 24,222,296 43,294,373 113,883,080
2006 Less than Between Between Between More Non- Total
1 month 1 and 3 months 1 and than specified
TCZK 3 months and 1 year 5 years 5 years
Financial liabilities for investment
contracts with DPF – – – 584,654 723,826 – 1,308,480
Guaranteed liability for investment
contracts with DPF – – – 584,654 723,826 – 1,308,480
Payables 3,232,937 3,810,272 881,244 1,355,704 – 17,179 9,297,336
Other liabilities – – – – – 46,971 46,971
Financial liabilities at fair value
through profit or loss 11,078 102,554 5,784 14,982 257,838 – 392,236
Negative fair value of derivatives 11,078 102,554 5,784 14,982 257,838 – 392,236
Liabilities to banks 277,129 – – – – – 277,129
Total financial liabilities 3,521,144 3,912,826 887,028 1,955,340 981,664 64,150 11,322,152
104 ANNUAL REPORT 2006
2005 Less than Between Between Between More Non- Total
1 month 1 and 3 months 1 and than specified
TCZK 3 months and 1 year 5 years 5 years
Financial liabilities for investment contracts
with DPF – – – 465,722 600,202 – 1,065,924
Guaranteed liability for investment
contracts with DPF – – – 465,722 600,202 – 1,065,924
Subordinated liabilities – – – – 2,500,000 – 2,500,000
Other liabilities evidenced by paper 40,690 – 4,027,500 – – – 4,068,190
Payables 3,033,899 6,092,748 363,884 409,238 61,572 10,424 9,971,765
Other liabilities – – – – – 38,635 38,635
Financial liabilities at fair value
through profit or loss 122,257 116,786 123,425 107,812 41,537 – 511,817
Negative fair value of derivatives 122,257 116,786 123,425 107,812 41,537 – 511,817
Liabilities to banks 264,910 – – – – – 264,910
Total financial liabilities 3,461,756 6,209,534 4,514,809 982,772 3,203,311 49,059 18,421,241
Note F.13.6. provides information about expected maturity of insurance provisions.
E.2.2. MARKET RISK
All financial instruments and positions are subject to market risk, the risk that future changes in market conditions may make an instrument more or less
valuable. Financial instruments held for trading are recognised at fair value and all changes in market conditions directly affect net trading income.
Non-trading financial instruments recognized initially at fair value through profit or loss are recognised at fair value and all changes in market conditions
directly affect the net fair value gains on financial assets and liabilities at fair value through profit or loss not held for trading. Financial instruments available
for sale are recognised at fair value plus directly attributable transaction costs and all changes in market conditions affect the equity revaluation reserve.
Financial instruments held to maturity, loans and receivables are recognised at amortised value using the effective interest rate method. Impairment of
financial assets available for sale, held to maturity, loans and receivables is recognised in net income.
The Company manages its use of trading instruments in response to changing market conditions. Exposure to market risk is formally managed in
accordance with risk limits or frameworks set by senior management by buying or selling instruments or entering into offsetting positions. The “Risk
measurement and control” section at the end of this note describes the approaches used to manage market risk.
E.2.2.1. Interest rate risk
The Company’s operations are subject to the risk of interest rate fluctuations to the extent that interest-earning assets (including investments) and
interest-bearing liabilities mature or reprise at different times or in differing amounts. In the case of floating rate assets and liabilities the Company is also
exposed to an interest rate cash flow risk, which varies depending on the different reprising characteristics of the various floating rate instruments.
Asset-liability management activities are conducted in the context of the Company’s sensitivity to interest rate changes. The Company is more liability sensitive
because its interest-earning assets have a shorter duration and their interest rates are re-fixed more frequently than the majority of its interest-bearing liabilities.
This means that in a rising interest rate environment, in connection with the re-fixing of interest rates, the margins earned will widen as assets reprise. The
actual effect will depend on a number of factors, including the extent to which repayments are made earlier, or later, than the contracted dates and variations
in interest rate sensitivity within the reprising periods and among currencies. Furthermore, with rising interest rates, the net present value of assets will
decrease less than the net present value of liabilities. To achieve its risk management objectives, the Company uses a combination of derivative financial
instruments, particularly interest rate swaps, futures, and options, as well as other types of contracts. The instruments used are detailed in note F.4.3.
Interest rate derivatives are primarily used to bridge the mismatch in the reprising of assets and liabilities. In some cases derivatives are used to convert
certain groups of policyholder loans and other interest-earning assets to floating or fixed rates to reduce the risk of losses in value due to interest rate
changes or to lock in spreads. In addition, the Company enters into interest rate swaps to fix the interest rates on its floating-rate debts at a certain level.
Part of the Company’s return on financial instruments arises from its management of the incongruity between the duration of its assets and liabilities.
ANNUAL REPORT 105
The tables below summarise the interest rate sensitivity of the Company’s financial assets and liabilities at the reporting date. The carrying amounts of
interest-rate-sensitive assets and liabilities and the notional amounts of swaps and other derivative financial instruments are presented in the periods in
which they mature or in which the interest rates will next be fixed. To reflect anticipated prepayments, certain asset and liability categories are included
in the table based on the estimated rather than the contractual maturity dates. Items are allocated to time bands by reference to the earlier of the next
contractual interest rate reprising date and the expected maturity date.
Interest rate sensitivity of financial assets and financial liabilities:
2006 Effective Less than Between Between Between More Non- Total
interest 3 months 3 months 1 and 2 2 and 5 than 5 specified
TCZK rate and 1 year years years years
Subsidiaries and associates – – – – – – 3,950,694 3,950,694
Financial assets – 23,168,730 14,467,315 4,272,893 10,281,208 25,126,847 23,113,481 100,430,474
Financial assets available for sale – – – 135,960 – 4,128,492 910,119 5,174,571
Equity securities – – – – – – 910,119 910,119
Debt securities 3.68% – – 135,960 – 4,128,492 – 4,264,452
Financial assets held to maturity – – – – 1,049,506 837,104 – 1,886,610
Debt securities 7.60% – – – 1,049,506 837,104 – 1,886,610
Financial assets at fair value
through profit or loss held
for trading – 242,791 505,689 – 1,069 – 13,489,110 14,238,659
Equity securities held for trading – – – – – – 13,489,110 13,489,110
Debt securities held for trading 2.52% – 124,867 – – – – 124,867
Positive fair value of derivatives – 242,791 380,822 – 1,069 – – 624,682
Financial assets at fair value
through profit or loss not held
for trading – 4,403,613 12,318,130 2,593,763 8,991,083 19,937,214 7,372,543 55,616,346
Debt securities not held
for trading 4.77% 4,403,613 12,318,130 2,593,763 8,991,083 19,937,214 – 48,243,803
Equity securities not held
for trading – – – – – – 7,372,368 7,372,368
Other not held for trading – – – – – – 175 175
Loans and receivables – 18,522,326 1,643,496 1,543,170 239,550 224,037 170,611 22,343,190
Loans and advances to banks 2.45% 13,997,991 – – – – 163,838 14,161,829
Loans and advances
to non-banks 1) 1,182 – 179 – 7,364 – 8,725
Receivables – 4,523,153 1,643,496 1,542,991 239,550 216,673 6,773 8,172,636
Cash and cash equivalents – 1,171,098 – – – – – 1,171,098
Total financial assets – 23,168,730 14,467,315 4,272,893 10,281,208 25,126,847 27,064,175 104,381,168
1) Loans and advances to non-banks include almost fully impaired overdue loans where an interest is no more charged.
106 ANNUAL REPORT 2006
2005 Effective Less than Between Between Between More Non- Total
interest 3 months 3 months 1 and 2 2 and 5 than 5 specified
TCZK rate and 1 year years years years
Subsidiaries and associates – – – – – – 16,728,599 16,728,599
Financial assets – 22,168,193 11,228,696 5,512,020 10,100,199 21,579,599 26,565,774 97,154,481
Financial assets available for sale – – – – – – 1,779,769 1,779,769
Equity securities – – – – – – 1,779,769 1,779,769
Financial assets held to maturity – – – – 1,049,487 821,241 – 1,870,728
Debt securities 7.60% – – – 1,049,487 821,241 – 1,870,728
Financial assets at fair value
through profit or loss held
for trading – 293,278 542,034 – 59,170 – 11,160,391 12,054,873
Equity securities held for trading – – – – – – 11,160,391 11,160,391
Positive fair value of derivatives – 293,278 542,034 – 59,170 – – 894,482
Financial assets at fair value
through profit or loss not held
for trading – 1,486,858 7,704,298 4,074,879 8,953,649 20,595,115 13,027,394 55,842,193
Debt securities not held
for trading 4.89% 1,486,858 7,704,298 4,074,879 8,953,649 20,595,115 – 42,814,799
Equity securities not held
for trading – – – – – – 13,027,219 13,027,219
Other not held for trading – – – – – – 175 175
Loans and receivables – 20,388,057 2,982,364 1,437,141 37,893 163,243 349,133 25,357,831
Loans and advances to banks 2.51% 16,341,173 200,000 670,101 – – – 17,211,274
Loans and advances
to non-banks 1.63% 1,843 319,714 – – 8,591 – 330,148
Receivables – 4,045,041 2,462,650 767,040 37,893 154,652 349,133 7,816,409
Cash and cash equivalents – – – – – – 249,087 249,087
Total financial assets – 22,168,193 11,228,696 5,512,020 10,100,199 21,579,599 43,294,373 113,883,080
ANNUAL REPORT 107
2006 Effective Less than Between Between Between More Non- Total
interest 3 months 3 months 1 and 2 2 and 5 than 5 specified
TCZK rate and 1 year years years years
Financial liabilities for investment
contracts with DPF – – – 5,218 579,436 723,826 – 1,308,480
Guaranteed liability for investment
contracts with DPF 2.65% – – 5,218 579,436 723,826 – 1,308,480
Payables – 7,043,209 881,244 1,306,400 49,304 – 17,179 9,297,336
Other liabilities – – – – – – 46,971 46,971
Financial liabilities at fair value
through profit or loss – 145,776 135,549 108,392 2,519 – – 392,236
Negative market value of derivatives – 145,776 135,549 108,392 2,519 – – 392,236
Liabilities to banks 2.48% 277,129 – – – – – 277,129
Total financial liabilities – 7,466,114 1,016,793 1,420,010 631,259 723,826 64,150 11,322,152
2005 Effective Less than Between Between Between More Non- Total
interest 3 months 3 months 1 and 2 2 and 5 than 5 specified
TCZK rate and 1 year years years years
Financial liabilities for investment
contracts with DPF – – – – 465,722 600,202 – 1,065,924
Guaranteed liability for investment
contracts with DPF 2.77% – – – 465,722 600,202 – 1,065,924
Subordinated liabilities 7.51% – – – – 2,500,000 – 2,500,000
Other liabilities evidenced by paper – 4,037,690 30,500 – – – – 4,068,190
Bonds 2.57% 4,037,690 – – – – – 4,037,690
Deposit bill of exchange – – 30,500 – – – – 30,500
Payables – 9,126,647 363,884 405,441 3,797 61,572 10,424 9,971,765
Other liabilities – – – – – – 38,635 38,635
Financial liabilities at fair value
through profit or loss – 403,370 108,447 – – – – 511,817
Negative market value of derivatives – 403,370 108,447 – – – – 511,817
Liabilities to banks 1.96% 264,910 – – – – – 264,910
Total financial liabilities – 13,832,617 502,831 405,441 469,519 3,161,774 49,059 18,421,241
E.2.2.2. Equity price risk
Equity price risk is the risk that equity prices will fluctuate affecting the fair value of equity investments and other instruments that derive their value from
a particular equity investment or index of equity prices.
The Company manages its use of equity investments in response to changing market conditions and limits the risk by maintaining a diversified portfolio.
E.2.2.3. Currency risk
The Company is exposed to currency risk through transactions in foreign currencies and through its assets and liabilities denominated in foreign currencies.
The Company’s main foreign exposures are to Europe and the United States of America. Its exposures are measured mainly in Euros (“EUR”), U.S. Dollars
(“USD”), Slovak Crowns (“SKK”), Cypriot Pounds (“CYP”) and Russian Rubles (“RUR”). As the currency in which the Company presents its financial
statements is CZK, movements in the exchange rates between these currencies and the CZK affect the Company financial statements.
The Company’s transactional exposures give rise to foreign currency gains and losses that are recognised in the income statement. These exposures
comprise the monetary assets and liabilities of the Company that are not denominated in the Company’s functional currency. In respect of monetary assets
and liabilities in foreign currencies, the Company ensures that its net exposure is kept to an acceptable level by buying and selling foreign currencies at spot
rates when considered appropriate, or using short-term FX operations.
The Company also has investments in foreign operations whose net assets are exposed to a foreign currency translation risk.
108 ANNUAL REPORT 2006
The following table shows the composition of financial assets and liabilities with respect to the main currencies:
2006 EUR USD SKK CYP CZK Other Total
TCZK
Subsidiaries and associates 391,530 – – 1,305,096 1,960,835 293,233 3,950,694
Financial assets 8,544,433 9,067,449 1,750,080 – 80,922,459 146,053 100,430,474
Financial assets available for sale 837,342 213,186 – – 4,124,043 – 5,174,571
Debt securities 837,342 213,186 – – 3,213,924 – 4,264,452
Equity securities – – – – 910,119 – 910,119
Financial assets held to maturity – – – – 1,886,610 – 1,886,610
Debt securities – – – – 1,886,610 – 1,886,610
Financial assets at fair value through
profit or loss held for trading 2,182,867 5,660,589 457 – 6,288,689 106,057 14,238,659
Equity securities held for trading 2,101,031 5,621,689 – – 5,662,778 103,612 13,489,110
Debt securities held for trading – – – – 124,867 – 124,867
Positive fair value of derivatives 81,836 38,900 457 – 501,044 2,445 624,682
Financial assets at fair value through
profit or loss not held for trading 5,352,194 1,985,007 – – 48,278,990 155 55,616,346
Debt securities not held for trading 543,116 1,115,755 – – 46,584,932 – 48,243,803
Equity securities not held for trading 4,809,078 869,252 – – 1,693,883 155 7,372,368
Other not held for trading – – – – 175 – 175
Loans and receivables 130,527 1,188,560 1,745,971 – 19,246,471 31,661 22,343,190
Loans and advances to banks 110,001 1,022,917 – – 13,028,911 – 14,161,829
Loans and advances to non-banks – – – – 8,725 – 8,725
Receivables 20,526 165,643 1,745,971 – 6,208,835 31,661 8,172,636
Cash and cash equivalents 41,503 20,107 3,652 – 1,097,656 8,180 1,171,098
Reinsurance assets – – 34,705 – 8,231,539 – 8,266,244
Total 8,935,963 9,067,449 1,784,785 1,305,096 91,114,833 439,286 112,647,412
During 2006, mainly as a result of split-off transaction, the Company has reduced its open position in assets denominated in EUR. New investments were
made most of all in CZK and USD.
ANNUAL REPORT 109
2005 EUR USD SKK CYP CZK Other Total
TCZK
Subsidiaries and associates 5,280,736 – 4,280 3,375,407 7,776,510 291,666 16,728,599
Financial assets 9,204,360 7,990,264 1,510,283 – 78,257,986 191,588 97,154,481
Financial assets available for sale – – – – 1,779,769 – 1,779,769
Equity securities – – – – 1,779,769 – 1,779,769
Financial assets held to maturity – – – – 1,870,728 – 1,870,728
Debt securities – – – – 1,870,728 – 1,870,728
Financial assets at fair value through
profit or loss held for trading 2,390,627 5,386,742 4,656 – 4,270,649 2,199 12,054,873
Equity securities held for trading 2,003,264 5,222,148 – – 3,934,979 – 11,160,391
Positive fair value of derivatives 387,363 164,594 4,656 – 335,670 2,199 894,482
Financial assets at fair value through
profit or loss not held for trading 6,350,520 2,200,585 – – 47,167,539 123,549 55,842,193
Debt securities not held for trading 420,488 1,205,070 – – 41,065,692 123,549 42,814,799
Equity securities not held for trading 5,930,032 995,515 – – 6,101,672 – 13,027,219
Other not held for trading – – – – 175 – 175
Loans and receivables 391,769 355,040 1,503,889 – 23,067,123 40,010 25,357,831
Loans and advances to banks – 192,704 – – 17,018,570 – 17,211,274
Loans and advances to non-banks – – – – 330,148 – 330,148
Receivables 391,769 162,336 1,503,889 – 5,718,405 40,010 7,816,409
Cash and cash equivalents 71,444 47,897 1,738 – 102,178 25,830 249,087
Reinsurance assets – – 6,196 – 7,882,566 – 7,888,762
Total 14,485,096 7,990,264 1,520,759 3,375,407 93,917,062 483,254 121,771,842
110 ANNUAL REPORT 2006
2006 EUR USD SKK CYP CZK Other Total
TCZK
Financial liabilities for investment
contracts with DPF – – – – 1,308,480 – 1,308,480
Guaranteed liability for investment
contracts with DPF – – – – 1,308,480 – 1,308,480
Payables 31,103 93,247 1,321,179 – 7,835,057 16,750 9,297,336
Other liabilities – – – – 46,971 – 46,971
Financial liabilities at fair value
through profit or loss 215,602 4,785 – – 171,060 789 392,236
Negative market value of derivatives 215,602 4,785 – – 171,060 789 392,236
Liabilities to banks – – – – 277,129 – 277,129
Total 246,705 98,032 1,321,179 – 9,638,697 17,539 11,322,152
Net foreign currency position – 2006 8,689,258 8,969,417 463,606 1,305,096 81,476,136 421,747 101,325,260
2005 EUR USD SKK CYP CZK Other Total
TCZK
Financial liabilities for investment
contracts with DPF – – – – 1,065,924 – 1,065,924
Guaranteed liability for investment
contracts with DPF – – – – 1,065,924 – 1,065,924
Subordinated liabilities – – – – 2,500,000 – 2,500,000
Other liabilities evidenced by paper – – – – 4,068,190 – 4,068,190
Payables 72,682 109,010 1,191,798 – 8,580,400 17,875 9,971,765
Other liabilities – – – – 38,635 – 38,635
Financial liabilities at fair value
through profit or loss 66,054 94,795 2,905 – 348,063 – 511,817
Negative market value of derivatives 66,054 94,795 2,905 – 348,063 – 511,817
Liabilities to banks – – – – 264,910 – 264,910
Total 138,736 203,805 1,194,703 – 16,866,122 17,875 18,421,241
Net foreign currency position – 2005 14,346,360 7,786,459 326,056 3,375,407 77,050,940 465,379 103,350,601
ANNUAL REPORT 111
The following table summarises, by major currency, the contractual amounts of the Company’s forward exchange, futures and option contracts, with details
of the contracted exchange rates and the remaining periods to maturity. Foreign currency amounts are translated at the rates ruling at the balance sheet date:
TCZK 2006 2005
Buy EUR
Less than three months 2,286,244 2,800,968
Between three months and one year 109,980 –
More than one year 12,895,155 –
Total 15,291,379 2,800,968
Sell EUR
Less than three months 9,473,006 12,539,258
Between three months and one year 219,960 29,005
More than one year 13,201,155 290,050
Total 22,894,121 12,858,313
Buy USD
Less than three months 15,657 3,387,653
Total 15,657 3,387,653
Sell USD
Less than three months 8,808,656 10,957,365
Between three months and one year – 526,183
More than one year 665,360 –
Total 9,474,016 11,483,548
Buy SKK
Less than three months 329,194 829,352
Between three months and one year 219,960 752,251
Total 549,154 1,581,603
Sell SKK
Less than three months 768,176 1,410,787
Between three months and one year 109,980 752,251
Total 878,156 2,163,038
Buy other
Less than three months 953,232 178,638
Total 953,232 178,638
Sell other
Less than three months 624,202 –
Total 624,202 –
E.2.3. CREDIT RISK
The Company is subject to credit risk through its trading, lending and investing activities and where it acts as an intermediary on behalf of policyholders or
other third parties.
The Company’s primary exposure to credit risk arises through the purchase of debt securities and through the provision of loans and advances. The amount
of credit exposure in this regard is represented by the carrying amounts of the assets in the balance sheet. The Company is exposed to credit risk on
various other financial assets, including derivative and debt investments and the current credit exposure in respect of these instruments is equal to the
carrying amount of these assets in the balance sheet. In addition, the Company is exposed to an off balance sheet credit risk through commitments to
extend issued credit and guarantees – for more details refer to note F.38.1.
The Company’s credit exposure at the balance sheet date arising from financial instruments held or issued for trading and non-trading purposes is
represented by the fair value of instruments with a positive fair value at that date, as recorded in the balance sheet. Notional amounts disclosed in the
notes to the financial statements do not represent the amounts to be exchanged by the parties to the derivatives and do not measure the
Company’s exposure to credit or market risks. The amounts to be exchanged are based on the terms of the derivatives.
The risk that the counterparties to the instruments might default on their obligations is monitored on an ongoing basis. In monitoring the credit risk
exposure, consideration is given to instruments with a positive fair value and to the volatility of the fair value of the instruments. To manage the level of
credit risk, the Company deals with counterparties with a good credit standing and enters into master netting agreements whenever possible. Master
netting agreements provide for the net settlement of contracts with the same counterparty in the event of default.
Concentrations of credit risk arise where groups of counterparties have similar economic characteristics that would cause their ability to meet their
contractual obligations to be similarly affected by changes in economic or other conditions.
112 ANNUAL REPORT 2006
The following tables show the economic and geographic concentration of credit risk:
TCZK 2006 2006 (%) 2005 2005 (%)
Economic concentration
Financial services 41,387,728 53.20 38,174,125 53.57
Public sector 26,076,260 33.52 22,137,183 31.06
Telecom providers 2,878 0.01 – –
Other 10,324,520 13.27 10,951,640 15.37
Total 77,791,386 100 71,262,948 100
Geographic concentration
Czech Republic 50,488,647 64.90 46,575,278 65.36
Slovak Republic 1,740,847 2.24 1,482,796 2.08
Russia 7,086 0.01 – –
Netherlands 6,084,659 7.82 4,112,780 5.77
Cyprus 994,955 1.28 697,187 0.98
Other EU countries 16,883,654 21.70 16,661,420 23.38
Other 1,591,538 2.05 1,733,487 2.43
Total 77,791,386 100 71,262,948 100
The amounts reflected in the tables represent the maximum accounting loss that would be recognised at the balance sheet date if counter parties failed
completely to perform as contracted and any collateral or security proved to be of no value. The amounts, therefore, greatly exceed expected losses, which
are included in the allowance for uncollectibility.
E.2.4. INSURANCE RISK
The Company is exposed to actuarial and underwriting risk through a wide range of life and non-life products offered to customers: participating and
non-participating traditional life products, unit-linked, fixed and variable annuities, universal life products, pension products, guaranteed investment
products and all lines of non-life products (fire, accident and health, automobile, third party liability and disability). Insurance risk relates to the uncertainty
of the insurance business.
The most significant components of actuarial risk are the premium risk and the reserve risk. These concern the adequacy of insurance premium rate levels
and the adequacy of provisions with respect to insurance liabilities and the capital base. The adequacy is assessed taking into consideration the supporting
assets (fair and book value, currency and interest sensitivity), changes in interest rates and exchange rates and developments in mortality, morbidity,
non-life claims frequency and amounts, lapses and expenses as well as general market conditions. Specific attention is paid to the adequacy of provisions
for the life business. For a detailed description of the liability adequacy test see note D.2.3.
E.2.4.1. Concentration of insurance risk
A key aspect of the insurance risk faced by the Company is the extent of concentration of insurance risk, which determines the extent to which a particular
event or series of events could impact significantly upon the Company’s liabilities. Such concentrations may arise from a single insurance contract or
through a number of related contracts where significant liabilities could arise. An important aspect of the concentration of insurance risk is that it could arise
from the accumulation of risks within a number of different insurance classes.
Concentrations of risk can arise in low frequency, high-severity events such as natural disasters; in situations where the Company is exposed to
unexpected changes in trends, for example, unexpected changes in human mortality or in policyholder behaviour; or where significant litigation or
legislative risks could cause a large single loss, or have a pervasive effect on many contracts.
E.2.4.2. Geographic and sectoral concentrations
The risks underwritten by the Company are primarily located in the Czech Republic.
Within non life insurance, the management believes that the Company has no significant concentration of exposure to any group of policyholders measured
by social, professional, age or similar criteria.
ANNUAL REPORT 113
E.2.4.3. Low frequency, high-severity risks
The most significant risk of natural disaster to which the Company is exposed is the risk of flooding in the Czech Republic. In the event of a major flood, the
Company expects the property portfolio to see high claims for structural damage to properties and contents, and high claims for business interruption while
transport links are inoperable and business properties are closed for repair. Apart from the risk of flooding other climatic phenomena, such as long lasting
snow-fall or strong tornados would have a similar effect.
The Czech Republic suffered major flooding in 2002 across a large part of Bohemia (affecting large industrial areas), including Prague. During the year 2006
there were two major flooding (a spring flooding and a summer flooding). The details relating to the spring flooding are disclosed in the table below. The
summer flooding was caused by heavy local rain fall. No comparative figures are available on the market in relation to this flooding. Changes which the
Company has made in its property portfolio and improvements in its mapping of high risk areas and regions to limit its exposure to flood claims had
a positive effect (see the table below).
Good risk diversification resulted in a situation, where a total gross insurance claims incurred in relation to 2006 flooding and heavy snow in amount of
CZK 1,977 million did not cause an increase in insurance claim expenses in comparison with the prior year (see F.28.) as it was in the case of impact
of 2002 flooding.
The table below shows the key characteristics of the floods in 2002 and 2006:
2002 Flooding 2006 Spring Flooding
Claims MCZK Claims MCZK
(in thousands) (in thousands)
Total damage (estimate published by the Czech Insurers Association) n/a 73,000 n/a n/a
Insured damage 82 36,811 14 780
The Company’s share – gross 52 8,888 10 369
The Company’s share – net 52 290 10 222
The Company’s net-share of total damage n/a 3.97% n/a n/a
The Company’s net-share of insured damage 63.41% 7.87% 71.43% 28.46%
E.3. HEDGING
The Company uses derivative financial instruments to manage the potential earnings impact of interest rate and foreign currency movements. Several
types of derivative financial instruments are used for this purpose, including interest rate swaps and currency swaps, options, forward contracts and other
derivatives. The purpose of the Company’s hedging activities is to protect the Company from the risk that the net cash inflows will be adversely affected by
changes in interest or exchange rates, credit ratings or market prices. The Company enters into transactions to ensure that it is economically hedged in
accordance with its asset-liability risk management policies.
Interest rate hedging derivatives are designated as economic hedges of benchmark interest rates for specified assets or groups of similar assets, liabilities
or groups of similar liabilities, or anticipated transactions. The Company’s risk management activities concentrate on economic hedging of the
Company’s net exposure based on its asset and liability positions. Therefore the Company monitors its interest rate risk exposures by reviewing the net
asset or liability gaps within the relevant reprising bands.
Where the Company economically hedges a portfolio of loans or liabilities (especially life insurance liabilities) in respect of the interest rate risk it classifies
the loans into homogenous groups, each with specific maturities.
The Company manages its use of hedging derivatives in response to changing market conditions as well as to changes in the characteristics and mix of the
related assets, liabilities and firm commitments.
E.4. RISK MANAGEMENT AND CONTROL
The Company dedicated the financial risk management to a professional department within the Company and the interest rate risk, FX risk, equity price
risk, liquidity risk, market risks and credit risk is managed by own experts. This enables the Company to concentrate on risk management policies, including
management of the insurance risks.
114 ANNUAL REPORT 2006
E.4.1. INTEREST RATE SENSITIVITY
The Company uses a duration analysis to estimate the degree of sensitivity to interest rate changes in respect of its trading and non-trading positions. The
duration of a bond is the life, in years, of a notional zero coupon bond whose fair value would change by the same amount as the real bond or portfolio in
response to a change in market interest rates. Financial instruments, including derivatives, used to manage asset-liability positions have the effect of
changing the net duration.
E.4.2. MARKET VALUE AT RISK
The market risk of the Company’s financial asset and liability trading positions is monitored, using a Value at Risk analysis and other methods (cash-flow
matching, duration analysis, etc.). The Value at Risk represents the potential losses from adverse changes in market factors for a specified time period and
confidence level. This approach, which is based on JP Morgan Risk Metrics methodology, calculates the Value at Risk using a covariance matrix of relative
changes in market factors and the net present value of trading positions assuming that these relative changes are normally distributed. Another method
used by the Company is the Monte Carlo simulation for non-linear instruments (e.g. options) based on simulating future changes of underlying assets using
the covariance from last period.
E.4.3. CREDIT VALUE AT RISK
To assess the credit Value at Risk the Company uses credit risk calculations based on the JP Morgan Credit Metrics methodology using transition matrices
and Monte-Carlo simulations of rating transitions.
E.4.4. INSURANCE RISK MANAGEMENT
The Company manages the insurance risk using internal guidelines for product design, reserving, pricing criteria, reinsurance strategy and guidelines for
underwriting. Monitoring of risk profiles, review of insurance-related risk control and asset/liability management are also carried out by senior management.
For those insurance contracts that contain high interest rate guarantees stochastic modelling is used to assess the risk of these guarantees. The pricing
reflects the cost of the guarantees and appropriate reserves are established accordingly.
New methods based on dynamic financial analysis are currently being developed and tested. These methods will be used, among others, to measure the
economic capital of insurance risks.
E.4.4.1. Underwriting strategy
The underwriting strategy is an integral part of the annual business plan that specifies the classes of business to be written within the planned period and
the target sectors of clients. Following approval by the Board of Directors, the strategy is cascaded to the individual underwriters in the form of
underwriting limits (each underwriter can write business by line size, class of business, territory and industry in order to ensure the appropriate risk
selection within the portfolio). The underwriters review all general insurance contracts (only non-life) on an annual basis and have the right to decline the
renewal or to change the terms and conditions of the contract.
E.4.4.2. Reinsurance strategy
The Company reinsures some of the risks it underwrites in order to control its exposures to losses and protect its capital resources. The Company has
based its reinsurance scheme on a complementary combination of contracts with external reinsurers (external reinsurance) and contracts with captive
reinsurance.
External reinsurance
The Company concludes a combination of proportionate and non-proportionate reinsurance treaties to reduce its net exposure. The maximum net exposure
limits for particular business lines are reviewed annually. To provide additional protection the Company uses facultative reinsurance for certain insurance
contracts.
As a part of its reinsurance strategy, the Company carries out regular monitoring of the financial position of its reinsurers. The main tools for managing the
reinsurers’ credit risk are published rating reports, in particular those published by Standard & Poor’s.
Captive reinsurance
For economic and business reasons the Company has added captive reinsurance to its reinsurance program effective from the beginning of 2005.
CP Reinsurance company Ltd., founded for this purpose, is the Company’s subsidiary (see chapter C). CP Reinsurance company Ltd. does not have a rating.
The reinsurance operations are centralized within one specialist department.
ANNUAL REPORT 115
E.4.4.3. Asset liability matching
The Company has established an Asset and Liability Management Committee. This is an advisory body in charge of monitoring the Company’s asset and
liability positions with the objective of ensuring that the Company can always meet its obligations – without incurring undue costs and in accordance with
the Company’s internal policies and regulatory capital requirements.
The key goal is to match the timing of the cash flows from the respective assets and liabilities.
The Company manages its financial position using an approach that balances quality, diversity, liquidity and return on investment. The desired result of the
investment process is to optimise the net of taxes, risk adjusted investment income and the risk-adjusted total return, whilst ensuring that the assets and
liabilities are managed on a cash flow and duration basis.
The Company assigns particular asset portfolios to major classes of liabilities/equity – i.e. non-life insurance liabilities, life insurance liabilities and
shareholder equity. The investment strategy is adjusted to the particular portfolios, taking into account the effective duration, yield curve, sensitivity,
liquidity, asset sector concentration, credit quality and regulatory limits.
E.4.5. OPERATIONAL RISKS
The operational risk management process is based primarily on analysing the risks and designing modifications to work procedures and processes to
eliminate, as far as possible, the risks associated with operational events (losses caused by risks other than market and credit risk). Work procedures
governing the investment and risk management processes constitute a part of the Company’s system of mandatory policies and procedures.
E.4.6. OPERATING SYSTEMS AND IT SECURITY MANAGEMENT
Organization of the Company’s IT is based on separating the IT security unit from IT operations and IT development. The rules set by the Company
regarding IT risk management and IT security are based on the rules and recommendations contained in ISO/IEC 17799:2000 Information Technology –
Code of practice for information security management. For key systems, the business continuity plans originally developed in 2002 – 2003 to ensure the
continuity of the IT systems’ operation in the event of an emergency situation were partially updated in 2005, as planned. These plans contain scenarios for
restoring individual key systems to normal operation sufficiently quickly to ensure that the Company's business is not threatened. The top priority is to
eliminate the negative impacts of any emergency situation on the clients' ability to access the Company’s services. An integral part of making changes to
the IT infrastructure and IT systems is comprehensive testing of their fitness for operation in the Company's internal and external networks. This testing is
conducted by an independent, specialist company and is mandatory for all new systems and changes to routine IT operations to ensure the high quality of
the Company's systems is maintained.
F. NOTES TO THE BALANCE SHEET AND INCOME STATEMENT
F.1. INTANGIBLE ASSETS
Intangible assets comprise the following:
2006 2006 2005
Software 1,403,367 1,417,358
Other intangible assets 32,735 7,697
Total intangible assets 1,436,102 1,425,055
116 ANNUAL REPORT 2006
F.1.1. SOFTWARE AND OTHER INTANGIBLE ASSETS
The following table shows the roll-forward of the remaining categories of intangible assets:
2006 Software Other Total
intangible
TCZK assets
Cost
Balance at 1 January 2,754,914 19,117 2,774,031
Additions 483,474 31,617 515,091
Disposals -144 – -144
Balance at 31 December 3,238,244 50,734 3,288,978
Amortisation and impairment losses
Balance at 1 January 1,337,556 11,420 1,348,976
Amortisation charge for the year 497,428 6,579 504,007
Disposals -107 – -107
Balance at 31 December 1,834,877 17,999 1,852,876
Carrying amount at 31 December 1,403,367 32,735 1,436,102
The amortization charge for the current period is recognized under “Other expenses” in the income statement.
2005 Software Other Total
intangible
TCZK assets
Cost
Balance at 1 January 2,039,737 16,137 2,055,874
Additions 828,987 3,438 832,425
Disposals -113,810 -458 -114,268
Balance at 31 December 2,754,914 19,117 2,774,031
Amortisation and impairment losses
Balance at 1 January 1,015,648 6,994 1,022,642
Amortisation charge for the year 435,717 4,869 440,586
Disposals -113,809 -443 -114,252
Balance at 31 December 1,337,556 11,420 1,348,976
Carrying amount at 31 December 1,417,358 7,697 1,425,055
ANNUAL REPORT 117
F.2. PROPERTY, PLANT AND EQUIPMENT
The following table shows the roll-forward of property, plant and equipment:
2006 Land and Other tangible Tangible Total Of which
buildings assets and assets under under finance
TCZK equipment construction leases
Cost
Balance at 1 January 4,072,233 2,765,049 357,792 7,195,074 40,044
Additions 111,044 304,327 191,004 606,375 15,718
Disposals -778,585 -267,945 – -1,046,530 -4,411
Transfer to/from investment property 296,119 – -235,905 60,214 –
Other movements -225,670 – -34,706 -260,376 –
Balance at 31 December 3,475,141 2,801,431 278,185 6,554,757 51,351
Depreciation and impairment losses
Balance at 1 January 1,163,574 2,057,077 4,373 3,225,024 19,065
Depreciation charge for the year 69,207 396,803 – 466,010 10,040
Impairment losses recognized 27,297 – – 27,297 –
Reversal of impairment losses -66 – – -66 –
Disposals -239,146 -191,878 – -431,024 -2,178
Balance at 31 December 1,020,866 2,262,002 4,373 3,287,241 26,927
Carrying amount at 31 December 2,454,275 539,429 273,812 3,267,516 24,424
Other movements include reclassification of selected land and buildings into non-current assets held for sale with a total net book value of TCZK 260,376
(see F.5.) and transfers from tangible assets under construction in the amount of TCZK 34,706 to land and buildings.
2005 Land and Other tangible Tangible Total Of which
buildings assets and assets under under finance
TCZK equipment construction leases
Cost
Balance at 1 January 4,250,722 2 846,593 533,710 7,631,025 34,398
Additions 108,654 254,502 30,084 393,240 10,098
Disposals -162,422 -336,046 -467 -498,935 -4,452
Transfer to/from investment property -181,932 – -148,324 -330,256 –
Other movements 57,211 – -57,211 – –
Balance at 31 December 4,072,233 2,765,049 357,792 7,195,074 40,044
Depreciation and impairment losses
Balance at 1 January 1,222,478 2,016,522 – 3,239,000 13,882
Depreciation charge for the year 71,488 368,254 – 439,742 7,943
Impairment losses recognized 142,545 – 4,373 146,918 –
Reversal of impairment losses -153,788 – – -153,788 –
Disposals -34,881 -327,699 – -362,580 -2,760
Transfer to investment property -84,268 – – -84,268 –
Balance at 31 December 1,163,574 2,057,077 4,373 3,225,024 19,065
Carrying amount at 31 December 2,908,659 707,972 353,419 3,970,050 20,979
118 ANNUAL REPORT 2006
F.3. INVESTMENT PROPERTY
The following table shows the roll-forward of investment property:
TCZK 2006 2005
Balance at 1 January 3,230,699 3,551,067
Additions 62,218 268,637
Capitalized subsequent expenditure 235,905 148,324
Transfer to/from property, plant and equipment -296,119 97,664
Other movements – 52,415
Proceeds from disposals -259,330 -437,888
Realised gains from investment property 46,830 2,061
Realised losses from investment property -82,770 -3,286
Unrealised gains from investment property 109,070 128,329
Unrealised losses from investment property -134,892 -576,624
Balance at 31 December 2,911,611 3,230,699
The significant transfers to property, plant and equipment are the result of an internal reorganization. The Company is concentrating its offices in fewer
buildings so the occupancy ratio of some buildings has increased. Consequently the buildings and related land were transferred from investment property
to property, plant and equipment. The Company has also transferred land on which the new central office of the Company is being constructed.
The fair value of investment property is based on the valuation of an independent valuer who holds a recognised and relevant professional qualification and
has recent experience in the location and category of the investment property being valued.
The key variables used in this method are estimated market rental income (calculated based on inflation rate), capacity utilization, maintenance and renewal
expenses (based on the acquisition price, technical condition, useful life and discount rate depending on the conditions).
F.4. FINANCIAL ASSETS
Financial assets comprise the following:
TCZK 2006 2005
Financial assets available for sale 5,174,571 1,779,769
Financial assets held to maturity 1,886,610 1,870,728
Financial assets at fair value through profit or loss held for trading 14,238,659 12,054,873
Financial assets at fair value through profit or loss not held for trading 55,616,346 55,842,193
Loans and receivables 22,343,190 25,357,831
Cash and cash equivalents 1,171,098 249,087
Total financial instruments 100,430,474 97,154,481
F.4.1. FINANCIAL ASSETS AVAILABLE FOR SALE
TCZK 2006 2005
Bonds 4,264,452 –
Government bonds 4,051,266 –
Corporate bonds 213,186 –
Shares 910,119 1,779,769
Total financial assets available for sale 5,174,571 1,779,769
In 2006, in line with the investment strategy, the Company started to acquire selected bonds into the available for sale assets category.
During 2006 the Company sold selected equity securities. The most significant was the sale of shares in Modrá pyramida stavební spofiitelna, a.s. with
a net book value of TCZK 368,627 and the sale of shares in PraÏské sluÏby, a.s. with a net book value of TCZK 343,604.
ANNUAL REPORT 119
F.4.2. FINANCIAL ASSETS HELD TO MATURITY
Financial assets held to maturity comprise the following:
2006 Fair Amortised Carrying
TCZK value cost amount
Bonds 2,306,810 1,886,610 1,886,610
Government bonds 86,824 71,261 71,261
Corporate bonds 2,219,986 1,815,349 1,815,349
Total financial assets held to maturity 2,306,810 1,886,610 1,886,610
2005 Fair Amortised Carrying
TCZK value cost amount
Bonds 2,363,337 1,870,728 1,870,728
Government bonds 85,251 66,071 66,071
Corporate bonds 2,278,086 1,804,657 1,804,657
Total financial assets held to maturity 2,363,337 1,870,728 1,870,728
F.4.3. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS HELD FOR TRADING
Financial assets at fair value through profit or loss held for trading comprise the following:
TCZK 2006 2005
Bonds 124,867 –
Other public-sector bonds 124,867 –
Shares 13,489,110 11,160,391
Equity securities 13,489,110 11,160,391
Positive fair values of derivatives 624,682 894,482
Total 14,238,659 12,054,873
All financial instruments held for trading are valued based on quoted market prices, except derivatives, which are valued based on generally accepted
valuation techniques depending on the product (i.e. discounted expected future cash flows, Black-Scholes model, etc.).
The following tables show the valuation of the various types of derivatives:
2006 Notional amount with remaining life of Fair values
TCZK Less than Between three More than Assets Liabilities
three months and one year
Interest rate derivatives months one year
OTC – products:
Interest rate swaps 3,000,000 200,000 29,907,680 251,869 351,911
Total 3,000,000 200,000 29,907,680 251,869 351,911
120 ANNUAL REPORT 2006
2006 Notional amount with remaining life of Fair values
TCZK Less than Between three More than Assets Liabilities
three months and one year
Currency derivatives months one year
OTC – products:
Forward exchange contracts 296,315 – – 2,679 5
Currency/cross currency swaps 19,127,468 – 971,360 358,225 15,346
Foreign exchange options (purchase) 1,121,190 109,980 – 11,909 –
Foreign exchange options (sale) 302,445 219,960 – – 13,092
Total 20,847,418 329,940 971,360 372,813 28,443
2005 Notional amount with remaining life of Fair values
TCZK Less than Between three More than Assets Liabilities
three months and one year
Other derivatives months one year
OTC – products – – 137,475 – 11,882
Total – – 137,475 – 11,882
2005 Notional amount with remaining life of Fair values
TCZK Less than Between three More than Assets Liabilities
three months and one year
Interest rate derivatives months one year
OTC – products:
Interest rate swaps 1,000,000 3,820,000 30,462,200 688,365 355,619
Total 1,000,000 3,820,000 30,462,200 688,365 355,619
2005 Notional amount with remaining life of Fair values
TCZK Less than Between three More than Assets Liabilities
three months and one year
Currency derivatives months one year
OTC – products:
Forward exchange contracts 33,356 – – – 147
Currency/cross currency swaps 30,132,994 2,231,039 306,000 206,117 140,784
Total 30,166,350 2,231,039 306,000 206,117 140,931
2005 Notional amount with remaining life of Fair values
TCZK Less than Between three More than Assets Liabilities
three months and one year
Other derivatives months one year
OTC-products – – 145,025 – 15,267
Total – – 145,025 – 15,267
All gains and losses on derivative contracts are recognised in the income statement.
ANNUAL REPORT 121
F.4.4. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS NOT HELD FOR TRADING
Financial assets at fair value through profit or loss not held for trading comprise the following:
TCZK 2006 2005
Bonds 48,243,803 42,814,799
Government bonds 20,499,036 20,336,626
Other public-sector bonds 1,261,253 1,290,501
Corporate bonds 26,483,514 21,187,672
Shares 7,372,368 13,027,219
Equity securities 162,425 158,152
Mutual funds investments 7,209,943 12,869,067
Other 175 175
Total 55,616,346 55,842,193
F.4.5. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS (BOTH HELD FOR TRADING AND NOT HELD FOR TRADING) – BROKEN DOWN BY THE APPLIED VALUATION METHOD
TCZK 2006 2005
Market price 45,126,108 37,460,863
Net present value of future cash flows 17,558,236 17,409,809
Redemption price 7,170,661 13,027,394
Total 69,855,005 67,897,066
For puttable instruments such as open-ended mutual funds where the Company has the right to redeem its interest in the fund at any time for cash equal
to its proportional share of the fund’s asset value, this redemption price is considered to be the fair value of the instrument.
F.4.6. LOANS AND ADVANCES TO BANKS
Loans and advances to banks comprise the following:
TCZK 2006 2005
Term deposits at banks 11,973,455 13,285,683
Loans to banks 254,341 924,442
Loans and advances provided under repo operations 1,770,195 3,001,149
Other 163,838 0
Total loans and advances to banks 14,161,829 17,211,274
The following table shows gross loans and advances to banks and impairment losses thereon:
TCZK 2006 2005
Loans and advances to banks – performing 13,907,488 16,956,894
Loans and advances to banks – non-performing 4,044,516 4,044,516
Subtotal loans and advances to banks 17,952,004 21,001,410
Less impairment losses -3,790,175 -3,790,136
Total loans and advances to banks, net of impairments 14,161,829 17,211,274
122 ANNUAL REPORT 2006
F.4.7. LOANS AND ADVANCES TO NON-BANKS
Loans and advances to non-banks comprise the following:
TCZK 2006 2005
Loans to non-banks including policyholder loans 8,725 330,148
Total loans and advances to customers 8,725 330,148
The decrease in loans to non banks arises from repayment of a loan in the amount of TCZK 161,047 and capitalization of a loan in the amount of
TZCK 150,000 (see also note C[11]).
The following table shows gross loans and advances to non-banks and related impairment losses:
TCZK 2006 2005
Loans and advances to non-banks – performing 7,543 328,410
Loans and advances to non-banks – non-performing 5,357,438 5,943,701
Subtotal loans and advances to non-banks 5,364,981 6,272,111
Less impairment losses -5,356,256 -5,941,963
Total loans and advances to non-banks, net of impairments 8,725 330,148
F.4.8. RECEIVABLES
Receivables comprise the following:
TCZK 2006 2005
Receivables arising out of direct insurance operations 5,580,860 5,311,047
Amounts owed by policyholders 5,538,416 5,253,025
Amount owed by intermediaries 42,444 58,022
Receivables arising out of reinsurance operations 3,319,391 3,232,282
Trade and other receivables 1,117,628 1,447,207
Tax receivables 13,349 23,556
Subtotal receivables (gross) 10,031,228 10,014,092
Less impairment losses -1,858,592 -2,174,127
Total receivables, net of impairments 8,172,636 7,839,965
F.5. NON-CURRENT ASSETS HELD FOR SALE
Fourteen buildings previously occupied or partially occupied by the Company are presented as non-current assets held for sale based on the commitment
to sell the buildings made either in the sale contracts or during the final negotiations with the buyers at the balance sheet date. Efforts are being made to
sell the buildings, and a sale is expected in the first half of 2007. At 31 December 2006 the assets classified as held for sale amounted to TCZK 214,964
and the related deferred tax liability amounted to TCZK 22,730.
Immediately before the transfer, the carrying amount of the assets was TCZK 260,376. An impairment loss of TCZK 45,412 arising from the measurement
of the disposal assets to the lower of their carrying amount and their fair value less costs to sell, has been recognised in other expenses.
ANNUAL REPORT 123
F.6. REINSURANCE ASSETS
Reinsurance assets comprise the following:
TCZK 2006 2005
Reinsurers' share of insurance liabilities 8,266,244 7,888,762
Of which: captive reinsurance 6,785,937 6,802,072
Total assets arising from reinsurance contracts 8,266,244 7,888,762
Current 4,491,942 4,544,561
Non-current 3,774,302 3,344,201
Total 8,266,244 7,888,762
The amounts included in reinsurance assets represent expected future claims to be recovered from the Company’s reinsurers and the reinsurers’ share in
unearned premiums.
Ceded reinsurance arrangements do not relieve the Company of its direct obligations to policyholders. Thus, a credit exposure exists with respect to
reinsurance ceded to the extent that any reinsurer is unable to meet the obligations assumed under the reinsurance agreements.
The following table shows percentage of reinsurance assets ceded to external reinsurers grouped according to their rating by Standard & Poor’s:
Rating Percentage share in re insurance assets
AAA 5%
AA+ to AA- 34%
A+ to A- 50%
worse than A- 0%
non-rated 11%
F.7. DEFERRED TAX
The next table shows the roll-forward of net deferred taxes:
TCZK 2006 2005
Net deferred tax asset/(liability) at 1 January -603,699 -893,608
Deferred tax (expense)/income for the period -130,481 292,038
Deferred tax recognised directly in equity 22,757 -2,129
Net deferred tax asset/(liability) at 31 December -711,423 -603,699
124 ANNUAL REPORT 2006
The recognized deferred tax assets and liabilities comprise the following:
TCZK 2006 2006 2005 2005
Deferred tax Deferred tax Deferred tax Deferred tax
liabilities assets liabilities assets
Intangible assets -3,613 – – 8,843
Ownership interests -265 – – 7,446
Financial assets -194,671 253,622 -213,824 323,455
Financial assets at fair value through profit or loss -114,010 – -115,009 –
Financial assets available-for-sale -67,373 – -85,526 –
Financial assets held-to-maturity -13,288 – -13,289 –
Loans and receivables – 253,622 – 323,455
Other assets -22,730 – – –
Investment property – 72,171 – 67,993
Property, plant and equipment -240,524 – -253,846 –
Prepayments and accrued income – 2,311 – 2,215
Insurance liabilities -601,355 – -563,069 –
Financial liabilities – 22,142 – 14,823
Provisions – 1,489 – 2,265
Deferred tax assets/(liabilities) -1,063,158 351,735 -1,030,739 427,040
Net deferred tax assets/(liabilities) -711,423 – -603,699 –
F.7.1. CURRENT TAX AND DEFERRED TAX RECOGNISED DIRECTLY IN EQUITY
The deferred tax recognised directly in equity comprises the following:
TCZK 2006 2005
Deferred tax – revaluation gain on property, plant and equipment -47,858 -52,462
Deferred tax – revaluation gain on financial assets at AFS -67,373 -85,526
Current tax – unrealized gain/losses on financial assets at AFS -7,141 -24,463
Total -122,372 -162,451
F.8. OTHER ASSETS
The other assets comprise the following:
TCZK 2006 2005
Works of art 55,912 56,670
Subtotal other assets 55,912 56,670
Less impairment losses – –
Total other assets 55,912 56,670
F.9. PREPAYMENTS AND ACCRUED INCOME
Prepayments and accrued income comprise the following:
TCZK 2006 2005
Rental 109,431 117,544
Prepayments and other deferrals 79,027 71,773
Deferred acquisition costs 563,468 487,571
Total prepayments and accrued income 751,926 676,888
ANNUAL REPORT 125
F.9.1. DEFERRED ACQUISITION COSTS (DAC)
The Company defers only non-life insurance acquisition costs. All deferred acquisition costs are usually to be released within one year.
F.10. CASH AND CASH EQUIVALENTS
Cash and cash equivalents comprise the following:
TCZK 2006 2005
Cash in hand 315 284
Balances with banks payable on demand 1,164,090 238,808
Other cash value 6,693 9,995
Total cash and cash equivalents 1,171,098 249,087
As at 31 December 2006 the Company had cash of TCZK 1,001,264 deposited in a special current account with preferential interest rate.
F.11. IMPAIRMENT LOSSES ON LOANS AND ADVANCES TO BANKS AND CUSTOMERS, RECEIVABLES, NON CURRENTASSETS HELD FOR SALE, INVENTORIES AND OTHER ASSETS RECOGNISED
The next table shows the roll-forward of the impairment losses on loans and advances to banks and non-banks, receivables and other assets recognised:
TCZK 2006
Balance at 1 January 11,906,226
Impairment losses on loans and advances to banks and non-banks 10,765
Reversal of impairment losses on loans and advances and receivables -62,439
Write-off impairment losses on disposal assets -523,229
Additions/release of adjustments to receivables -326,300
Impairment losses on non current assets held for sale 45,412
Total impairment losses 11,050,435
Reversals of impairment or impairment losses on receivables from direct insurance are recognised in the income statement. An increase of an impairment
is recorded as a decrease in the premium written, while a reversal of an impairment is recorded as an increase in the premium written.
TCZK 2005
Balance at 1 January 12,107,068
Impairment losses on loans and advances to banks and non-banks and receivables 72,114
Reversal of impairment losses on loans and advances and receivables -10,840
Write-off impairment losses on disposal assets -451,588
Additions/release of adjustments to receivables 189,472
Total impairment losses 11,906,226
126 ANNUAL REPORT 2006
F.12. CAPITAL AND RESERVES
Capital and reserves attributable to the Company’s shareholders comprise the following:
TCZK 2006 2005
Issued capital 4,000,000 2,980,963
Reserves 3,874,691 4,094,378
Revaluation reserve 686,839 1,065,779
Legal and statutory reserves 682,478 682,478
Catastrophe and equalisation reserves 2,505,644 2,346,121
Retained earnings 9,202,536 13,787,834
Net profit for the year 8,293,200 4,641,276
Prior years retained earnings 909,336 9,146,558
Total attributable to equity holders of the Company 17,077,497 20,863,175
Capital and reserves represent the balance of the Company’s net assets after deducting all of its liabilities.
F.12.1. SHARE CAPITAL ISSUED
Issued capital represents capital in respect of which the shareholders’ liability in respect of an enterprise’s obligations towards its creditors is limited. The
amount is the current nominal capital approved by a shareholders’ resolution.
The following table provides details of authorised and issued shares:
pc 2006 2005
Number of shares authorised 40,000 2,980,963
Number of shares issued, out of which: 40,000 2,980,963
fully paid 40,000 2,980,963
Par value per share (CZK) 100,000 1,000
The general meeting of the Company held on 30 June 2006 decided to increase the share capital by TCZK 1,019,037 through a transfer from retained
earnings. The increase was registered in the Commercial Register on 15 August 2006.
The general meeting of the Company held on 19 September 2006 decided to increase the nominal value of the shares from CZK 1,000 per share to
CZK 100,000 per share.
The following table reconciles the number of shares outstanding at the beginning and at the end of the year:
pc Ordinary shares
2006 2005
Balance at 1 January 2,980,963 2,980,963
Shares emited 1,019,037 –
Balance as at 15 August 4,000,000 –
Change in nominal value of the shares -3,960,000 –
Balance at 31 December 40,000 2,980,963
At 31 December 2006, the registered share capital comprised registered shares totalling TCZK 4,000,000 (2005: TCZK 997,469) and no bearer shares
(2005: TCZK 1,983,494).
ANNUAL REPORT 127
The owners of ordinary shares are entitled to receive dividends as declared and are entitled to one vote per share at meetings of the Company’s shareholders.
The sole shareholder of the Company is CZI Holdings N.V., 1017 CA Amsterdam, Herengracht 516, the Netherlands; registered on 6 December 2006, with
identification number 34245976.
F.12.2. REVALUATION RESERVE
The revaluation reserve represents the revaluation surplus, net of deferred tax, recognised on property transferred from property, plant and equipment to
investment property following a change in its use and changes in the fair value of financial assets available for sale, net of deferred and current tax.
F.12.3. LEGAL AND STATUTORY RESERVES
The creation and use of the statutory reserve fund is limited by legislation. The legal reserve fund is not available for distribution to the shareholders.
F.12.4. CATASTROPHE AND EQUALISATION RESERVES
Catastrophe and equalisation reserves are required under local insurance legislation and are classified as a separate part of equity within these accounts as
they do not meet the definition of a liability under IFRS. They are not available for distribution.
F.12.5. DIVIDENDS
At the Annual General Meeting on 30 June 2006 the shareholder approved the distribution of retained earnings in the form of a dividend in the amount of
CZK 2,684 per each share in nominal value of CZK 1,000 amounting to TCZK 8,000,904. The total profit generated in 2005 in the amount of TCZK 4,641,276
and the prior year profit in the amount of TCZK 3,359,628 was used for distribution.
At the General Meeting on 11 December 2006 the shareholder approved further distribution of retained earnings in the form of dividend of CZK 87,500 per
each share in nominal value of CZK 100,000, amounting to TCZK 3,500,000.
F.13. INSURANCE LIABILITIES
The insurance provisions (gross) comprise the following:
TCZK 2006 2005
Provision for unearned premiums (UPR) 5,839,985 5,350,182
Claims reported by policyholders but not settled (RBNS) 10,248,086 10,483,145
Claims incurred but not reported (IBNR) 5,332,327 5,489,445
Life assurance provision 66,499,418 65,865,548
Other insurance provisions 449,059 463,785
Total insurance provisions 88,368,875 87,652,105
F.13.1. PROVISION FOR UNEARNED PREMIUM
The next table shows the roll forward of the non-life provision for unearned premiums:
2006 Gross Reinsurance Net
TCZK
Balance at 1 January 5,350,182 -1,911,440 3,438,742
Added during the year 25,813,007 -1,908,793 23,904,214
Released to the income statement -25,323,189 1,911,440 -23,411,749
Foreign currency translation -15 – -15
Balance at 31 December 5,839,985 -1,908,793 3,931,192
128 ANNUAL REPORT 2006
2005 Gross Reinsurance Net
TCZK
Balance at 1 January 5,069,153 -1,345,812 3,723,341
Additional entry into captive reinsurance – -536,434 -536,434
Added during the year 25,759,735 -1,375,006 24,384,729
Released to the income statement -25,478,362 1,345,812 -24,132,550
Foreign currency translation -344 – -344
Balance at 31 December 5,350,182 -1,911,440 3,438,742
F.13.2. CLAIMS REPORTED BY POLICYHOLDERS
The next table shows the roll forward of claims reported by policyholders:
2006 Gross Reinsurance Net
TCZK
Balance at 1 January 10,483,145 -3,240,804 7,242,341
Plus claims incurred 13,365,332 -5,019,026 8,346,306
Current year 12,268,226 -4,629,043 7,639,183
Transfer from IBNR 1,097,106 -389,983 707,123
Less claims paid -13,556,011 4,707,745 -8,848,266
Foreign currency translation -44,380 -1,171 -45,551
Balance at 31 December 10,248,086 -3,553,256 6,694,830
2005 Gross Reinsurance Net
TCZK
Balance at 1 January 8,829,304 -2,300,418 6,528,886
Additional entry into captive reinsurance – -520,050 -520,050
Plus claims incurred 14,704,211 -4,894,481 9,809,730
Current year 13,552,899 -4,566,917 8,985,982
Transfer from IBNR 1,151,312 -327,564 823,748
Less claims paid -13,008,978 4,474,145 -8,534,833
Foreign currency translation -41,392 – -41,392
Balance at 31 December 10,483,145 -3,240,804 7,242,341
F.13.3. CLAIMS INCURRED BUT NOT REPORTED
The next table shows the roll forward of claims incurred but not reported:
2006 Gross Reinsurance Net
TCZK
Balance at 1 January 5,489,445 -1,951,309 3,538,136
Plus additions recognised during the year 928,426 -411,512 516,914
Less transfer to claims reported provision -1,097,106 389,983 -707,123
Foreign currency translation 11,562 – 11,562
Balance at 31 December 5,332,327 -1,972,838 3,359,489
ANNUAL REPORT 129
2005 Gross Reinsurance Net
TCZK
Balance at 1 January 5,223,549 -1,355,696 3,867,853
Additional entry into captive reinsurance – -482,946 -482,946
Plus additions recognised during the year 1,419,886 -440,231 979,655
Less transfer to claims reported provision -1,151,312 327,564 -823,748
Foreign currency translation -2,678 – -2,678
Balance at 31 December 5,489,445 -1,951,309 3,538,136
The next table describes the development of claims reported by policyholders:
TCZK Prior 2001 2001 2002 2003 2004 2005 2006 Total
Estimate of cumulative claims
at the end of underwriting year x 9,606,000 21,130,000 11,086,000 12,668,823 13,342,816 14,821,967 x
One year later x 9,426,000 20,378,000 11,176,324 12,704,785 12,702,152 x x
Two years later x 9,402,000 20,399,744 11,026,799 12,385,503 x x x
Three years later x 9,319,556 20,454,492 10,834,057 x x x x
Four years later x 9,256,950 20,368,472 x x x x x
Five years later 9,221,933 x x x x x x
Estimate of cumulative claims x 9,221,933 20,368,472 10,834,057 12,385,503 12,702,152 14,821,967 80,334,084
Cumulative payments x 8,559,348 19,433,366 9,844,785 10,806,494 10,669,000 9,187,071 68,500,064
Provisions for outstanding claims
not distinguished by accident year – – – – – – – 843,675
Claims handling cost – – – – – – – 1,030,770
Value recognised
in the balance sheet 1,871,948 662,585 935,106 989,272 1,579,009 2,033,152 5,634,896 15,580,413
F.13.4. LIFE INSURANCE PROVISIONS
2006 Gross Reinsurance Net
TCZK
Balance at 1 January 65,865,548 -782,555 65,082,993
Premium allocation 9,344,851 – 9,344,851
Release of liabilities due to benefits paid, surrenders and other terminations -8,113,104 – -8,113,104
Fees deducted from account balances -2,049,817 – -2,049,817
Unwinding of discount/accretion of interest 2,102,426 – 2,102,426
Changes in unit-prices 5,454 – 5,454
Change in liability arising from liability adequacy test -818,435 – -818,435
Allocation of discretionary bonus (DPF) 99,827 – 99,827
Change in IBNR and RBNS 131,110 -52,940 78,170
Of which captive reinsurance – -52,940 –
Change in UPR -68,442 6,268 -62,174
Of which captive reinsurance – 6,268 –
Balance at 31 December 66,499,418 -829,227 65,670,191
130 ANNUAL REPORT 2006
The life insurance provisions include the liability inadequacy (the other life insurance technical provision) of TCZK 3,038,449 (2005: TCZK 3,857,790), arising
mainly from the difference between the anticipated revenues from financial investments and the technical interest rate used to calculate premium rates.
The most important factors affecting the level of the other life insurance technical provision in 2006 were the development of the portfolio of insurance
contracts and the projected level of expenses. The development of the portfolio reduced the provision by TCZK 541,261, while the change in expenses,
including the effect of inflation reduced the provision by TCZK 332,327.
Other significant assumptions which had an impact on the level of the provision were the movement in the risk free interest rates used for discounting and
the change in the value of the guaranteed interest rate option. General economic changes, including movement in the risk free interest rates, have a direct
impact on the expected volatility of significant financial parameters used in stochastic modelling and valuations. The total impact on the provision amounted
to TCZK -75,530. The change in the value of the guaranteed interest rate option had increased the provision by TCZK 127,344.
Other assumptions such as persistency rates, mortality and morbidity and correlation of all factors influencing the level of the other life insurance technical
provision had a negligible impact and increased the provision by TCZK 3,340.
2005 Gross Reinsurance Net
TCZK
Balance at 1 January 64,002,226 -521,964 63,480,262
Premium allocation 10,819,908 – 10,819,908
Release of liabilities due to benefits paid, surrenders and other terminations -10,617,575 – -10,617,575
Fees deducted from account balances -1,889,343 – -1,889,343
Unwinding of discount/accretion of interest 2,242,366 – 2,242,366
Changes in unit-prices -2,161 – -2,161
Change in liability arising from liability adequacy test 1,057,303 – 1,057,303
Allocation of discretionary bonus (DPF) 44,613 – 44,613
Change in IBNR and RBNS 239,589 -253,789 -14,200
Of which captive reinsurance – -253,789 –
Change in UPR -31,378 -6,802 -38,180
Of which captive reinsurance – -6,802 -6,802
Balance at 31 December 65,865,548 -782,555 65,082,993
The most important parameters affecting the level of the premium deficiency reserve in 2005 were the movement in the risk free interest rates used for
discounting and the change in value of the guaranteed interest rate option. The movement in the risk free interest rates has a direct impact on the
expected volatility of significant financial parameters used in stochastic modelling and valuations. The total impact on the premium deficiency reserve
amounted to TCZK 1,377,272.
Furthermore, the level of this reserve was affected by the change in the insurance portfolio, which resulted in a decrease of TCZK 277,031, and by the
change in annuitants’ mortality assumptions, which increased the reserve by TCZK 217,187.
The other assumptions such as the projected increase in expense levels taking into account inflation, lapses and correlation of all factors influencing the
level of premium deficiency reserve had a total impact (decrease) of TCZK 260,125.
F.13.5.OTHER INSURANCE PROVISIONS
The development of other insurance provisions was as follows:
2006 Aging Contractual Total
provision non-discretionary
TCZK bonuses
Gross
Balance as at 1 January 29,054 434,731 463,785
Creation of provisions – 460,879 460,879
Utilization of provisions -29,054 -446,551 -475,605
Balance of gross provisions as at 31 December – 449,059 449,059
Balance of reinsurance as at 31 December – -2,130 -2,130
Balance of net provisions as at 31 December – 446,929 446,929
ANNUAL REPORT 131
2005 Aging Contractual Total
provision non-discretionary
TCZK bonuses
Gross
Balance as at 1 January 40,713 444,721 485,434
Creation of provisions 13,563 416,707 430,270
Utilization of provisions -25,222 -426,697 -451,919
Balance of gross provisions as at 31 December 29,054 434,731 463,785
Balance of reinsurance as at 31 December – -2,654 -2,654
Balance of net provisions as at 31 December 29,054 432,077 461,131
F.13.6. REMAINING MATURITIES OF INSURANCE LIABILITIES AND FINANCIAL LIABILITIES FOR INVESTMENTCONTRACTS
2006 Less than Between 1 Between 5 Between 10 Between 15 More than Total
TCZK 1 year and 5 years and 10 years and 15 years and 20 years 20 years
Insurance liabilities 13,925,112 8,594,537 18,471,443 16,036,570 12,805,003 18,536,210 88,368,875
UPR 5,382,005 457,980 – – – – 5,839,985
RBNS & IBNR 6,855,382 3,895,103 1,480,139 1,324,335 1,090,629 934,825 15,580,413
Life assurance provisions 1,238,666 4,241,454 16,991,304 14,712,235 11,714,374 17,601,385 66,499,418
Other insurance provisions 449,059 – – – – – 449,059
Financial liabilities for investment
contracts with DPF – 584,654 284,840 31,664 69,261 338,061 1,308,480
Guaranteed liability for investment
contracts with DPF – 584,654 284,840 31,664 69,261 338,061 1,308,480
2005 Less than Between 1 Between 5 Between 10 Between 15 More than Total
TCZK 1 year and 5 years and 10 years and 15 years and 20 years 20 years
Insurance liabilities 14,122,035 8,640,715 17,742,884 17,028,030 12,798,225 17,320,256 87,652,105
UPR 5,224,072 126,110 – – – – 5,350,182
RBNS & IBNR 7,347,392 4,152,873 1,437,533 1,277,807 958,355 798,630 15,972,590
Life assurance provisions 1,115,611 4,359,206 16,299,050 15,742,341 11,833,886 16,515,454 65,865,548
Other insurance provisions 434,960 2,526 6,261 7,882 5,984 6,172 463,785
Financial liabilities for investment
contracts with DPF – 465,722 254,076 24,950 49,121 272,055 1,065,924
Guaranteed liability for investment
contracts with DPF – 465,722 254,076 24,950 49,121 272,055 1,065,924
F.14. FINANCIAL LIABILITIES FOR INVESTMENT CONTRACTS WITH DPF
Financial liabilities for investment contracts with DPF comprise liabilities from contracts that do not meet the definition of insurance contracts and contain
a discretionary participation feature (DPF).
The carrying amount is the accumulated deposit increased by allocated interest. If future premiums and benefits are contractually agreed, the method of
valuation is the same as for the life assurance provision within insurance liabilities.
Financial liabilities for investment contracts with DPF comprise the following:
TCZK 2006 2005
Guaranteed liability for investment contracts with DPF 1,308,480 1,065,924
Total financial liabilities for investment contracts with DPF 1,308,480 1,065,924
132 ANNUAL REPORT 2006
2006 Gross
TCZK
Balance at 1 January 1,065,924
Premium allocation 337,898
Release of liabilities due to benefits paid, surrenders and other terminations -108,601
Fees deducted from account balances -24,098
Unwinding of discount/accretion of interest 33,267
Allocation of discretionary bonus (DPF) 4,090
Balance at 31 December 1,308,480
2005 Gross
TCZK
Balance at 1 January 753,259
Premium allocation 411,221
Release of liabilities due to benefits paid, surrenders and other terminations -110,020
Fees deducted from account balances -16,201
Unwinding of discount/accretion of interest 26,004
Allocation of discretionary bonus (DPF) 2,331
Balance at 31 December 1,065,924
F.15. SUBORDINATED LIABILITIES
The subordinated liabilities comprise the following:
TCZK 2006 2005
Subordinated loans – 2,500,000
Total subordinated liabilities – 2,500,000
On 10 June 2003, under a subordinated loan agreement, the Company accepted a loan of TCZK 2,500,000 from the PPF Group N.V. maturing in 2018. The
fixed interest rate is 7.51% p.a.
On 1 July 2003, PPF, a.s. acquired part of the Company’s subordinated loan from the PPF Group N.V. in the amount of TCZK 365,000.
The Company was transformed via a split-off with the incorporation of a new company Home Credit Grand Holding a.s. on 19 July 2006. All liabilities from
the subordinated loan from PPF Group N.V. and PPF a.s. were transferred to the new company. See also note C.
F.16. OTHER LIABILITIES EVIDENCED BY PAPER
In accordance with the conditions of the issue as disclosed in the prospectus, the Company repaid the Bonds with a nominal value of TCZK 4,000,000 on
15 July 2006.
The next table shows the residual maturity of bonds issued by the Company:
2005 Total Less than Between 1 Between 2 More than
TCZK 1 year and 2 years and 5 years 5 years
Deposit bill of exchange 30,500 30,500 – – –
Bonds, rate 2.6% 4,037,690 4,037,690 – – –
Total bonds issued 4,068,190 4,068,190 – – –
The bonds issued by the Company were variable interest rate bond. The interest rate shown in the table above was the average rate as at the year end.
The amortisation of any discount or premium and interest related to other liabilities evidenced by paper are recognised in interest expense and similar charges.
ANNUAL REPORT 133
F.17. FINANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS
Financial liabilities at fair value through profit or loss comprise the following:
2006 Fair
TCZK value
Negative fair value of derivatives 392,236
Interest rate derivatives 351,911
Currency derivatives 28,443
Other derivatives 11,882
Total liabilities at fair value through profit or loss 392,236
2005 Fair
TCZK value
Negative fair value of derivatives 511,817
Interest rate derivatives 355,619
Currency derivatives 140,931
Other derivatives 15,267
Total liabilities at fair value through profit or loss 511,817
F.18. LIABILITIES TO BANKS
Liabilities to banks comprise the following:
TCZK 2006 2005
Bank loans received under repo operations 277,129 264,910
Total liabilities to banks 277,129 264,910
Interest arising on liabilities to banks is recognised in interest expense and similar charges.
F.19. PROVISIONS
Provisions comprise the following:
TCZK 2006 2005
Restructuring 6,203 9,436
MTPL deficit 2,139,410 2,146,750
Other provisions 147,235 119,653
Total other provisions 2,292,848 2,275,839
TCZK 2006 2005
Balance at 1 January 2,275,839 2,286,915
Provisions created during the year 237,788 83,729
Provisions used during the year -213,429 -93,061
Provisions released during the year -7,340 -1,744
Balance at 31 December 2,292,848 2,275,839
Non-current (>1 years) 2,165,307 2,184,208
Current (<1 year) 127,541 91,631
Total 2,292,848 2,275,839
134 ANNUAL REPORT 2006
Provision for MTPL deficit
On 31 December 1999, statutory MTPL insurance was replaced by contractual MTPL insurance in the Czech Republic. All rights and obligations arising
from statutory MTPL insurance prior to 31 December 1999, including the deficit of received premiums to cover the liabilities and costs, were transferred to
the Czech Bureau of Insurers (“the Bureau“).
On 12 October 1999, the Company obtained a license to write contractual MTPL insurance in the Czech Republic and as a result, the Company became
a member of the Bureau.
Each member of the Bureau guarantees the appropriate portion of the Bureau’s liabilities based on the member’s market share for this class of insurance.
Based on information publicly available and information provided by members of the Bureaux, the Company created a provision adequate to cover the cost
of claims likely to be incurred in relation to the liabilities ceded. However, the final and exact amount of the incurred cost of claims will only be known in
several years.
F.20. PAYABLES
Payables comprise the following:
TCZK 2006 2005
Payables arising out of insurance contracts 1,668,844 1,858,817
Trade payables 884,648 941,643
Payables arising out of reinsurance operations 5,116,002 6,037,169
Payables arising out of employers liability insurance 494,283 475,438
Finance lease liabilities 16,535 14,583
Wages and salaries 329,886 257,562
Social security and health insurance 132,668 116,577
Taxes payable 568,592 216,254
Retauning from contract for work garbage - disposal 3,815 5,414
Received advanced payments 10,150 9,246
Other 71,913 39,062
Total payables 9,297,336 9,971,765
F.20.1. FINANCE LEASE LIABILITIES
2006 Payments Interest Finance lease
TCZK liabilities
Finance lease liabilities:
Less than one year 8,278 -926 7,352
Between one and five years 9,858 -675 9,183
Total finance lease liabilities 18,136 -1,601 16,535
2005 Payments Interest Finance lease
TCZK liabilities
Finance lease liabilities:
Less than one year 6,247 -611 5,636
Between one and five years 9,806 -859 8,947
Total finance lease liabilities 16,053 -1,470 14,583
ANNUAL REPORT 135
F.21. ACCRUALS AND DEFERRED INCOME
TCZK 2006 2005
Accrued agent commissions 1,107,481 1,099,915
Deferred reinsurance commission 64,279 52,159
Uninvoiced supplies 340,888 163,071
Total accruals and deferred income 1,512,648 1,315,145
F.22. NET INSURANCE PREMIUM REVENUE
Net premium revenue in life and non-life insurance comprises the following:
TCZK 2006 2005
Non-life insurance
Gross premium written 25,124,447 25,246,957
Of which: direct insurance business 24,823,092 24,888,042
Reinsurance business assumed 301,355 358,915
Premium ceded (outward reinsurance premium) -10,011,091 -11,822,040
Of which: captive reinsurance -7,646,714 -9,468,427
Change in unearned premiums (gross) -489,803 -281,029
Change in unearned premiums (reinsurance share) -2,647 565,628
Total Premium Income Net, (earned) from non-life insurance 14,620,906 13,709,516
Life insurance
Gross premium written 13,201,443 15,001,761
Of which: direct insurance business 13,199,563 14,995,655
Reinsurance business assumed 1,880 6,106
Premium ceded (outward reinsurance premium) -1,042,396 -1,166,540
Of which: captive reinsurance -1,030,514 -1,150,583
Total Premium Income Net, (earned) from life insurance 12,159,047 13,835,221
Grand Total Premium Income, Net (earned) 26,779,953 27,544,737
The above table shows the gross premium after impairment and reversal of impairment losses related to premium receivables in the total amount of
TCZK 125,722 (2005: TCZK 140,984 ).
F.22.1. GROSS PREMIUM ANALYSIS
Gross premiums from direct insurance business (including both life and non-life) are set out below by country:
TCZK 2006 2005
Czech Republic 38,085,565 39,937,649
Netherlands 1,032 1,110
Slovak Republic 175,398 260,712
Other states EU 35,298 41,695
Other 28,597 7,552
Gross premiums 38,325,890 40,248,718
136 ANNUAL REPORT 2006
The following table shows a breakdown of gross life insurance premiums.
TCZK 2006 2005
Individual premiums 13,186,736 14,983,960
Premiums under group contracts 14,707 17,801
Gross life insurance premiums 13,201,443 15,001,761
Periodic premiums 11,795,367 11,279,144
Single premiums 1,406,076 3,722,617
Gross life insurance premiums 13,201,443 15,001,761
Premium from contracts without profit sharing 83,160 90,154
Premium from contracts with profit sharing 12,955,370 14,833,308
Premium from contracts where policyholders bear the investment risk 162,913 78,299
Gross life insurance premiums 13,201,443 15,001,761
The following table provides a breakdown of non-life insurance according to the specific insurance classes:
TCZK 2006 2005
Accident and health insurance
Gross premium written 528,355 483,678
Gross premium earned 542,031 479,652
Gross claims expenses -117,221 -201,036
Gross operational expenses -89,393 -66,207
Outwards reinsurance result -121,809 -71,411
Motor vehicle lability and carrier’s liability insurance
Gross premium written 8,806,187 9,137,254
Gross premium earned 8,759,824 8,990,999
Gross claims expenses -4,887,133 -6,086,388
Gross operational expenses -1,316,233 -1,153,742
Outwards reinsurance result -651,116 -445,329
Other motor
Gross premium written 5,921,270 6,468,092
Gross premium earned 6,003,639 6,510,555
Gross claims expenses -3,942,418 -4,430,233
Gross operational expenses -836,945 -743,268
Outwards reinsurance result -390,639 -325,445
Marine, aviation and transport
Gross premium written 191,493 169,464
Gross premium earned 200,303 142,241
Gross claims expenses -55,649 -76,934
Gross operational expenses -45,579 -39,110
Outwards reinsurance result -69,323 -25,160
Fire and property
Gross premium written 6,491,219 6,391,904
Gross premium earned 6,430,462 6,355,925
Gross claims expenses -3,889,537 -2,679,366
Gross operational expenses -969,373 -838,069
Outwards reinsurance result -1,121,143 -1,605,790
ANNUAL REPORT 137
TCZK 2006 2005
Liability
Gross premium written 1,478,666 1,385,950
Gross premium earned 1,462,274 1,334,476
Gross claims expenses -562,917 -419,296
Gross operational expenses -230,232 -140,003
Outwards reinsurance result -158,101 -227,162
Credits and guarantees
Gross premium written 1,004,733 487,596
Gross premium earned 492,440 414,849
Gross claims expenses 624,480 -727,976
Gross operational expenses -52,285 -4,768
Outwards reinsurance result -23,423 -7,880
Travel assistance
Gross premium written 379,067 258,529
Gross premium earned 383,105 245,178
Gross claims expenses -255,180 -151,068
Gross operational expenses -98,545 -63,242
Outwards reinsurance result -22,936 -28,364
Miscellaneous financial loss
Gross premium written 85,217 105,575
Gross premium earned 76,839 108,559
Gross claims expenses -7,369 -76,748
Gross operational expenses -192 -7,760
Outwards reinsurance result -49,226 -15,236
Active reinsurance
Gross premium written 238,240 358,915
Gross premium earned 283,727 383,494
Gross claims expenses -70,890 -79,670
Gross operational expenses -22,913 -61,218
Outwards reinsurance result 19,955 -43,139
Gross premium written 25,124,447 25,246,957
Gross premium earned 24,634,644 24,965,928
Gross claims expenses -13,163,834 -14,928,715
Gross operational expenses -3,661,690 -3,107,851
Outwards reinsurance result -2,587,761 -2,794,916
F.23. INTEREST INCOME AND SIMILAR INCOME
TCZK 2006 2005
Financial instruments held to maturity 139,865 138,366
Financial instruments available-for-sale 14,547 –
Financial instruments at fair value through profit or loss held for trading -20,260 61,019
Financial instruments at fair value through profit or loss not held for trading 1,921,275 1,737,683
Loans and receivables 467,384 685,643
Other 18,545 19,287
Total interest and similar income 2,541,356 2,641,998
138 ANNUAL REPORT 2006
F.24. OTHER INCOME FROM FINANCIAL ASSETS
Other income from investments comprises the following:
TCZK 2006 2005
Realised gains 856,722 56,793
Reversals of impairment losses on financial assets 77,423 19,403
Dividends 292,025 132,863
Net trading income 2,814,013 2,710,226
Net fair value gains on financial assets and liabilities at fair value through profit or loss not held for trading 639 1,563,299
Total other income from investments 4,040,822 4,482,584
F.24.1. REALISED GAINS
The realised gains comprise the following:
TCZK 2006 2005
Financial instruments held-to-maturity – 45,133
Financial instruments available-for-sale 639,396 –
Loans and receivables 217,326 11,660
Total realised gains 856,722 56,793
The most significant transaction during 2006 was the sale of the shares in Modrá Pyramida stavební spofiitelna, a.s. on which the Company made a profit of
TCZK 623,840 (see also F.4.1.).
The Company was paid a receivable in the amount of TCZK 201,529 relating to an out-of-court arrangement in 2006. The receivable was fully impaired in
previous accounting periods.
F.24.2. REVERSALS OF IMPAIRMENT LOSSES ON FINANCIAL ASSETS
Reversals of impairment losses comprise the following:
TCZK 2006 2005
Loans and receivables 62,439 10,840
Other Receivables (except for policyholders) 14,984 8,563
Total reversals of impairment losses on investments 77,423 19,403
F.24.3. NET TRADING INCOME
Net trading income comprises the following:
TCZK 2006 2005
Securities trading 1,925,626 1,807,755
Debt securities -7,735 5,405
Equity securities 1,933,361 1,802,350
FX trading 1,329,609 -9,072
Derivatives -441,222 911,543
Total net trading income 2,814,013 2,710,226
ANNUAL REPORT 139
F.24.4. NET FAIR VALUE GAINS ON FINANCIAL ASSETS AND LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSSNOT HELD FOR TRADING
TCZK 2006 2005
Fair value gains on financial assets and liabilities at fair value through profit or loss not held for trading 963,862 1,905,392
Debt securities 570,639 1,127,098
Equity securities 393,223 778,294
Fair value losses on financial assets and liabilities at fair value through profit or loss not held for trading -963,223 -342,093
Debt securities -813,389 -300,737
Equity securities -149,834 -41,356
Total net fair value gains on financial assets and liabilities at fair value through profit or loss not held for trading 639 1,563,299
F.25. INCOME FROM INVESTMENT PROPERTY
TCZK 2006 2005
Realised gains 46,830 2,061
Unrealised gains 109,070 128,329
Rental income from investment property 185,124 167,135
Balance at 31 December 341,024 297,525
F.26. NET FEE AND COMMISSION INCOME, AND INCOME FROM SERVICE ACTIVITIES
Fee and commission income, and income from service activities comprises the following:
TCZK 2006 2005
Payments transactions 1,079 2,487
Commission income 214,269 207,170
Securities lending fees 3 42
Other 43,304 34,924
Total fee and commission income 258,655 244,623
Most of the commission income is generated by the administration of compulsory employer’s liability insurance.
Fee and commission expenses, and expenses from service activities comprises the following:
TCZK 2006 2005
Brokerage fees -92,404 -12,131
Asset management fee -153,226 -184,239
Underwriting and corporate finance fees -12,037 -16,587
Payments transactions -101,437 -115,130
Other -15,984 -13,020
Total fee and commission expenses -375,088 -341,107
Total net fee and commission income, and income from service activities -116,434 -96,484
In 2006 brokerage fees include two extraordinary items in the total amount of TCZK 83,471. It includes brokerage fees for the sale of e-Banka, a.s. and
brokerage fee related to the sale of the shares in Modrá pyramida stavební spofiitelna, a.s.
140 ANNUAL REPORT 2006
F.27. OTHER INCOME
Other income comprises the following:
TCZK 2006 2005
Reversal of impairment losses 66 153,788
Gain on disposal of property, plant, equipment, and intangible assets 176,986 8,471
Foreign currency gains 330,670 550,021
Rental income from operating lease 137,056 124,262
Other income 58,731 54,709
Total other income 703,509 891,251
Based on the decision of the management of the Company selected buildings and related land were sold during 2006. The Company made a profit on the
sale of 28 operational buildings.
F.28. NET INSURANCE CLAIMS AND BENEFITS
Net insurance claims and benefits comprise the following:
TCZK 2006 2005
Life insurance 9,207,396 12,823,561
Benefits and surrenders 8,425,016 11,030,667
Changes in life insurance technical provisions 703,606 1,735,123
Other 78,774 57,771
Non-life insurance 8,586,513 9,486,707
Claims paid 8,848,266 8,534,833
Changes in non life insurance technical provisions -726,158 383,738
Changes in other technical provisions 425,885 365,434
Other 38,520 202,702
Total net insurance claims and benefits 17,793,909 22,310,268
F.28.1. BENEFITS AND SURRENDERS
Benefits and surrenders comprise the following:
TCZK 2006 2005
Gross benefits and surrenders 8,701,011 11,300,446
Reinsurers’ share -275,995 -269,779
Total benefits and surrenders 8,425,016 11,030,667
The decrease in gross benefits and surrenders is a result of the prior year activities, in particular the Company has carried out special activities to improve
the insurance portfolio (the impact of the activities was TCZK 2,241,601 in 2005). As a result survival insurance payments were also lower by TCZK 970,241
in 2006. However, this is compensated by increased surrender payments and extraordinary withdrawals (higher by TCZK 537,041 in 2006).
F.28.2. NON-LIFE INSURANCE CLAIMS PAID
Paid non-life insurance claims comprise the following:
TCZK 2006 2005
Gross claims paid 13,556,011 13,008,978
Reinsurers’ share -4,707,745 -4,474,145
Of which captive reinsurance -4,404,795 -3,964,766
Total non-life insurance claims paid 8,848,266 8,534,833
ANNUAL REPORT 141
F.28.3. CHANGES IN NON-LIFE INSURANCE TECHNICAL PROVISIONS
The changes in non-life insurance technical provisions comprise the following:
TCZK 2006 2005
Change in claims reported by policyholders -235,059 1,653,841
Change in claims reported by policyholders reinsurers’ share -312,452 -940,386
Change in IBNR -157,118 265,896
Change in IBNR, reinsurers’ share -21,529 -595,613
Total changes in non-life insurance technical provisions -726,158 383,738
The change is caused mainly by an adjustment of the provision for MTPL claims (regularly paid out as a fixed income) in 2005. The adjustment increased
the provision in order to reflect risks related to changes in legislation. In addition an annual review of all legal claims resulted in 2006 in a reduction of the
insurance provision in 2006.
F.29. INVESTMENT CONTRACTS BENEFITS
Investment contract benefits comprise the following:
TCZK 2006 2005
Change in financial liabilities for investment contracts with DPF
Guaranteed benefits 242,556 312,666
Total investment contracts benefits 242,556 312,666
F.30. INTEREST AND SIMILAR EXPENSE
TCZK 2006 2005
Subordinated liabilities 102,362 187,730
Liabilities evidenced by paper 60,525 109,718
Finance lease liabilities 1,120 1,051
Liabilities to banks 28,974 3,530
Liabilities to non-banks 8,542 –
Other 7,197 43,180
Total interest expense and similar expenses 208,720 345,209
F.31. OTHER EXPENSES FROM FINANCIAL ASSETS
The other expenses from financial assets comprises the following:
TCZK 2006 2005
Realised losses 44,183 –
Impairment losses on financial assets 115,562 220,856
Total other expenses from financial assets 159,745 220,856
The Company realized a loss on the sale of the shares in PraÏské sluÏby a.s in the amount of TCZK 44,183 (see also F.4.1.).
F.31.1. IMPAIRMENT LOSSES ON FINANCIAL ASSETS
Impairment losses comprise the following:
TCZK 2006 2005
Loans and receivables 10,765 72,114
Other Receivables (except for policyholders) 104,797 148,742
Total impairment losses on financial assets 115,562 220,856
142 ANNUAL REPORT 2006
F.32. EXPENSES FROM INVESTMENT PROPERTY
Other expenses from investment property comprises the following:
TCZK 2006 2005
Realised losses 82,770 3,286
Unrealised losses 134,892 576,624
Other expenses from investment property 88,277 70,853
Total expenses from investment property 305,939 650,763
F.33. ACQUISITION COSTS AND OTHER OPERATING EXPENSES
Acquisition costs and other operating expenses comprise the following:
TCZK 2006 2005
Acquisition costs 4,412,137 4,526,644
General administrative expenses 4,532,829 4,181,169
Reinsurance commissions and profit participation -2,645,963 -2,700,230
Total acquisition costs and other operating expenses 6,299,003 6,007,583
F.33.1. ACQUISITION COSTS
Acquisition costs include the following:
TCZK 2006 2005
Commissions 3,052,331 3,023,582
Staff costs 937,168 935,963
Marketing and advertising 449,734 407,702
Other 48,801 76,847
Change in deferred acquisition costs -75,897 82,550
Total acquisition costs 4,412,137 4,526,644
F.33.2. GENERAL ADMINISTRATIVE EXPENSE
General administrative expenses comprise the following:
TCZK 2006 2005
Staff costs 1,127,485 1,023,751
Technology and system costs 992,074 923,879
Rental, maintenance and repair expense 291,638 277,787
Advertising 390,277 393,128
Intermediary services 286,899 312,351
Advisory 393,138 258,984
Miscellaneous services 604,587 575,989
Consumption of energy 126,539 117,016
Landlords expenses 73,153 49,227
Change in other provission -7,340 -43,407
Other 254,379 292,464
Total general administrative expenses 4,532,829 4,181,169
Technology and system costs in general administrative expenses include staff costs of TCZK 281,863 (2005: TCZK 260,933).
ANNUAL REPORT 143
F.33.2.1. Staff costs
The next table shows details of staff costs:
TCZK 2006 2005
Wages and salaries 2,044,921 1,892,762
Compulsory social security contributions 695,052 693,751
Other 96,373 116,322
Total staff costs 2,836,346 2,702,835
Total remuneration included in staff cost for directors and executive officers 215,813 155,851
Staff costs are included in the sections Acquisition costs, Claims handling costs (2006: TCZK 479,175, 2005: TCZK 458,904), General administrative
expenses and Other expenses.
Other expenses include the costs of the Company’s health and social program (e.g. health program for managers, medical check-up for employees and
social benefits).
The average number of employees as at 31 December was as follows:
2006 2005
Directors and executive officers 1) 43 38
Other employees 5,208 5,524
Total average number of employees 5,251 5,562
1) this category includes employees – members of the Board of the Directors and directors or executive officers which are established by general direktor.
F.34. OTHER EXPENSES
Other expenses comprise the following:
TCZK 2006 2005
Amortisation on software and other intangible assets 504,007 440,586
Depreciation on property, plant and equipment 466,010 439,742
Foreign currency losses 496,663 425,945
Impairment losses on property, plant and equipment 27,297 146,918
Impairment losses on non-current assets held for sale 45,412 –
Loss on disposal of property, plant, equipment and intangible assets 168,673 78,083
Management of investment 23,602 35,240
Staff costs 10,655 23,224
Sundry expenses 48,352 11,403
Total other expenses 1,790,671 1,601,141
144 ANNUAL REPORT 2006
F.35. NET INCOME FROM INVESTMENTS IN SUBSIDIARIES AND ASSOCIATES
TCZK 2006 2005
Dividends 1,920,671 1,755,228
Realised gains 1,240,160 –
Total income 3,160,831 1 755,228
Realised losses 147,201 229,699
Impairment losses recognised 150,143 1,165
Total expenses 297,344 230,864
Total net income 2,863,487 1,524,364
The Company sold its interest in the subsidiary e-Banka, a.s. and made a profit of TCZK 946,576. The Company subsequently sold its whole interest in
PPF Banka, a.s. with a profit of TCZK 293,584. The Company’s interest in âP Finanãní holding, a.s. was also sold with a loss of TCZK 117,873.
An impairment loss in the amount of TCZK 150,000 has been recorded for the interest in První Callin agentura, a.s. See also note C.
F.36. INCOME TAX EXPENSES
The income tax expense comprises the following:
TCZK 2006 2005
Current tax expense 1,929,493 1,488,251
Deferred tax expense 130,481 -292,038
Total income tax expense 2,059,974 1,196,213
F.36.1. RECONCILIATION OF THE EFFECTIVE TAX RATE
The following table reconciles the tax expense:
TCZK 2006 2005
Tax rate 24% 26%
Profit from operations (before taxation) 10,353,174 5,837,489
Computed taxation using applicable tax rate -2,484,762 -1,517,747
Tax non-deductible expenses -318,001 -155,200
Non-taxable income 671,942 519,663
Changes in tax rates 3,188 39,000
Adjustments to prior years tax charges -1,681 -5,761
Income taxed at different rates 24,723 14,978
Tax credits 1,150 1,535
Other 43,467 -92,681
Total income tax expense/income -2,059,974 -1,196,213
ANNUAL REPORT 145
F.37. REPURCHASE AND RESALE AGREEMENTS
The Company raises funds by selling financial instruments under agreements to repurchase them at future dates at the same price plus interest at
a predetermined rate.
At 31 December assets sold under repurchase agreements were as follows:
TCZK 2006 2006 2005 2005
Fair value of Carrying amount Fair value of Carrying amount
underlying of corresponding underlying of corresponding
assets liabilities assets liabilities
Financial assets at fair value through profit or loss 275,366 277,129 264,544 264,910
Total assets 275,366 277,129 264,544 264,910
The Company also purchases financial instruments under agreements to resell them at future dates (“reverse repurchase agreements”). The seller
commits to repurchase the same or similar instruments at an agreed future date. Reverse repurchases are entered into as a means of providing funds to
customers. At 31 December assets purchased subject to agreements to resell them were as follows:
TCZK 2006 2006 2005 2005
Carrying amount Fair value of Carrying amount Fair value of
of receivables assets received of receivables assets received
as collateral as collateral
Loans and advances to banks 1,770,195 1,768,257 3,001,149 2,938,812
Total loans and advances 1,770,195 1,768,257 3,001,149 2,938,812
F.38. OFF BALANCE SHEET ITEMS
F.38.1. COMMITMENTS AND CONTINGENT LIABILITIES
The contractual amounts of commitments and contingent liabilities are set out in the following table by category. The amounts reflected in the table for
guarantees and letters of credit represent the maximum accounting loss that would be recognised at the balance sheet date if the counterparties failed
completely to repay the debt.
TCZK 2006 2005
Guarantees:
Payment guarantees 127,072 149,618
Total commitments and contingent liabilities 127,072 149,618
These commitments and contingent liabilities carry an off balance-sheet credit risk because only organisation fees and accruals for probable losses are
recognised in the balance sheet until the commitments are fulfilled or expire. Many of the contingent liabilities and commitments will expire without being
advanced either in whole or in part. Therefore, the amounts do not represent the expected future cash flows.
146 ANNUAL REPORT 2006
F.38.2. OTHER CONTINGENCIES
F.38.2.1. Legal
The Company is involved in 2 court cases with a minority shareholder relating to resolutions of the General Meetings held in 1996, and 2000. As yet, none
of these proceedings have been finally resolved although the Company was successful in first instance and appellate procedures. Based on past court
proceedings and a review of Company procedures and legal analyses carried out by external legal counsel, the management of the Company believes that
it is unlikely that any of these cases will be concluded in favour of the plaintiff.
The Company is also involved in 4 cases concerning the decision of the general meeting of the Company in 2005 approving a squeeze-out of minority
shareholders. Based on legal analyses carried out by external legal counsel, management of the Company believes that it is unlikely that any of these cases
will be concluded in favour of the plaintiff however the outcome of the cases is dependent on the decision of the Constitutional Court on the applicability of
specific paragraphs of the Commercial Code.
F.38.2.2. Participation in nuclear pool
As a member of the Czech Nuclear Pool, the Company is jointly and severally liable for the obligations of the pool. This means that, in the event that one or
more of the other members are unable to meet their obligations to the pool, the Company would take over the uncovered part of this liability, pro-rata to its
own net retention used for the contracts in question. The management does not consider the risk of another member being unable to meet its obligations
to the pool to be material to the financial position of the Company. In addition the potential liability of the Company for any given insured risk is contractually
capped at twice the Company’s net retention for that risk.
F.38.2.3. Membership in the Czech Insurance Bureau
As a member of the Czech Insurance Bureau (“the Bureau”) related to MTPL insurance the Company is committed to guarantee the MTPL liabilities of the
Bureau. For this purpose the Company makes contributions to the guarantee fund of the Bureau based on the calculations of the Bureau.
In the event of a fellow member of the Bureau being unable to meet its liabilities arising from MTPL due to insolvency, the Company may be required to
make additional contributions to the guarantee fund. The management does not believe the risk of this occurring is material to the financial position of the
Company.
F.38.2.4. âeská poji‰Èovna – Litigation
The Company is a party to litigation with the National Property Fund of the Czech Republic (the “NPF”), in which the NPF is seeking compensation under
an Agreement to enter into a future agreement, which was entered into by the Company and the NPF on 8 October 1997. The Company’s position in the
dispute is that the NPF’s alleged claim has no foundation. Based on the course of the litigation to date, the information known, and legal analyses carried
out to-date, the management of the Company is of the opinion that the plaintiff will not be successful in this action.
F.38.3. GUARANTEES RECEIVED
Guarantees received were as follows:
TCZK 2006 2005
Guaranties –- received 7,365 847,026
Value of property received as a collateral 34,659 34,976
Receivables on shares, bonds and promissory notes 465,457 528,871
Total contingent assets 507,481 1,410,873
F.39. RELATED PARTIES
F.39.1. IDENTITY OF RELATED PARTIES
As at 30 December PPF Group N.V. was the owner of the Company. On 31 December 2006 the new shareholder replaced PPF Group N.V. within a process
of reorganisation of the PPF Group. As at 31 December 2006 CZI Holdings N.V. is the sole shareholder of the Company. The ultimate parent company is
PPF Group N.V.
The Company has a related party relationship with its parent company which is CZI Holdings N.V. as at the year end and during the year with PPF Group N.V.,
together with their fellow subsidiaries.
The Company also has a related party relationship with its subsidiaries and associates.
ANNUAL REPORT 147
The key management personnel of the Company and its parent, their close family members and other parties which are controlled, jointly controlled or
significantly influenced by such individuals and entities in which such individuals hold significant voting power are also considered related parties.
Key management personnel of the Company comprise the members of the Board of Directors and the Supervisory Board.
In considering each possible related party relationship, attention is directed to the substance of the relationship and not merely the legal form.
F.39.2. TRANSACTIONS WITH KEY MANAGEMENT PERSONNEL
TCZK 2006 2005
Shortdterm employee benefits 40,853 28,150
Post-employment benefits – –
Other long-term benefits 66,735 20,201
Termination benefits – –
Share based payment – –
Short-term employee benefits include wages, salaries and social security contributions, allowances provided for membership of the statutory bodies,
bonuses and non-monetary benefits such as medical care and cars.
Other long-term benefits include income under group life insurance.
The change in other long term benefits is caused by the group life insurance of key management personnel maturing in 2006. Short-term employee
benefits have increased due to higher bonuses paid to the members of the Board of Directors in 2006 as a result of the good financial results and due to
changes in the Supervisory board structure.
As at 31 December 2006 and 31 December 2005 the members of the statutory bodies held no shares of the Company.
F.39.3. RELATED PARTY TRANSACTIONS
The related party transactions were carried out on terms equivalent to those that would apply in similar transactions with unrelated parties.
The related parties are fall into the following groups:
Group 1 – subsidiaries and associates directly consolidated within the Company’s group;
Group 2 – enterprises directly consolidated within the group of the ultimate parent company;
Group 3 – other related parties or the Company’s non-consolidated subsidiaries or associates.
F.39.3.1. Parent Company
The Company entered into no transactions and had no outstanding balances with its parent company CZI Holdings N.V. As at 31 December 2005 the
Company had a liability to PPF Group N.V. in respect of a subordinated debt in the amount of TCZK 2,135,000.
During the course of the year the Company had the following significant transactions with the ultimate parent company PPF Group N.V.:
TCZK 2006 2005
Other income 11,549 –
Total income 11,549 –
Interest expense and similar charges -87,417 -160,318
Total expenses -87,417 -160,318
148 ANNUAL REPORT 2006
F.39.3.2. Related parties
At the balance sheet date the Company has the following balances with other related parties:
2006 Group 1 Group 2 Group 3
TCZK
Assets
Financial assets 3,471,201 9,129,543 938,607
Financial assets at fair value through profit and loss i 721,184 5,213,296 936,287
Loans and receivables ii 2,750,017 3,880,840 2,320
Cash and cash equivalents – 35,407 –
Reinsurance assets iii 6,785,937 – –
Prepayments and accrued income 19,843 – 5,000
Total assets 10,276,981 9,129,543 943,607
Liabilities
Insurance liabilities 421,085 954,287 –
Financial liabilities 4,419,242 328,001 2,272
Payables iv 4,414,970 50,872 2,272
Financial liabilities at fair value through profit and loss 4,272 – –
Liabilities to banks – 277,129 –
Accruals and deferred income 9,284 4,426 –
Total liabilities 4,849,611 1,286,714 2,272
Notes:i. The balances with companies in Group 1 comprise units issued by âP INVEST, a.s. (DYK-P Akciov˘ fond, âPI Fond globálních znaãek) in the amount of TCZK 721,184, in
Group 2, bonds issued by Home Credit Group companies in the amount of TCZK 5,213,296 and in Group 3, units issued by âP INVEST, a.s. (other funds) in the amount of TCZK 936,287.
ii. The balances with companies in Group 1 comprise receivables from reinsurance (receivables from âeská poisÈovna – Slovensko a.s. and CP Reinsurance company Ltd.) in theamount of TCZK 2,702,976. Group 2 comprises of receivables from repo transactions with PPF Banka, a.s in the amount of TCZK 1,770,195, bank deposits with PPF Banka a.s. in the amount of TCZK 1,348,094 and insurance receivables from the Home Credit Group companies in the amount TCZK 736,198.
iii. The balance represents captive reinsurance (see F.6.).iv. The balances with companies in the Group 1 comprise reinsurance liabilities (liabilities to âeská poisÈovna – Slovensko a. s. and CP Reinsurance company Ltd.) in the amount
of TCZK 4,397,860.
ANNUAL REPORT 149
2005 Group 1 Group 2 Group 3
TCZK
Assets
Property, plant and equipment 1,355 – 1,924
Financial assets 10,788,895 16,240 12,015
Financial assets at fair value through profit and loss i 3,881,065 – –
Loans and receivables ii 6,705,414 16,240 12,015
Cash and cash equivalents 202,416 – –
Reinsurance assets iii 6,802,072 – –
Prepayments and accrued income 14,868 – –
Total assets 17,607,190 16,240 13,939
Liabilities
Insurance liabilities 962,718 – 568
Financial liabilities 5,990,304 437,930 4,300
Liabilities evidenced by paper 351,208 – –
Subordinated debt – 365,000 –
Payables iv 5,372,795 72,930 4,300
Financial liabilities at fair value through profit and loss 1,391 – –
Liabilities to banks 264,910 – –
Accruals and deferred income 9,317 3,570 –
Total liabilities 6,962,339 441,500 4,868
Notes:i. The balances with subsidiaries include bonds issued by Home Credit Holding a.s. in the amount of TCZK 2,240,061 and units issued by âP INVEST, a.s. in the amount of
TCZK 1,478,043.ii. The balances with subsidiaries include loans related to repurchase operations with PPF Banka, a. s. in the amount of TCZK 3,001,149, receivables from direct insurance and
reinsurance (related mainly to âeská poisÈovna – Slovensko a.s., âeská poji‰Èovna ZDRAVÍ a. s. and Home Credit Holding a. s.) in the amount of TCZK 1,956,261, subordinateddeposits and bank deposits (mainly related to PPF Banka a.s. and E Banka a.s.) in the amount of TCZK 876,890 and receivables from captive reinsurance in the amount ofTCZK 696,591.
iii. The balance represents captive reinsurance (see F.6.).iv. Payables arising from direct insurance operations (mainly due to âeská poji‰Èovna ZDRAVÍ a.s., âeská poisÈovna – Slovensko a.s., Home Credit Holding a.s.) in the amount of
TCZK 1,545,062.
150 ANNUAL REPORT 2006
During the course of the year the Company had the following significant transactions with other related parties:
2006 Group 1 Group 2 Group 3
TCZK
Revenue
Premium Income Net i -8,376,862 292,434 64,605
Net income from investments in subsidiaries, associates and joint ventures ii 1,920,671 – –
Interest and similar income 167,265 168,638 79,434
Other income from financial assets -212,133 -6,849 17,339
Net trading income -196,593 – –
Net fair value gains on financial assets and liabilities at fair value through
profit and loss not held for trading -15,540 -6,849 17,339
Income from investment property 48,401 – –
Fee and commission income 7,619 722 1,928
Other income 44,593 47,685 5,821
Total revenues -6,400,446 502,630 169,127
Expenses
Insurance technical charges 4,625,185 -49,776 –
Life Insurance 321,706 – –
Non-life Insurance iii 4,303,479 -49 776 –
Interest and similar expenses -15,985 -14,945 -760
Acquisition costs -97,755 – –
General administrative expenses -27,306 -156,011 -73,833
Reinsurance commissions and profit participation iv 2,192,367 – –
Fee and commission expense -86,983 -108,874 -64,303
Other expenses -1,002 -2,229 –
Total expenses 6,588,521 -331,835 -138,896
Notes:i. The balances in Group 1 comprise captive reinsurance (see F.22.) and transactions with HC Group companies up to the split-off date (see note C [1]) in the amount of
TCZK 174,074. Transactions after the split-off date are included in Group 2 in the amount of TCZK 290,637.ii. The balances with subsidiaries include dividends received from CP Reinsurance company Ltd. in the amount of TCZK 1,597,928.iii. The balances in Group 1 include captive reinsurance (see note F.28.2.).iv. The balances comprise the reinsurance provision from CP Reinsurance company Ltd. in the amount of TCZK 2,192,367.
ANNUAL REPORT 151
2005 Group 1 Group 2 Group 3
TCZK
Revenue
Premium Income Net i -9,311,705 2,662 7,482
Net income from investments in subsidiaries, associates and joint ventures ii 1,754,409 – –
Interest and similar income 236,283 – 20,077
Other income from financial assets 494,871 – 1,012,237
Net trading income iii 326,271 – 1,012,237
Net fair value gains on financial assets and liabilities at fair value through
profit and loss not held for trading 168,600 – –
Income from investment property 48,800 – –
Fee and commission income 27,114 – –
Other income 162,910 27,351 –
Total revenues -6,587,318 30,013 1,039,796
Expenses
Insurance technical charges 5,500,586 -535 -2,384
Life Insurance 527,777 – –
Non-life Insurance iv 4,972,809 -535 -2,384
Interest and similar expenses -54,854 -27,412 –
Other expenses from financial assets – – –
Acquisition costs -78,299 – –
General administrative expenses -35,067 -410,610 -18,444
Reinsurance commissions and profit participation v 2,205,324 – –
Fee and commission expense -280,400 – –
Other expenses -53,380 – -2,705
Total expenses 7,203,910 -438,557 -23,533
Notes:i. The balances in Group 1 comprise mainly of captive reinsurance (see F.22.). ii. The balances with subsidiaries include dividends received from CP Reinsurance company Ltd. in the amount of TCZK 830,864, PPF Banka a.s. in the amount of TCZK 568,225
and CP Strategic investments in the amount of TCZK 355,320.iii. The income in Group 3 comprises realised profit of trading with the securities of PPF Cyprus Ltd. iv. The balances in Group 1 include captive reinsurance (see note F.28.2.).v. The balances comprise of reinsurance commission from captive reinsurance.
The Company did not issue nor receive any guarantees from related parties in 2006 or in 2005.
F.40. EARNINGS PER SHARE
The next table shows the earnings per share:
TCZK 2006 2005
Net income 8,293,200 4,641,276
Weighted average number of shares 40,000 40,000
Earnings per share (CZK) 207.330 116.032
The earnings per share figure is calculated by dividing the net income by the weighted average number of common shares outstanding.
The general meeting of the Company held on 30 June 2006 decided to increase the share capital by TCZK 1,019,037 as a transfer from retained earnings
together with an issue of new shares to parent company.
The general meeting of the Company held on 19 September 2006 decided to change the nominal value of the shares with corresponding decrease in the
number of shares issued. The nominal value was increased from CZK 1,000 per share to CZK 100,000 per share. In respect of both of these changes the
number of shares for the reported period and the comparative period has been adjusted.
152 ANNUAL REPORT 2006
F.41. FAIR VALUE OF ASSETS AND LIABILITIES
The next table compares the carrying and fair value of financial assets:
2006 2005
Carrying amount Fair value Carrying amount Fair value
Subsidiaries and associates 3,950,694 n/a 16,728,599 n/a
Investment property 2,911,611 2,911,611 3,230,699 3,230,699
Financial assets 100,430,474 100,850,674 97,154,481 97,617,618
Financial assets available-for-sale 5,174,571 5,174,571 1,779,769 1,779,769
Equity securities 910,119 910,119 1,779,769 1,779,769
Financial assets held-to-maturity 1,886,610 2,306,810 1,870,728 2,363,337
Debt securities 1,886,610 2,306,810 1,870,728 2,363,337
Financial assets at fair value through profit or loss held for trading 14,238,659 14,238,659 12,054,873 12,054,873
Debt securities held for trading 124,867 124,867 – –
Equity securities held for trading 13,489,110 13,489,110 11,160,391 11,160,391
Positive market values of derivatives 624,682 624,682 894,482 894,482
Financial assets at fair value through profit
or loss not held for trading 55,616,346 55,616,346 55,842,193 55,842,193
Debt securities not held for trading 48,243,803 48,243,803 42,814,799 42,814,799
Equity securities not held for trading 7,372,368 7,372,368 13,027,219 13,027,219
Other not held for trading 175 175 175 175
Loans and receivables 22,343,190 22,341,177 25,357,831 25,328,359
Loans and advances to banks 14,161,829 14,159,816 17,211,274 17,181,802
Loans and advances to non-banks 8,725 8,725 330,148 330,148
Receivables 8,172,636 8,172,636 7,816,409 7,816,409
Cash and cash equivalents 1,171,098 1,171,098 249,087 249,087
Total financial assets 107,292,779 n/a 117,113,779 n/a
The fair value of a financial instrument is defined as the amount for which a financial instrument could be exchanged between two willing parties in the
ordinary course of business. The fair value is based on market prices. If market prices are not available the fair value is calculated by using the present value
of future cash flows method.
ANNUAL REPORT 153
A comparison between the fair value and carrying value of financial liabilities is shown below:
TCZK 2006 2005
Carrying amount Fair value Carrying amount Fair value
Financial liabilities for investment contracts with DPF 1,308,480 n/a 1,065,924 n/a
Guaranteed liability for investment contracts with DPF 1,308,480 n/a 1,065,924 n/a
Financial liabilities 10,013,672 10,012,884 17,355,317 17,510,749
Subordinated liabilities – – 2,500,000 2,652,679
Other liabilities evidenced by paper – – 4,068,190 4,070,943
Bonds and notes issued – – 4,037,690 4,040,443
Bills of exchange outstanding – – 30,500 30,500
Financial liabilities at fair value through profit or loss 392,236 392,236 511,817 511,817
Negative market values of derivatives 392,236 392,236 511,817 511,817
Liabilities to banks 277,129 276,341 264,910 264,910
Payables 9,297,336 9,297,336 9,971,765 9,971,765
Other liabilities 46,971 46,971 38,635 38,635
Total financial liabilities 11,322,152 n/a 18,421,241 n/a
The fair value of the guaranteed liability for investment contracts with DPF cannot be reliably measured.
F.42. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS
Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that
are believed to be reasonable under the circumstances.
The Company makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related
actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities
within the next financial year are discussed below.
F.42.1. ASSUMPTIONS USED TO CALCULATE INSURANCE LIABILITIES
The Company uses certain assumptions when calculating its insurance liabilities. The process used to determine the assumptions that have the greatest
effect on the measurement of the items in the Company’s financial statements, and the effects of changes in the assumptions that would have a material
effect on the recognised amounts, are discussed in part D.2.4.
F.42.2. IMPAIRMENT OF LOANS AND RECEIVABLES
At each balance sheet date the Company assesses whether there is objective evidence that any loan or receivable or the related debtor is impaired. A loan
or receivable is impaired if there is objective evidence of impairment as a result of one or more events that have occurred since its initial recognition and
the resulting loss event (or events) has an impact on the estimated future cash flows from the loan or receivable or the related debtor that can be reliably
estimated.
Objective evidence that any loan or receivable or the related debtor is impaired includes observable data that comes to the attention of the Company about
the following loss events:
a) significant financial difficulty of the issuer or obligor;
b) a breach of contract, such as default on interest or principal payments;
c) the disappearance of an active market for that financial asset due to financial difficulties of the debtor.
The Company first assesses whether objective evidence of impairment exists individually for any loans or receivables that are individually significant, and
individually or collectively for any loans or receivables that are not individually significant. For the purposes of the collective evaluation of impairment, loans
and receivables are grouped on the basis of similar credit risk characteristics.
154 ANNUAL REPORT 2006
Future cash flows from loans and receivables are estimated on the basis of contractual cash flows and historical loss experience for loans and receivables
with similar credit risk characteristics. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current
conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that
do not exist currently. The methodology and assumptions used for estimating future cash flows are reviewed regularly by the Company to reduce any
differences between loss estimates and actual loss experience.
F.42.3. INCOME TAXES
Significant judgement is required in determining the provision for income taxes. There are transactions and calculations for which the ultimate tax
determination is uncertain during the ordinary course of business. The Company recognises liabilities for anticipated tax audit issues based on estimates of
whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such
differences will impact on the income tax and deferred tax provisions in the period in which such determination is made.
F.42.4. FAIR VALUE OF DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS
The fair value of financial instruments that are not traded on an active market (for example, over-the-counter derivatives) is determined using valuation
techniques. The Company uses its judgement to select a variety of methods and makes assumptions that are mainly based on the market conditions
existing at each balance sheet date.
G. SUBSEQUENT EVENTS
The Company has recognized these important non-adjusting events that have occurred since the balance sheet date up to 30 March, 2007:
G.1. MERGER OF CP REINSURENCE COMPANY LTD. AND FOX CREDIT SERVICES LTD.
On 1 February 2007 the Board of Directors of the Company approved a plan to merge of the subsidiaries CP Reinsurance company Ltd. and FOX Credit
Services Ltd. The plan for the merge was approved by the statutory bodies of both merging companies on 22 January 2007.
G.2. THE PROJECT FOR THE SALE OF SIGNIFICANT LAND AND BUILDINGS
On 16 February 2007 the Board of Directors of the Company approved a project for the sale of portfolio of selected significant land and buildings. The
property will be sold as a group of assets to a selected investor. The sale project is expected to be realized by the end of the first half of the year. The
approved conditions of the sale project provide that none of the land or building will be sold significantly below its net book value as recorded in the
financial statements as at 31 December 2006. The Company will lease back the relevant space in the sold building for the next 10 years and will have the
option to prolong the term of lease for up to a further 5 years (differentiated in respect of buildings) for its operational purposes.
G.3. HURRICANE KYRRIL
On 18 and 19 January 2007 an unusually violent windstorm with hurricane-strength winds (named Kyrril) moved across almost the whole of the Czech
Republic. This natural disaster has resulted in insurance claims with an estimated value of CZK 800 million. The Company expects that about 70% of the
claims will be covered by reinsurance.
G.4. âSOB SQUEEZE OUT
At the balance sheet date the Company owns 57 711 shares of âeskoslovenská obchodní banka, a.s. (âSOB) representing a 1.13% share. On March 8 2007,
the Czech National Bank approved the proposal of KBC Bank, N.V. (KBC Bank) to convene an extraordinary general meeting of âSOB to decide on a buy-out
(squeeze-out) of minority shareholders for a consideration amounting to CZK 36,298 per share. This approval is a necessary step towards initiating the
squeeze-out procedure to buy-out the minority shareholders. Currently the Company is in negotiation with KBC Bank to sell its entire stake in âSOB prior to
completion of the squeeze-out procedure for the same consideration.
ANNUAL REPORT 155155 ANNUAL REPORT 2006
Report on Relations Among Related Parties, 2006 Accounting Period
The Company: âeská poji‰Èovna a.s., with its registered office at Spálená 75/16, Prague 1, postal code 113 04, ID: 45272956, is required to compile, for the
2006 accounting period, a “Report on Relations Among Related Parties” pursuant to Section 66a(9) of Act No. 513/1991 Coll., the Commercial Code, as
amended.
DESCRIPTION OF RELATIONS BETWEEN THE COMPANY AND “RELATED PARTIES”
During the 2006 accounting period, the Company entered into the following contracts with related parties:
• With AB – CREDIT a.s., registered office Prague 4, Na Pankráci 1658, postal code 140 21, ID 40522610, the following:
– Purchase agreement on sale of movable property dated 2 January 2006,
– FX swap dated 4 January 2006,
– FX swap dated 6 February 2006,
– FX swap dated 20 February 2006,
– FX swap dated 27 February 2006,
– FX swap dated 20 March 2006,
– Agreement on reimbursement of telephone fee costs,
– Agreement on reimbursement of wages,
– Aggregated motor insurance contracts.
• With CP Reinsurance company Ltd., registered office Florinis, 11, office no. 502, Nicosia, Republic of Cyprus, ID 148685, the following:
– Property and Casco Reinsurance Agreement dated 16 February 2006,
– Motor Third Party Liability Reinsurance Agreement dated 16 February 2006,
– Personal Accident Reinsurance Agreement dated 16 February 2006,
– Medical Expenses Reinsurance Agreement dated 16 February 2006,
– Securities Purchase Agreement & Mutual Setoff Agreement dated 17 February 2006.
• With CP Strategic Investments B.V., registered office Herengracht 450, 1017CA Amsterdam, Netherlands, ID 34124690, the following:
– Share purchase agreement dated 8 August 2006.
• With âeská poisÈovÀa – Slovensko, akciová spoloãnosÈ, abbreviated name: âPS, a. s., registered office Plynárenská 7/C, Bratislava, postal code 824 79,
Slovak Republic, ID 31354327, the following:
– Reinsurance contract on reinsurance of non-life insurance in 2006 dated 4 April 2006,
– Stop Loss reinsurance contract to cover non-life insurance in 2006 dated 4 April 2006,
– Reinsurance contract to cover life and retirement (annuity) insurance and dread disease insurance risks in 2006 dated 4 April 2006,
– Agreement on reimbursement of costs of participation in winter sports games.
• With âeská poji‰Èovna ZDRAVÍ a.s., registered office Prague 10, Litevská 1174/8, postal code 100 00, ID 49240749, the following:
– Reinsurance contract to cover accident insurance risks in 2006 dated 9 November 2006,
– Facultative reinsurance slip dated 30 October 2006,
– Purchase agreement on sale of furniture and fittings dated 20 January 2006,
– Liability insurance contract.
156 ANNUAL REPORT 2006
• With âP DIRECT, a.s., registered office Prague 4, Na Pankráci 1658, postal code 140 21, ID 25635191, the following:
– Agreement on assignment of receivable and acceptance of debt dated 1 February 2006 (Company transferred car lease to a new lessee),
– Purchase agreement on sale of mobile telephone dated 3 March 2006,
– Amendments to agreement on non-exclusive sales representation dated 18 April 2005,
– Amendment no. 1 to professional liability insurance contract,
– Aggregated motor insurance contracts.
• With âP finanãní holding a.s., registered office Prague 4, Na Pankráci 1658, postal code 140 21, ID 26116731, the following:
– Agreement on transfer of securities dated 29 September 2006.
• With âP finanãní servis a.s. in liquidation, registered office Prague 4, Na Pankráci 1658, postal code 140 21, ID 26116723, the following:
– Agreement on purchase-sale of stake in Finansovy servis o.o.o. dated 11 December 2006,
– Agreement on storage of archive dated 18 December 2006,
– Purchase agreement on sale of movables dated 26 September 2006,
– Agreement on termination of lease dated 2 January 2006 (in building at the address Na Pankráci 1658/121, Prague 4),
– Agreement dated 15 August 2006 on termination of Services Agreement dated 10 September 2001.
• With âP INVEST investiãní spoleãnost, a.s., registered office Prague 1, PurkyÀova 74/2, postal code 110 00, ID 43873766, the following:
– Sales Representation Agreement dated 11 July 2006,
– Lease of parking garage spaces dated 13 February 2006 (in building at the address Vladislavova 17, Prague 1),
– Amendment no. 2 dated 22 November 2006 to lease of parking garage spaces dated 1 February 2005 (in building at the address Vladislavova 17, Prague 1),
– Amendment no. 2 dated 22 February 2006 to lease of non-residential space dated 31 January 2005 (in building at the address PurkyÀova 74/2, Prague 1),
– Lease of non-residential space dated 31 May 2006 (in building at the address PurkyÀova 74/2, Prague 1),
– Agreement on termination of garage lease dated 22 November 2006 (in building at the address Vladislavova 17, Prague 1),
– Agreement dated 31 May 2006 on termination of lease of non-residential space (in building at the address PurkyÀova 74/2, Prague 1),
– Agreement dated 25 October 2006 on termination of lease of non-residential space (in building at the address PurkyÀova 74/2, Prague 1),
– Amendment no. 2 dated 1 September 2006 to lease of non-residential space dated 22 March 2005 (in building at the address Ra‰ínova 7, Brno),
– Lease of non-residential space dated 28 November 2006 (in building at the address Ra‰ínova 7, Brno),
– Amendment no. 1 dated 21 February 2006 to lease of non-residential space dated 5 September 2005 (in building at the address PraÏská 1280, âeské
Budûjovice),
– Agreement on reimbursement of expert services costs,
– Agreement on reimbursement of costs incurred to support “Financial Consulting” project,
– Agreement on reimbursement of costs of participation in winter sports games,
– Agreement on reimbursement of postage costs,
– Agreement on reimbursement of telephone fees,
– Motor insurance contracts,
– Insurance contract – property insurance for businesses,
– Insurance contract – accident insurance for employees.
• With eBanka, a.s., registered office Prague 1, Na Pfiíkopû 19, postal code 117 19, ID 562246, the following:
– Agreement on clearing cash deposit processed by security agency dated 1 February 2006,
– Amendment no. 12 dated 30 March 2006 to Account agreement on fees charged on cash deposits,
– Amendment no. 1 dated 26 June 2006 on termination of Agreement on mutual cooperation in providing services to clients who are legal entities,
dated 25 March 2006,
– Agreement dated 29 June 2006 on termination of Agreement on provision of payments system with incentive function for âeská poji‰Èovna a.s. sales
personnel,
– Agreement dated 4 September 2006 on termination of Agreement on acting as an intermediary for âP employee savings,
– Amendment no. 2 dated 4 September 2006 to the Agreement on acting as a financial services intermediary dated 28 February 2003,
– Opening accounts for Conseq Investment management, a.s.,
– Amendment no. 13 dated 7 June 2006 and Amendment no. 14 dated 16 November 2006 to the Agreement on bank and other services covering the
opening and maintenance of a Company Account,
– Agreement on provision of an eBanka payments system dated 30 November 2006,
– Agreement on cooperation in insurance for executives dated 30 March 2006,
ANNUAL REPORT 157
– Amendment no. 3 dated 5 January 2006 to lease of non-residential space dated 4 April 2001 (in building at the address Dr. Bechera 23, Karlovy Vary),
– Amendment no. 2 dated 8 June 2006 to lease of non-residential space dated 21 October 2004 (in building at the address Dr. Bechera 24, Karlovy Vary),
– Amendment no. 2 dated 16 January 2006 to lease of non-residential space dated 29 January 2004 (in building at the address U Stromovky 9, Havífiov),
– Lease of non-residential space dated 7 March 2006 (in building at the address ·kolní 1054, Chomutov),
– Lease of non-residential space dated 13 March 2006 (in building at the address Komenského 4, Cheb),
– Lease of parking garage spaces dated 27 March 2006 (in building at the address PraÏská 1280, âeské Budûjovice),
– Sub-lease of non-residential space dated 28 July 2006 (in building at the address Tfiída 9. kvûtna 542, Tábor),
– Natural hazards insurance contract, for building Charles Square Center, Karlovo nám. 10, Prague 2,
– Insurance contract – property insurance for businesses,
– Amendment nos. 1 – 4 to insurance contract on property insurance for businesses,
– Amendment no. 5 to natural hazards insurance contract,
– Amendment nos. 12 – 13 to insurance contract for insurance of buildings, movables other than motor vehicles, electronic equipment (natural hazards,
theft, liability, insurance of electrical equipment),
– Termination of Account Agreement dated 30 August 2006.
• With EURONEWS, a.s., registered office Prague 5, Holeãkova 103, postal code 150 00, ID 25690272, the following:
– Framework agreement on supply of goods and services dated 14 April 2006,
– Insurance contract for natural hazards, theft of electronics, insurance of movables,
– Amendment to insurance contract for natural hazards, theft of electronics, insurance of movables,
– Liability insurance contract.
• With FOX Credit Services Ltd., registered office Florinis, 11, office no. 504, Nicosia, Republic of Cyprus, ID 132843, the following:
– Loan Agreement, dated 1 September 2006,
– Mutual Setoff Agreement, dated 19 October 2006.
• With HC Holding a.s., registered office Brno, Moravské námûstí 249/8, postal code 602 00, ID 26978601, the following:
– Agreement on subscription of shares dated 13 April 2006.
• With Home Credit a.s., registered office Brno, Moravské námûstí 249/8, postal code 602 00, ID 26978636, the following:
– Cooperation agreement dated 1 March 2006,
– Framework agreement on marketing cooperation dated 24 March 2006,
– Amendment no. 1 dated 31 October 2006 to agreement on acting as a financial services intermediary dated 15 January 2004,
– Amendment no. 1 dated 1 November 2006 to cooperation agreement dated 3 January 2005,
– Agreement on reimbursement of costs of participation in winter sports games,
– Property insurance contract,
– Motor damage insurance contract,
– Operations insurance contract.
• With Home Credit B.V., Herengracht 450, 1017CA Amsterdam, Netherlands, ID 34126597, the following:
– Agreement on subscription and sale of bonds dated 15 June 2006.
• With Home Credit International a.s., registered office Prague 1, Ovocn˘ trh 8/1096, postal code 117 19, ID 60192666, the following:
– Agreement on purchase of movables dated 30 June 2006,
– Travel insurance contracts.
• With OPEN GATE – Boarding school, osmileté gymnázium v Babicích, s.r.o., registered office Babice 5, ¤íãany, postal code 251 01, ID 27089941, the
following:
– Motor insurance contracts,
– Travel insurance contracts.
158 ANNUAL REPORT 2006
• With Penzijní fond âeské poji‰Èovny, a.s., registered office Prague 1, Truhláfiská 1106/9, postal code 110 00, ID 61858692, the following:
– Framework agreement on marketing cooperation dated 3 April 2006,
– Lease of non-residential space dated 14 February 2006 (in building at the address Slovanská alej 24A, PlzeÀ),
– Agreement on reimbursement of travel expenses,
– Agreement on reimbursement of costs of participation in winter sports games,
– Agreement on reimbursement of telephone fees,
– MTPL and motor damage insurance contracts,
– Property insurance contracts,
– Termination of lease of non-residential space (in building at the address Slovanská alej 24A, PlzeÀ),
• With PPF a.s., registered office Prague 4, Na Pankráci 1658, postal code 140 21, ID 25099345, the following:
– Agreement on presentation of partner dated 22 May 2006,
– Agreement on acting as intermediary in the sale/purchase of securities dated 10 January 2006,
– Agreement on acting as intermediary in the sale/purchase of securities dated 16 January 2006,
– Movables lease dated 27 April 2006,
– Vehicle lease dated 10 March 2006,
– Vehicle lease dated 10 April 2006,
– Vehicle lease dated 12 May 2006,
– Vehicle lease dated 5 June 2006,
– Vehicle lease dated 23 June 2006,
– Vehicle lease dated 1 August 2006,
– Vehicle lease dated 10 August 2006,
– Vehicle lease dated 8 September 2006,
– Vehicle lease dated 5 October 2006,
– Two vehicle leases dated 2 October 2006,
– Three agreements on assignment of receivable and acceptance of debt dated 18 April 2006,
– Purchase agreement for passenger car dated 1 August 2006,
– Three purchase agreements for passenger car dated 18 April 2006,
– Purchase agreement for mobile telephones dated 7 July 2006,
– Purchase agreement for Sherlog security system Sherlog dated 1 May 2006,
– Amendment no. 7, Amendment no. 8 and Amendment no. 9 to Services Agreement dated 21 April 2004,
– Amendment no. 1 dated 30 March 2006 and Amendment no. 2 dated 27 September 2006 to lease of non-residential space (in building at the address
Na Pankráci 1658/121, Prague 4),
– Agreement on reimbursement of costs of entrance tickets,
– Agreement on reimbursement of costs of refreshments,
– Agreement on reimbursement of costs of office supplies,
– Agreement on reimbursement of air fares,
– Agreement on reimbursement of travel expenses,
– Agreement on reimbursement of BUPA insurance costs,
– Agreement on reimbursement of training and accommodation costs,
– Agreement on reimbursement of administrative fee,
– Agreement on reimbursement of contractual penalty,
– Agreement on reimbursement of costs of SmartClose project,
– Agreement on reimbursement of costs of electrical energy analysis,
– Agreement on reimbursement of meal voucher costs,
– Agreement on reimbursement of CCS costs,
– Agreement on reimbursement of extraordinary security guard costs,
– Agreement on reimbursement of moving costs,
– Agreement on reimbursement of costs of tour guide and transportation costs,
– Agreement on reimbursement of cash flow costs,
ANNUAL REPORT 159
– Agreement on reimbursement of telephone fees,
– Agreement on reimbursement of parking fees,
– Agreement on provision of vacation and reimbursement of wage compensation paid for vacation provided,
– Agreement on reimbursement of costs of TMP event,
– Agreement on reimbursement of course fees,
– Agreement on reimbursement of costs of winter sports games,
– Aggregated motor insurance contracts,
– Property insurance contract.
• With PPF Art a.s., registered office Prague 1, PurkyÀova 74/2, PSâ 113 04, ID 63080672, the following:
– Services Agreement dated 10 January 2006,
– Purchase agreement for movables dated 1 February 2006,
– Purchase agreement for cargo trailer dated 20 March 2006,
– Agreement dated 9 January 2006 on termination of Agreement on presentation of partner dated 14 December 2004,
– Agreement dated 9 January 2006 on termination of lease of non-residential space dated 14 May 2004,
– Agreement on termination of lease of non-residential space dated 14 August 2003,
– Agreement on transfer of rights and obligations under lease of non-residential space dated 12 August 2003,
– Agreement on sale of intangible property,
– Property insurance contracts,
– Liability insurance contracts,
– Motor damage insurance contract.
• With PPF Asset Management a.s., registered office Prague 4, Na Pankráci 121/1658, postal code 140 21, ID 25629123, the following:
– Amendment no. 9 dated 15 March 2006 to “Management Contract,”
– Aggregated motor insurance contracts,
– Travel insurance contracts.
• With PPF banka a.s., registered office Prague 4, Na StrÏi 1702/65, postal code 140 62, ID 47116129, the following:
– Framework agreement on cooperation dated 4 January 2006,
– Agreement on acting as intermediary for syndicated loan dated 3 April 2006,
– Agreement on arranging share issue dated 25 July 2006,
– Agreement on Implementation of Settlement of Mutual Rights and Obligations dated 4 September 2006,
– Agreement on sale of securities dated 9 May 2006,
– Agreements on opening and maintenance of current accounts,
– Amendment nos. 1 and 2 to Agreements on opening and maintenance of current accounts,
– Bank guarantee agreement dated 12 January 2006,
– Bank guarantee agreement dated 27 January 2006,
– Bank guarantee agreement dated 24 February 2006,
– Bank guarantee agreement dated 4 April 2006,
– Bank guarantee agreement dated 2 May 2006,
– Bank guarantee agreement dated 12 May 2006,
– Bank guarantee agreement dated 31 July 2006,
– Bank guarantee agreement dated 7 November 2006,
– Bank guarantee agreement dated 23 November 2006,
– Two Bank guarantee agreements dated 20 October 2006,
– Two Bank guarantee agreements dated 26 October 2006,
– Purchase agreement for passenger car dated 21 August 2006,
– Purchase agreement for mobile telephones dated 29 August 2006,
– Sub-lease of non-residential space dated 29 September 2006 (in building at the address Na StrÏi 1702/65, Prague 4),
– Amendment no. 1 dated 30 June 2006 to sub-lease of non-residential space dated 30 December 2004 (in building at the address Na StrÏi 1702/65, Prague 4),
– Amendment no. 1 dated 31 January 2006 to agreement on provision of consultancy services dated 16 August 2005,
– Amendment no. 4 dated 29 September 2006 to Cooperation Agreement dated 5 February 2004,
160 ANNUAL REPORT 2006
– Agreement on termination of agreement on provision of consultancy services,
– Agreement on termination of sub-lease of non-residential space,
– Agreement on reimbursement of costs of providing bank letter of reference,
– Agreement on reimbursement of costs of winter sports games,
– Agreement on provision of vacation and reimbursement of wage compensation paid for vacation provided,
– Agreement on reimbursement of telephone fees,
– Agreement on reimbursement of costs of âP syndicate concluding dinner,
– Statutory executive liability insurance contract,
– Motor vehicle fleet insurance contract,
– Termination of account agreement dated 30 August 2006,
• With PPF burzovní spoleãnost a.s., registered office Prague 4, Na Pankráci 1658, postal code 140 21, ID 60196211, the following:
– Agreement on reimbursement of telephone fees,
– MTPL and motor damage insurance contract,
– Property insurance contract.
• With PPF Group N.V., registered office Herengracht 450 – 454, 1017CA Amsterdam, Netherlands, ID 33264887, the following:
– Memorandum of understanding regarding subordinated loan dated 3 May 2006,
– Agreement on stabilizing of âeská poji‰Èovna shareholder structure upon split-off dated 9 May 2006,
– Agreement on transfer of securities for consideration dated 19 December 2006,
– Loan Agreement dated 10 July 2006.
• With První Callin agentura a.s., registered office Prague 4, Na Pankráci 121/1658, postal code 140 21, ID 27108562, the following:
– Agreement on subscription of shares dated 27 September 2006,
– Agreement on set-off of receivables dated 29 September 2006,
– Vehicle lease dated 1 February 2006,
– Vehicle lease dated 4 October 2006,
– Vehicle lease dated 25 October 2006,
– Lease of non-residential space dated 5 June 2006 (in building at the address Tfi. Míru 2647, Pardubice),
– Sub-lease of non-residential space dated 4 January 2007(in building at the address Türkova 9, Prague 4),
– Amendment no. 1 dated 14 June 2006 to Loan Agreement dated 15 June 2005,
– Amendment no. 1 dated 1 August 2006 to agreement on sales representation,
– Amendment no. 2 to movables lease,
– Agreement on provision of vacation and reimbursement of wage compensation paid for vacation provided,
– Agreement on reimbursement of seminar participation fee,
– Liability insurance contract,
– Agreement on reimbursement of MTPL insurance premium.
• With Public Picture & Marketing a.s., registered office Prague 1, PurkyÀova 74/2, postal code 113 04, ID 25667254, the following:
– Amendment no. 6 dated 1 February 2006 to Services Agreement dated 1 September 2000,
– Agreement on reimbursement of visa arrangement costs,
– Agreement on reimbursement of air fares,
– Agreement on reimbursement of telephone fees,
– Insurance contracts – liability insurance for businesses,
– Insurance contract – natural hazards insurance of movables,
– Aggregated motor insurance contract.
• With REFICOR s.r.o., registered office Prague 4, Na Pankráci 1658, postal code 140 21, ID 25600958, the following:
– Purchase agreement for movable property dated 31 July 2006,
– Movables lease dated 30 June 2006,
– Movables lease dated 31 July 2006,
– Vehicle lease dated 7 December 2006,
ANNUAL REPORT 161
– Lease of non-residential space dated 28 June 2006 (in building at the address nám. 28 October 20, Hradec Králové),
– Lease of non-residential space dated 1 August 2006 (in building at the address Spálená 75/16, Prague 1),
– Lease of parking garage spaces dated 25 July 2006 (in building at the address nám. 28 October 20, Hradec Králové),
– Agreement on reimbursement of telephone fees,
– Agreement on reimbursement of meal voucher costs,
– Agreement on reimbursement of costs of franking machine,
– Agreement on reimbursement of mail-related costs,
– Agreement on maintenance of telephone exchange,
– Agreement on reimbursement of customer travel costs.
• With TERMIZO a.s., registered office Liberec, Dr. Milady Horákové 571, postal code 460 06, ID 64650251, the following:
– Liability insurance contract,
– Insurance contract – insurance of computer equipment,
– Insurance contract – machinery insurance,
– Insurance contract – insurance against theft,
– Insurance contract – insurance of movables against natural hazards.
• With Univerzální správa majetku a.s., registered office Prague 4, Na Pankráci 1658, postal code 140 21, ID 60192330, the following:
– Professional liability insurance contracts,
– Insurance contract – insurance of valuables against theft or robbery,
– Insurance contract – insurance of movables against natural hazards,
– Aggregated motor insurance contract.
• With é·˘ecÚ‚Ó Ò Ó„‡Ì˘ÂÌÌÓÈ ÓÚ‚ÂÒÚ‚ÂÌÌÓÒÚ¸˛ «îË̇ÌÒÓ‚˚È Ò‚ËÒ», registered office Russian Federation, 123022, Moscow, ul. Pravdy, building
no. 8, str. 1, ID 7703304510, the following:
– Agreement on transfer of securities dated 11 December 2006.
All of the above agreements were entered into at arm’s length. Likewise, all consideration provided and received under these agreements was provided
and received under arm’s length terms and none of these agreements resulted in any injury to the Company.
During the 2006 accounting period, no measures or other legal actions were taken in the interests of or at the instigation of any related parties.
The statutory body hereby declares that it compiled this report with the use of due care, and that the information presented in this report is correct and
complete.
Prague, 30 March 2007
Ladislav Bartoníãek
Chairman of the Board of Directors
Jan JeÏdík
Member of the Board of Directors
162 ANNUAL REPORT 2006
Organization and Contactsas at Annual Report compilation date
âESKÁ POJI·ËOVNA BASIC ORGANIZATION CHART
General Meeting
Supervisory Board
Board of Directors
CEO Executive Chairman Executive Board Member Executive Board Member
for Development of L&P for Strategy and
Activities Organizational
Development
ORGANIZAâNÍ SCHÉMA CENTRÁLY
ALM Motor
Insurance
Life Assurance
Operations Support
Life and Non-life
Policy
Administration
Alternative
Distribution
Consolidation CRM
Treasury Property &
Casualty
Insurance
Non-life and
Payment Systems
Development
Communications
Center
Sales of Personal
Lines
Accounting, Taxes,
and Financial
Reporting
Marketing
Non-life Risk
Analysis and
Control
Life and
Commission
Systems
Development
Payments Sales Management
Support
Controlling L&P Product
Development
Non-life Actuarial
Mathematics
IT Operations Personnel Sales Through
External Partners
Responsible
Actuaries
Life Product
Management
Sales of Business
Lines
CEO Lard Friese
Executive Board Executive Board Executive Board Executive Board Executive Board Executive Board Executive Board
Member for Member for Member for IT Member for Member for Sales Member for Member for
Investment Policy Business Risks Operations and Financial Marketing and Client
Human Resources Management Segmentation
Non-life Operations
Support
IT Strategy and
Architecture
Economics Regions Life Actuarial
Mathematics and
Analysis
PMV Product
Management
Underwriting Non-life Claims Agencies Property Insurance
Product
Management
ANNUAL REPORT 163
Executive Board Internal Audit Communications Risk Legal Program
Member for and Investigations and Compliance Management Office
Reinsurance and
International
Underwriting
Reinsurance
Administration
Office of the Czech
Nuclear Pool
164 ANNUAL REPORT 2006
Persons Responsible for the Annual Report
STATEMENTWe hereby declare that the information presented in this Annual Report is factual and that no material information has been omitted that could influence an
accurate and precise assessment of the issuer and the securities issued by it.
Ladislav Bartoníãek
Chairman of the Board of Directors
Jan JeÏdík
Member of the Board of Directors
AUDIT OF THE FINANCIAL STATEMENTSSince 1993, the Company's financial statements have been audited by KPMG âeská republika Audit, s.r.o. The audit of the 2006 financial statements was
completed on 30 March 2006.
ID: 49619187
Registered office: PobfieÏní 648/1a, 186 00 Prague 8
Statutory audit firm: no. 71
Auditor-in-charge: Franti‰ek Dostálek
License: no. 176
ANNUAL REPORT 165
DIRECTORY OF SELECTED COMPANIES OF THE âESKÁ POJI·ËOVNA FINANCIAL GROUP
âeská poisÈovÀa – Slovensko, akciová spoloãnosÈ
Address: Plynárenská 7/C, 824 79 Bratislava
Slovak Republic
Tel.: +421 258 276 666
Fax: +421 258 276 100
E-mail: [email protected]
Website: www.cps.sk
Penzijní fond âeské poji‰Èovny, a.s.
Address: Truhláfiská 1106/9, 110 00 Praha 1
Tel.: +420 221 109 111
Fax: +420 221 109 518
E-mail: [email protected]
Website: www.pfcp.cz
âeská poji‰Èovna ZDRAVÍ a.s.
Address: Litevská 1174/8, 100 05 Prague 10
Info-line: +420 841 111 132
Tel.: +420 267 222 515
Fax: +420 267 222 936
E-mail: [email protected]
Website: www.zdravi.cz
âP INVEST investiãní spoleãnost, a.s.
Address: PurkyÀova 74/2, 110 00 Prague 1
Info-line: +420 844 111 121
Tel.: +420 224 052 148
Fax: +420 224 052 273
E-mail: [email protected]
Website: www.cpinvest.cz
PPF banka a.s.
Address: Na StrÏi 1702/65, 140 62 Prague 4
Tel.: +420 221 611 310
Fax: +420 221 611 780
E-mail: [email protected]
Website: www.ppfbanka.cz
PPF Asset Management a.s.
Address: Na Pankráci 121/1658, 140 21 Prague 4
Tel.: +420 224 555 201
Fax: +420 224 555 304
E-mail: [email protected]
Website: www.ppf.cz
âe‰skaya strachovaya kompaniya o.o.o.
Address: ul. Pravdy 8, building no. 1, 125 040 Moscow
Russian Federation
Tel.: +7 (495) 785 82 00
Fax: +7 (495) 785 82 09
E-mail: [email protected]
Website: www.czins.ru
166 ANNUAL REPORT 2006
DIRECTORY OF âESKÁ POJI·ËOVNA HEAD OFFICE, REGIONS, AND AGENCY OFFICES
âeská poji‰Èovna a.s.
Registered office: Spálená 75/16
113 04 Prague 1
Head office: Na Pankráci 121
140 21 Prague 4
âP Client Services: +420 841 114 114
Assistance service for motorists: +420 224 557 004
Telephone: +420 224 051 111
Fax: +420 224 052 200
E-mail: [email protected]
Internet: www.ceskapojistovna.cz
Prague Region
Address: Regionální fieditelství
PurkyÀova 74/2
113 06 Prague 1
Tel.: +420 224 052 113
Agencies: Revoluãní 2, Hráského 2231, ·tefánikova 10, Molákova 11, Sokolovská 55, Litevská 8, Kaplanova 8
South Bohemia Region
Address: Regionální fieditelství
PraÏská 1280
370 04 âeské Budûjovice
Tel.: +420 387 738 111
Agencies: âeské Budûjovice, Jihlava, JindfiichÛv Hradec, Strakonice, Tábor, Tfiebíã, Îìár nad Sázavou
West Bohemia Region
Address: Regionální fieditelství
Slovanská alej 24A
326 63 PlzeÀ
Tel.: +420 377 414 111
Agencies: Bene‰ov, Beroun, DomaÏlice, Karlovy Vary, Kladno, Klatovy, PlzeÀ, Pfiíbram, Tachov
North Bohemia Region
Address: Regionální fieditelství
Felberova 4/8
460 95 Liberec
Tel.: +420 485 344 611
Agencies: âeská Lípa, Dûãín, Chomutov, Liberec, Litomûfiice, Mûlník, Mladá Boleslav, Most, Rakovník, Teplice, Turnov,
Ústí nad Labem
ANNUAL REPORT 167
East Bohemia Region
Address: Regionální fieditelství
nám. 28 October 20
500 02 Hradec Králové
Tel.: +420 466 814 111
Agencies: Hradec Králové, Chrudim, Jiãín, Kolín, Náchod, Nymburk, Pardubice, Svitavy, Vrchlabí, Vysoké M˘to
South Moravia Region
Address: Regionální fieditelství
Ra‰ínova 7
601 66 Brno
Tel.: +420 542 181 111
Agencies: Blansko, Brno, Bfieclav, Hodonín, KromûfiíÏ, Uherské Hradi‰tû, Vy‰kov, Zlín, Znojmo
North Moravia Region
Address: Regionální fieditelství
28 October 60
702 00 Ostrava
Tel.: +420 596 271 111
Agencies: Fr˘dek-Místek, Havífiov, Hranice, Nov˘ Jiãín, Olomouc, Opava, Ostrava, ·umperk, Vsetín
Company name: âeská poji‰Èovna a.s.
Registered office: Spálená 75/16, 113 04 Praha 1
Head office: Na Pankráci 121, 140 21 Praha 4
Phone: +420 224 051 111
Fax: +420 224 052 200
E-mail: [email protected]
Internet: www.ceskapojistovna.cz
Bankers: Komerãní banka, a.s.
account No.: 17433-021/0100
Consultation of content, design, and production:
© B.I.G. Prague, Hill & Knowlton Associate, 2007
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