2017 ……………… ANNUAL REPORT

1

0. Social and Management Bodies

2  Social and Management Bodies Governing Board Chairman José Antonio Alustiza Usandizaga

Deputy Chairman Miguel Mª Tolosa Albistur

Secretary Luis Garitano Sánchez

Ordinary members Javier Gorroñogoitia Iturbe Mikel Ugarte Murua Iñigo Eizaguirre Illarramendi Javier Rivera Orbañanos José Antonio Martínez Angulo Mª Cruz Guridi Gurrutxaga Roberto Iñíguez de Onsoño Lafuente Juan Urrutia Txopitea Virginia Nila Toña Zugazaga

Supervisory Board Belén Cortabarría Acha José Félix Álvarez Suárez José Antonio Unanue Etxeberria

Management

Managing Director Luis Mª Ugarte Azpiri Investments Manager Javier Urtasun Zabalo Provisions Manager Koldo Ugaldea Loizate General Secretariat Manager Carlos Maza Guzmán Affiliations, Contributions and Pensions Manager Alicia Bollar Mendizabal IT Manager Lucio Gallastegui Ceciaga Personnel and General Services Manager Maider Biteri Ugarriza

3 1. Introduction

4 Introduction

The history of LagunAro, EPSV de Empleo (hereinafter, LagunAro, EPSV or LagunAro) goes back many years. In fact, in 2017 we celebrated 50 years since LagunAro was established with the current model, in 1967. In any case, the idea, or the embryo, of LagunAro was created in 1959 when, thanks to the vision of Mr José María Arizmendiarrieta. What at first appeared to be a social drama, after dismissal of the cooperative members from Social Security at the time, became an opportunity to found an Entity based on the values and principles of the cooperative model.

Since its inception, LagunAro has always two aspects, which can not be separated at any time. On the one hand, it plays a key role as the backbone and protector of the social security needs of the members of the cooperatives (illness, unemployment, retirement, etc.). On the other hand, the effective, responsible and professional economic-financial management of the resources available is necessary at all times, in order to ensure the offering, in appropriate conditions, of the social coverage to the group.

This economic-financial aspect is of particular importance in terms of the coverage of long-term pensions, financed through the capitalisation system, insofar as the correct management of resources is crucial for obtaining the necessary financial-actuarial balance. To this day, LagunAro, EPSV is a very important agent in our environment due to the volume of people that are under the Entity’s social coverage and the Equity Fund maintained for the coverage of pensions (€6,477 million), so that the level of demand in its management is very high.

This Annual Report aims to capture the management and developed recorded by LagunAro, EPSV during the year 2017 and explain it to all the agents with whom this Social Security Entity interacts (Cooperatives, mutualists, pensioners, institutions, society in general, etc.).

The information presented, despite the special attention to the events that took place in 2017, is part of a broader time horizon that also allows us to obtain a multi-year vision, which is so important for a Social Security Entity as LagunAro, EPSV.

In general, the management carried out at LagunAro, EPSV during the year 2017 can be considered as positive.

Regarding the Entity’s pension system, it should be emphasised, first, that the financial returns obtained from the management of the investments, including the changes in the value of the assets that we hold in our portfolio, have been higher than those necessary, with the subsequent strengthening of the equity affected by the coverage of our pensions. In turn, moderate inflationary pressures have enabled lower actuarial needs (for a hypothesis used in 2017 of the CPI at 1.4%, the actual figure has ended at 1.1%).

In this context of higher-than-expected return generation and lower actuarial needs, the Security or Solvency Margin has been strengthened, standing at 15.2% (14.3% as of late 2016).

In the field of distribution or short-term benefits, in 2017, the behaviour of the three main benefits was uneven. While the benefits of Health and Employment Assistance have evolved better than foreseen in the Management Plan, the Temporary Disability benefit has not reached the absenteeism target established (in fact, instead of being reduced compared to the absenteeism reported in 2016, it has increased).

In the specific case of the Health Assistance benefit, the assessment to be made regarding its evolution is very positive, as the level of expenditure has been below the forecasts and the figures reported in 2016, as well as the progress being achieved in the processes of improving the efficiency and management of this benefit.

5 Regarding the Employment Assistance benefit, the evolution maintained in 2017 can also be described as positive. Although the volume of expenditure remains high, with reductions being reported year after year, while the Fund that maintains this benefit is increasing, which should provide us with better conditions to face the coming years, in which it is estimated that the level of expenditure should remain high. In fact, as of late 2017, the aggregate Fund was already higher than the kept by this benefit at the beginning of the economic crisis in 2008.

This good performance is due, among other things, to the large number of temporary relocations that have been maintained, which have allowed us to keep reducing the incidence of effective unemployment, while continuing to manage definitive solutions. Both factors have contributed to mitigating the social impact of the complex personal situation in which the members of the Cooperatives affected by unemployment and liquidation are experiencing and expenses have been lower than those of the previous year.

In turn, in the case of Temporary Disability, the absenteeism rate as of 2017 was slightly above that of 2016, so it has not been possible to break the upward trend undertaken in 2014. In any case, this increase has been lower than that registered in the public system.

Finally, we should not forget that, in 2017, after eight consecutive years of gradual reduction of the group of active mutualist entities, this decreasing trend has been broken and there has been an increase in it, supported by the incorporation of staff in certain significant cooperatives, which is an indicator that the situation of the cooperatives is improving year after year.

6

2. Protected group

7

 Protected group

Policyholders At year-end, the group of active contributors of LagunAro, EPSV amounted to 28,534 policyholders. Of this group, the bulk (27,986 contributors) are the active policyholders of the 127 cooperatives affiliated with LagunAro, EPSV. Simultaneously, a group of 548 people are not currently active in their cooperatives and maintain, at their expense, contributions at LagunAro (contribution surpluses, capitalisation contributions, etc.).

As an innovation, it should be noted that after eight consecutive years of gradual reduction of the collective, 2017 has witnessed an increase in it, supported by the incorporation of staff in certain significant cooperatives.

These policyholders are distributed into four contribution types:

 Interim Mixed Model (Rate 2): only applies to policyholders born before 31.12.1950 and 31.12.1960 respectively. Contributions to the Public System, the Special System for Self-Employed Workers (RETA), are made at the minimum rate. This is a closed group that will gradually be reduced each year.  Standard Mixed Model (Rate 3): applicable to indefinite policyholders born after 1.1.1961 and any born before this date who decided to opt for this contribution method. The pension contribution rate is distributed proportionally between the Public System (60%) and LagunAro (40%).  Special Model (Rate 4): special method, applicable in very specific cases, in which no contributions are made to the LagunAro pension system, and contributions are made exclusively for this type of services to the Public System at real base rates. In any case, this group does contribute for the LagunAro distribution allowances.  Specific Duration Policyholder (MDD): the contribution and distribution between LagunAro and the RETA is equal to that of the Standard Mixed Model, although the services to which policyholders are entitled are adapted at LagunAro to the specific duration of the relationship with the company.

Distribution of active policyholders by contribution method 2017 evolution Models 31.12.2016 Registra- Cancellati 31.12.2017 Difference Transfers tions ons Interim Mixed (Rate 2) 2,339 13 -499 0 1,853 -486

Standard Mixed (Rate 3) 22,817 1,199 -1,146 140 23,010 193

Special (Rate 4) 2,133 326 -121 12 2,350 217

Specific Duration 535 485 -95 -152 773 238 Active policyholders in coop. 27,824 2,023 -1,861 0 27,986 162 Capitalisation Contributions 390 71 -102 359 -31 Family Care Leave 153 440 -451 142 -11 Other leave 46 34 -33 47 1 TOTAL 28,413 2,568 -2,447 0 28,534 121

8 In turn, a total of 3,767 policyholders are under suspension.

31.12.2016 Registrations Cancellations 31.12.2017 Difference

Under Suspension 3,492 868 -593 3,767 275

Active policyholder evolution 2007 – 2017 32.000 31.393 30.757 31.000 30.476 29.973 30.000 29.540 29.531 29.186 29.000 28.402 27.986 27.970 27.824 28.000

27.000

26.000 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Distribution of active members at 31.12.2016 by sex and age range.

293 > 60 539

1.243 55 - 59 1.842

1.821 50 - 54 2.298

2.853 45 - 49 3.162

2.978 40 - 44 3.678

1.761 35 - 39 2.672

775 30 - 34 1.210

250 WOMEN 25 - 29 530 MEN 27 < 25 54

0 500 1.000 1.500 2.000 2.500 3.000 3.500 4.000 Sex Number % Average age Men 15985 57.1 45.2 Women 12,001 42.9 45.5 TOTAL 27,986 45.3

9 Distribution of cooperatives and their policyholders by community at 31.12.2017

Community 1 Community 3 ABANTAIL 18 EROSKI 8,152

ALECOP 32 Number of policyholders 8,152 ARIZMENDI 170 ATEGI 11 Community 4 AUZO-LAGUN 208 AGRUPACION DE FUNDICION Y UTIL 10 BEHI-ALDE 16 AURRENAK S. COOP. 97 CAJA LABORAL 1.989 CICA S. COOP. 2 DIV.INGENIERIA Y SERV.EMPRESAR 2 COINALDE S. COOP. 34 EGUZKIGRAF 9 DIVISION DE CONSTRUCCION.S.COO 2 ERKOP 2 ELECTRA VITORIA, S.COOP. 196 ETXELAN 20 EMBEGA S. COOP. 85 HUHEZI 76 GOROS S.COOP. 39 IKERLAN 154 R. P. K. S. COOP. 119 ISEA 6 SAKANA S. COOP. 151 L.K.S. INGENIERIA 150 URSSA S. COOP. 5 LAGUNARO SERVICIOS 67 ZORTZIOK S. COOP. 97 LANA 38

LKS 142 Number of policyholders 876

MIK 11 MONDRAGON AUTOMOCION 2 MONDRAGON CENTRO DE PROMOCION 5 Community 5 MONDRAGON GOI ESKOLA POLITEKN 217 ULMA AGRICOLA 27 MONDRAGON LINGUA 45 ULMA C Y E 513 MONDRAGON SIST.DE INFOR. 25 ULMA CONVEYOR COMPONENTS 38 MONDRAGON UNIBERTSITATEA 6 ULMA EMBEDDED SOLUTIONS 12 MONDRAGON 60 ULMA FORJA 195 MU ENPRESAGINTZA 58 ULMA HORMIGON POLIMERO 144 OSARTEN 20 ULMA MANUTENCION 236 POLO DE INNOVACION GARAIA 2 ULMA PACKAGING 654 SARETEKNIKA SERVICIOS GLOBALES 27 ULMA PACKAGING TECHNOLOGICAL 32 TXANTXIKU IKASTOLA 57 ULMA SERVICIOS DE MANUTENCION 116 ULMA AGRICOLA 27 Number of policyholders 3,645 Number of policyholders 1,967

Community 2 Community 6 ALTSASUKO 25 BIURRARENA S. COOP. 14 BERRIOLA 6 GISAT S.COOP. 30 COPRECI 547 LATZ S. COOP. 27 EDERTEK 32 OIARSO S. COOP BEXEN 35 FAGOR AOTEK 26 ORONA S. COOP. 1.517 FAGOR ARRASATE 603 SIADECO S. COOP. 7 FAGOR AUTOMATION 319 TAJO S. COOP. 79 FAGOR EDERLAN 1627 Number of policyholders 1,709

10 FAGOR ELECTRONICA 161 FAGOR INDUSTRIAL 302 GALBAIAN 14 KONIKER 21 MONDRAGON ASSEMBLY 113 MONDRAGON COMPONENTES 4 UDALAITZ 925 Number of policyholders 4,729

Community 7 Community 10

ANARDI GOBEO 114 BATZ 639 DOMUSA CALEFACCION 160 CIKATEK 21 ECENARRO 67 CIKAUTXO 463 GERODAN 4 EIKA 342 GOIZPER 144 EKIN 149 LAN-MOBEL 97 HERRIOLA 4 MATZ-ERREKA 210 IKASTOLA ELEIZALDE 27 UROLA 41 ISOLEIKA 3 ZUBIOLA 32 KIDE 91 Number of policyholders 869 LEA-ARTIBAI 50 LEARTIKER 24 Community 8 MAIER 729 AMPO 409 MAIER TECHNOLOGY CENTRE 97 EDERFIL BECKER 125 MIBA 14 EREDU 46 Number of policyholders 2,653 HERTELL 11 IRIZAR 675 KENDU 24 ORKLI 432 Number of policyholders 1,722

Community 9 Community 11 DANOBAT GROUP 16 BATZ ZAMUDIO 57 DANOBAT 359 CONSONNI 27 DIKAR 82 ETORKI 38 GOIMEK 68 GUZTIOK-BAT 20 GOITI 51 M B SISTEMAS 48 IDEKO 75 MATRICI 306 ORBEA 132 MCCGRAPHICS 56 OSATU 18 ONDOAN 51 P. M. URRUZUNO IKAS. 9 POLIT.IKASTEG.TXORIERRI 20 SORALUCE 209 SOIETXE 16 DANOBAT GROUP 16 SOTERNA 6 Number of policyholders 1,019 Number of policyholders 645

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Distribution of Policyholders by Activity Sector as at 31.12.2017

7,1% 29,2% Financial Industry Services 7,2% Distribution 56,5%

Pensioners The group of pensioners (liabilities and beneficiaries) experienced a net increase of 456 people during the year, reaching a total of 13,506 people at the end of 2017 (10,946 liabilities and 2,560 beneficiaries).

Distribution of Pensioners by type of pension

31/12/2016 Registrations Cancellations 31/12/2017 Difference Retirement 9,784 614 -227 10,171 387 Permanent Incapacity 664 82 -107 639 -25 Mayor 35 2 -3 34 -1 Absolute 330 38 -41 327 -3 Qualified 299 42 -63 278 -21 Other (*) 128 36 -28 136 8 Passives 10.576 732 -362 10.946 370 Widowhood and orphanhood 2.421 157 -70 2.508 87 Other Beneficiaries (**) 53 3 -4 52 -1 Beneficiaries 2.474 160 -74 2.560 86 Pensioners 13.050 892 -436 13.506 456 * Pensioners receiving supplemented Pensions from the 1985 process for Policyholders under Suspension and Determined Cancellation. ** Beneficiaries receiving supplemented Pensions from the 1985 process of Policyholders under Suspension and Determined Cancellation.

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Regarding the group of PASSIVES, the largest net increase in 2017 is registered in the group of ordinary retirement pensioners (+387), as a result of the increase of 614 new pensioners and the cancellation due to death for 227 pensioners. The group of pensioners due to Permanent Incapacity, as a whole, saw a net decrease of 25 pensioners during the year. 82 new pensions were allocated (2 for Major Disability (GI), 38 for Absolute Permanent Incapacity (IPA) and 42 for Qualified Complete Permanent Disablement (DPTC)) while the cancellations for reaching retirement age or due to death came reached 107 (3 for GI, 41 for IPA, and 63 for DPTC). As regards the group of BENEFICIARIES, has increased in the year by 86 people. In particular, 160 new pensions were allocated, 140 of which come from the death of retired pensioners and 20 from active mutualists, while 74 deaths have occurred due to death during the year.

Pensioner development 2007 – 2017

16.000 Retirement Widowhood Perm. Incapacity Other Pensioners Total

14.000 13.506

13.050

12.559

12.009

12.000 11.448

10.929

10.334

10.171

9.784

9.784

10.000 9.345

9.226

8.898

8.650

8.427

8.166

7.969

7.456

8.000

6.987

6.465 6.033

6.000 5.710

4.000

2.560

2.474

2.380

2.218

2.112

2.020

1.936

1.851

1.756 1.664 2.000 1.574 672 738 793 801 794 788 750 734 697 664 639 210 215 212 145 148 152 159 159 137 128 136 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

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Health Assistance Beneficiaries The collective of ordinary beneficiaries of Health Assistance (active members and their children under 23 years of age or over 23 years who are disabled for work) amounts to 56,622 people as of late 2017, representing an increase of 430 people compared to the previous year. Of the total group of beneficiaries, 49.74% correspond to mutualists (28.163) and the remaining 50.26% to their beneficiary children (28.459). To the extent that the increase in children (+282) has been greater than that of active members (+148), the beneficiary ratio per mutualist has increased slightly with respect to the previous year, going from 2,006 to 2,011.

Evolution of Health Assistance Beneficiaries 2008-2017

Policyholders Sons – Daughters

Group 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Beneficiaries Index 1,74 1,78 1,81 1,85 1,88 1,91 1,95 1,97 2,00 2,01

14 2010 2011 2012 2013 2014 2015 2016

2. Allowances

15 Allowances

The total allowances granted by LagunAro and charged to the mandatory share throughout the year came to 248.8 million euros, with an increase of 2.6% over the figure reached in 2016. The allowances funded by the Distribution System and paid to active policyholders and their beneficiaries, represent 28.49% of the total, having experienced a decrease of -2.3% compared to 2016, largely due to the 9.8% reduction reported in the Employment Assistance benefit. The allowances financed by the Capitalisation System represent 71.6% of all allowances and showed an increase of 4.6% compared to 2016, mainly due to the increase in the number of pensioners and the revaluation of 2017 pensions, which in most cases was 1.12% (70% of the CPI increase for 2016, which was 1.6%).

Allowances -Thousand euros-

2016 2017 % Increase DISTRIBUTION Assistance 605 600 -0.83 Disabled assistance 381 397 4.20 Death grant 224 203 -9.38 Family allowances 3,585 3,387 -5.50 Maternity 2,236 1,746 -21.47 Paternity 600 1,015 69.00 Risk during pregnancy 748 617 -17.51 Employment subsidy 25,666 23,150 -9.80 Health assistance 11,807 11,623 -1.56 Temporary incapacity 30,684 31,959 4.16 TOTAL DISTRIBUTION 72,347 70,719 -2.25

CAPITALISATION Retirement and Widowhood Pensions 158,026 158,026 5.35 Pensions and Permanent Incapacity Expenses 11,862 11,862 -4.50 Specific Cancellation 255 255 -14.12 TOTAL CAPITALISATION 170,143 170,143 4.64

TOTAL ALLOWANCES FROM LagunAro (*) 242,490 242,490 2.58

(*)Does not include allowances granted to LagunAro policyholders by the Special System for Self-Employed Workers.

16 Health Assistance

Spending on the various modes of the Health Assistance service came to €11.62 million during the year, showing a reduction of 1.56% compared to 2016.

This reduction has occurred as the two most significant sections (“Hospital Centre Services” and “Specialities and Paediatrics”), which account 55% and 32% of the total expenditure, respectively, have been reduced in 2017 with respect to the previous year (-2.45% and -3.17%, respectively). On the other hand, the section on “Insurance Groups, Super Speciality, and Miscellaneous” presented an increase of 6.61%.

Continuing the trend of the last years, the allowances paid out during the year give an average consumption per beneficiary and month of €17.07, lower than the forecast consumption for this year (€18.50) and that recorded in 2016 (€17.58).

The current health context is characterised by a growing trend towards the chronification of the care processes (particularly, oncological cases), a marked tendency to concentration and bargaining power of hospital providers, development of new intensive diagnosis and treatment categories in technology, and the extension of the use of prosthetics and specific materials of high economic cost.

In spite of these factors, which exert an upward pressure on expenditure, it was possible to maintain the decreasing trend of recent years thanks to an efficient management of agreed prices, which this year, for the first time, have been negotiated with Clinics on a multiannual basis and a remarkable moderation of the use of the health services granted.

-Thousand euros-

Health Assistance Service

2016 2017 % increase

Specialities and Paediatrics 3,750 3,632 -3.17 Hospital Services 6,603 6,441 -2.45 Insurance groups, Super-speciality and Various 1,454 1,550 6.61

TOTAL 11,807 11,623 -1.56

AVERAGE CONSUMPTION PER BENEFICIARY AND MONTH 17.58 17.07 -2.89

17 Deviation by Policyholder Community

The system of Bonuses and Penalties regulated in the Service Regulations has the purpose of achieving a certain level of responsibility in consumption of the service within the Policyholder Communities and is based on the establishment of a monthly quantity that can be consumed by each beneficiary.

This system, in particular, states that the Communities that do not reach the calculated consumable spending level receive a bonus of 50% of the difference between the calculated average spending and the spending that has taken place.

Meanwhile, those Communities that exceed the calculated average spending have a penalty imposed of 50% of the difference between the calculated average spending and the spending that has taken place, as long as it does not exceed 110% of the calculated average spending. If the spending that has taken place exceeds 110% of the calculated average spending, the percentage penalty on this excess is increased to 75%.

As previously mentioned, the allowances paid out during the year give an average consumption per beneficiary and month of €17.07, equivalent to 92.25% of the amount provided as the consumable for the year (€18.50/month) which has made the bonuses higher than the penalties.

The graph that appears below shows the average spending performance per beneficiary in each of the eleven Policyholder Communities and a comparison with the calculated average spending.

Health Assistance Consumption by Community 2017. (Average spending per beneficiary and month)

Temporary Incapacity

The rate of absence due to Temporary Incapacity in 2017 was 4.96%, a result that showed an increase of 1.0% with respect to the rate reached in the previous year (4.91%).

Despite the increase that took place during the year, the absenteeism rate is within the target parameters stated in the Strategic Plan 2017-2010, which placed the target absence rate within a range of 4.60% / 5.00%, although the trend of the last four years is negative, after the positive result recorded between 2010 and 2013.

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The economic measures introduced in 2011, together with those adopted in the management area, have had a clear effect on the absence rate and on the economic results of the allowance, making it possible to maintain the absence rate in recent years at the levels set out in the Strategic Plan. In any case, the recent trend is causing the rate of absenteeism to approach the maximum limit of 5.00% established in the Strategic Plan, and the correct management of this variable in the coming years should be critical, provided that it does not continue to grow.

The economic measures introduced in 2011, together with those adopted in the management area, have had a clear effect on the absence rate and on the economic results of the allowance, making it possible since 2012 to maintain the absence rate in the maximum limit of 5.00%. In any case, the recent trend is causing the rate of absenteeism to approach the maximum reference of 5% and the correct management of this variable in the coming years should be critical, provided that it does not continue to grow.

Spending on the allowance came to €31.96 million, an increase of 4.16% compared to the previous year.

Temporary Incapacity Allowance- -Thousand euros-

Item 2016 2017 % increase

Illness 26,783 27,534 2.80 Occupational Accident 2,267 2,829 10.20 Non-Occupational 10.46 Accident 1,271 1,404 Sundry Expenses 62 193 209.88

Total 30,684 31,959 4.16

Number of hours and absence rate

Number of Hours Absence rate

2016 2017 % Increase 2016 2017 % Increase Illness 2,005,220 1,983,874 -1.06 4,337 4,309 -0.65

Occupational 190,794 206,427 8.19 0,397 0,448 12.85 Accident

Non-Occupational 79,793 91,674 14.89 0,173 0,199 15.03 Accident

Total 2,275,807 2,281,975 0.27 4,907 4,956 1.00

19 Temporary Incapacity Allowance: Absence rate

Non-Occupational Occupational Illness Temporary Accident Accident Incapacity

Deviation by Policyholder Community

This allowance also establishes a system of Bonuses and Penalties, as regulated in the Service Regulations, which is for the purpose of achieving a certain level of responsibility of use, under the same terms as in the Health Assistance allowance.

In this case, a calculated average spending level is established for each Policyholder Community according to its average level of advance payments and the partial fee for funding this allowance, set according to the expected absence rate, which is compared with the real spending by each of them in order to determine whether they are due a bonus (50% of the savings generated) or any of the established penalty levels (50% of the deviation in the 100%-110% range and 75% in the part that exceeds 110%).

In this respect, it should be noted that, in 2017, as a result of the negative change in the absenteeism rate, the penalties to be passed on to the Cooperatives (€3.26 million distributed among 7 Communities) have exceeded the bonuses to be refunded (€1.28 million, to be distributed among 4 Communities).

The percentage comparison between the spending by each Policyholder Community and the average spending allocated to each of them in accordance with the criterion mentioned, is shown in the following graph:

20 Temporary Incapacity Consumption by Community 2017. (%Real Spending/ Consumable Spending)

Family Allowances

This section covers allowances related to the family circumstances of the policyholders, in which the allowance from LagunAro, EPSV is calculated as the supplement necessary so that, together with the part received from the Social Security, it reaches 100% of the Consumption Advance.

Specifically, these are the allowances for Maternity, Paternity, Risk during pregnancy, Risk during breastfeeding and Caring for children affected by cancer or another serious illness.

In the case of Maternity, the number of open files decreased by 28.87%, while the number of paid hours in the year grew by 25.71%, increasing the accumulated expense by 21.47%.

Regarding Paternity, the reduction in the number of cases was 8.33%. On the contrary, the number of paid hours increased by 74.76%, due to the extension of the duration of this benefit (from 14 to 28 days) that came into force on 1 January 2017, which translates into an increase of 69.26% in aggregate expenses.

The chapter on Risks and Subsidies (including Risk during Pregnancy, Risk during Breastfeeding, and Care for Children Affected by Cancer) shows a decrease in the number of cases by 17.99%, which causes a reduction in the expense by 17.54%, with a different behaviour in its different sections (the cost of Care for Children Affected by Cancer or serious illness was increased, while that of Risk during Pregnancy and Risk during Breastfeeding decreased).

21 Allowances allocated and hours compensated

Number of allowances allocated Number of hours compensated 2016 2017 % Increase 2016 2017 % Increase

Maternity 485 345 -28.87 255,970 190,155 -25.71

Paternity 660 605 -8.33 49,750 86,942 74.76

Risks and 139 114 -17.99 105,143 87,483 -16.80 Subsidies

Allowances for Maternity, Paternity and Risks and Subsidies (Annual spending) -Thousand euros-

2016 2017 % Increase

Maternity 2,236 1,756 -21.47

Paternity 599 1,015 69.26

Risks and Subsidies 748 617 -17.54

Number of allowances allocated for Maternity, Paternity and Risks and Subsidies 2007-2017

Maternity Paternity Risk and Subsides

22 Employment subsidy

Spending on the various types of Employment Subsidy reached €23,15 million during the year.

The impact generated by the insolvency and liquidation situations of some cooperatives in previous years continues to demand important support in this area and, thus, that spending remains high, despite a decrease year after year. Thus, the indicated 23.15 million expenses in 2017 imply a reduction of 2.5 million over those reached in 2016, which means a reduction of 9.80%.

The uncertainty existing regarding economic trends and, therefore, for business and employment, have not prevented an exemplary response from the cooperatives as a whole, maintaining maximum relocation levels which, together with continuity in the management of other solutions, has made it possible to continue to reduce the rate of effective unemployment to minimum levels.

Nevertheless, there are still a significant number of people from cooperatives who are unemployed or are in the process of liquidation, for whom we have to continue to manage solutions, both temporary (provisional relocation to other cooperatives) and definitive, through this allowance.

Specifically, the partners affected by liquidation or structural unemployment processes without a definitive solution had a reduction in the year from 855 to 785, despite the fact that, throughout the year, 95 mutualists from Edesa Industrial-CATA have been incorporated into the group of partners in structural unemployment. Regarding definitive solutions, 166 partners have been answered, with 75 final relocations completed this year, as well as the 37 early retirements, 11 compensations, and the 43 cancellations by other types of solutions (leave of absence, retirement, Permanent Incapacity, etc.).

In this sense, 2017 can be considered as another positive year, insofar as, in addition to the definite solutions materialised as pointed out, the volume of provisional relocations has remained high, which has meant that the number of people who receive the Unemployment benefit has been decreasing throughout the year, with a subsequent impact on spending in this form of benefit, which is significantly reduced compared to the previous year (-45.13%).

When analysing the different modes of the benefit, we notice that Early Retirement is the one that has continued to demand the largest volume of resources in 2017, reaching €11.13 million. This figure is lower than that of the previous year (12.47 million). Most of this spending corresponded to early retirements approved in previous years, which have a duration of several years.

In 2017, unlike in previous years, in which the second item with the highest volume of expenses was Provisional Relocation, the second-ranked item was Definitive Relocation (4.81 million), after an increase of more than 32 %. In this sense, it should be noted that the regime of the “Financial Assistance for Definitive Relocation” came into force in 2015, replacing the amount of the fixed amount paid in a single payment for a bonus on the contribution by the recipient Cooperative to LagunAro, EPSV of the same amount, which is distributed in thirty-six monthly instalments.

As for the cost of Provisional Relocation (4.76 million), it has been reduced by 6.30% compared to 2016, due to the lower number of people under management as a consequence of the definitive solutions that are being achieved.

In turn, the Unemployment benefit, which includes the modalities of effective unemployment and mobile calendar, has recorded an expenditure of 1.89 million € in 2017, with a decrease of 45.13% compared to 2016, as a result of the good management carried out by the cooperatives in the relocations and the reduction of the mobile calendar files.

Finally, the financial contribution of LagunAro to finance the Training Plan for unemployed staff was €0.13 million in 2017.

23 Employment Subsidy Allowance -Thousand euros-

2016 2017 %Increase

Unemployment 3,448 1,892 -45.13 Temporary Relocation 5,076 4,756 -6.30

Definitive Relocation 3,639 4,805 32.04

Pre-retirement 12,472 11,126 -10.79 Compensation 855 439 -48.65 Professional Retraining 177 133 -24.86

TOTAL 25.666 23,150 -9.80

At the end of 2013, an Extraordinary General Meeting was held at which, amongst other matters, an increase in the fee that finances spending on this allowance was approved, increasing from 1 January 2014 from 3% to 6.50%. The purpose of this measure was to increase the flow of income in a situation of high spending levels to be expected after such a significant and large cooperative such as Fagor Electrodomésticos declaring bankruptcy.

In 2014, the first full year after this event, the new revenue, together with the good performance of the relocations, made it possible to balance the budget of income and spending without draining resources from the Employment Subsidy Fund. In the years 2015 and 2016, the maintenance of the fees at 6.5%, alongside the significant reduction in spending (-25% in 2015 and -21% in 2016), which led to notable surpluses (11.29 million in 2015 and 18.59 million in 2016). As a result of this positive evolution, the General Assembly approved in 2017 the reduction of the fee, as from 1 April, from 6.5% to 6.0%, which has not been an obstacle to generating a new positive balance in 2017, for an amount of €20.15 million

This has enabled the Employment Assistance Fund to reach €77.44 million, ranking above the highest point it reached just before the start of the economic crisis in 2008 (69.51 million). This situation will provide us with better conditions to face the coming years, in which expenditure is expected to remain relatively high thanks to the commitments already made and the number of partners pending final solutions.

Evolution of the Employment Subsidy Fund -Thousand euros- 31.12.2016 31.12.2017 Variation 2016

Employment Subsidy Fund 57,289 77,438 +20,149

24 Employment Subsidy Balance 2007-2017 -Million euros-

Retirement and Widowhood

Las pensiones de Jubilación y Viudedad abonadas en 2016 han ascendido a 166,5 millones de euros, lo que representa un incremento del 5,5% sobre las cuantías abonadas en 2016.

Amount of the Retirement and Widowhood Allowances 2007-2017 -Million euros-

25

Retirement

In 2017, in the Retirement pensioners group there were 614 registrations and 227 deaths. Of the new pensioners, 95 accessed the allowance at 65 years of age and 519 by taking early retirement, with 69 of them opting for redistribution of the pension, forming at this time a combined group of 1,324 people who have opted for this option.

With regard to statutory retirement, the average pension for the group retiring at the age of 65 reached €1,494/month, to be collected in twelve payments, €1,071/month (12 payments) for those taking early retirement without redistribution, and €1,071/month (12 payments) for those taking early retirement with redistributed pension.

The following table includes the data on the number and average of the pensions paid to the retirement pensioners group.

LagunAro Retirement group and average pensions Retirement 65 years Early Retirement Ear Ret Redistributed

31.12.2016 31.12.2017 31.12.2016 31.12.2017 31.12.2016 31.12.2017

Number of pensioners 1,477 1,502 7,037 7,345 1,270 1,324 Average age at year-end 75.5 75.4 71.6 71.4 68.5 68.7 Average Pension 1,477 1,494 1,044 1,071 1,088 1,071 (EUR/month)

26

Widowhood and orphanhood

The group of widowhood and orphanhood beneficiaries had a total of 160 new registrations and 74 cancellations. Of the 160 registrations, 140 resulted from the death of retirement pensioners and the other 31, from the death of active policyholders. The average pension of the beneficiaries of statutory widowers amounted to €933/month, to be collected in twelve payments, while the one for orphanhood is €727/month, also to be collected in twelve payments. Details of the composition and evolution of the group of pensioners for Widowhood and Orphanhood is shown in the following table:

Widowhood and Orphanhood Group and Average Pensions Widowhood Absolute orphanhood

31.12.2016 31.12.2017 31.12.2016 31.12.2017

Number of pensioners 2,402 2,488 19 20 Average age at year-end 74.7 75.4 43.2 43.5 Average Pension 909 933 718 727 (EUR/month)

Permanent Incapacity

The different categories of the allowance led to overall spending of €11.3 million, which represents a reduction of 4.5% compared to the previous year. Pensions for Permanent Incapacity, in their different categories (Absolute, Major Disability and Qualified Complete Permanent Disability) represent, with €7.4 million, 65.3% of the total spending. The financing of future Retirement and Widowhood pensions of these pensioners represents 33.7% of the benefit (3.8 million), the remaining 1.0% (€0.12 million) corresponding to other concepts such as Work Disability and After-Effects. Below is a detailed breakdown of the service both of the group and their average pensions.

Permanent Incapacity Allowance -Thousand euros

2016 2017 % Variation Permanent Incapacity Pensions 7,872 7,396 -6.05 Retirement and Widowhood Fees 3,869 3,815 -1.41 Other expenses 121 118 -2.54 Total 11,862 11,328 -4.5

27 Group and average pensions

Qualified Complete Absol. Perm. Incapacity Major Disability Permanent

Disablement(1) 31.12.2016 31.12.2017 31.12.2016 31.12.2017 31.12.2016 31.12.2017

Number of pensioners 330 327 35 34 299 278 Average age at year-end 57.4 56.1 53.8 54.1 62.0 61.0 Average Pension

(EUR/month) 1,079 1,061 1,563 1,684 709 696 (1) Does not include the complement paid by the Cooperative

28 Fees

Total proceeds during 2017 reached €323.8, of which €129.9 (40% of the total) were paid into the Special System for Self-Employed Workers and the remaining €193,9 million (60% of the total) into LagunAro: €95.1 million for funding of the distributed allowances and €98.8 million for the capitalisation allowances.

Thousand euros

2016 2017 % Diff. DISTRIBUTION

ASSISTANCE 601 628 4.49 Disability 395 419 Death 206 209 FAMILY ALLOWANCES 3,647 3,633 -0.38 Maternity 2,273 2,258 Paternity 687 688 Risks and Subsidies 687 687 EMPLOYMENT SUBSIDY (1) 43,783 41,640 -4.89 HEALTH ASSISTANCE 13,436 13,517 0.60 TEMPORARY INCAPACITY 30,552 31,290 2.42 ADMINISTRATION, MANAGEMENT COSTS 4,303 4,371 1.58 (2) Total DISTRIBUTION 96,322 95,079 -1.29 CAPITALISATION

RETIREMENT AND WIDOWHOOD 85,077 87,569 2.93 PERMANENT INCAPACITY 9,017 7,883 -12.58 SPECIFIC CANCELLATION 2,315 2,936 26.83 RATE 4 CONTRBUTION 269 389 44.61 Total CAPITALISATION 96,679 98,777 2.17 Total LAGUN-ARO FEES 193,001 193,856 0.44 Special System Self-Employed 128,779 129,895 0.87 Workers(3) TOTAL 321,779 323,751 0.61 (1) Does not include income derived from the financial performance of the positive balance on the balance sheet for the service, which in 2017 reached €1,658.3 Thousand euros. (2) It does not include the income derived from the financial income of the balance on the balance sheet of the distributed allowance other than those for Employment Assistance, which are charged to this account, amounting to €607.10 Thousand in 2017. (3) Exclusively incorporates the fees contributed by the cooperatives in favour of their partners, in accordance with the LagunAro system, but not any possible voluntary improvements paid for by the policyholders themselves.

29 The total fees managed by LagunAro (€193.9 million) decreased by 0.44% compared to the previous year (€193.0 million).

In this regard, it should be noted, on the one hand, that the group of mutualists has increased in 2017 compared to the previous year and, on the other hand, that the average level of advances has grown from 97.7% in late 2016 to 98.0% in late 2017, which means that the cooperatives have increased their advances, on average, above the inflation rate of 2016 (1.6%) with which the LagunAro, EPSV rate was updated in 2017.

In any case, in the distribution benefits, a 1.29% decrease was noted in the collection, mainly due to the reduction of half a point in the Employment Assistance rate for the month of April.

In the case of capitalisation benefits, revenues in 2017 were increased by 2.2% compared to 2016, due to the significant increase of 1.6% in the LagunAro rate in 2017, the increase in the rate, and the evolution of the group itself.

30 Evolution of fees La evolución de las distintas cuotas de la tarifa de referencia (Tarifa 3) en los últimos años para cada una de las prestaciones que conforman el sistema, medida en términos porcentuales sobre la base mensual de cotización, ha sido la siguiente: Contribution rate (new) 2013 2014 2015 2016 2017 ASSISTANCE 0.08% 0.08% 0.08% 0.09% 0.09% Disabled assistance 0.05% 0.05% 0.05% 0.06% 0.06% Death grant 0.03% 0.03% 0.03% 0.03% 0.03% FAMILY ALLOWANCES 0.64% 0.54% 0.54% 0.53% 0.53% Maternity 0.40% 0.34% 0.34% 0.33% 0.33% Paternity 0.10% 0.10% 0.10% 0.10% 0.10% Risks and Subsidies 0.14% 0.10% 0.10% 0.10% 0.10% EMPLOYMENT SUBSIDY 3.00% 6.50% 6.50% 6.50% 6.00% HEALTH ASSISTANCE 1.80% 2.10% 2.10% 2.00% 2.00% TEMPORARY INCAPACITY 4.50% 4.20% 4.20% 4.30% 4.30% ADMIN , MANAGEMENT COSTS 0.50% 0.60% 0.60% 0.60% 0.60% % Total Fee of monthly Consumption Advance (1) 10.52% 14.02% 14.02% 14.02% 13.52% PERMANENT INCAPACITY 5.05% 3.50% 3.50% 3.50% 2.75% RETIREMENT AND WIDOWHOOD 31.70% 30.75% 30.75% 30.75% 32.25% % Total Fee of 40% Month. Consumption Advance (2) 36.75% 34.25% 34.25% 34.25% 35.00% Special System Self-Employed Workers 26.70% 26.70% 26.70% 26.70% 26.70% % Total Fee of 60% Cons. Advance 14/12 (3) % Total Fee of annual Consumption Advance (4) 37.64% 39.78% 39.78% 39.78% 39.61%

In 2017, the consumption advances of the LagunAro contribution rate increased by 1.6% (2016 CPI increase), while the Employment Assistance rate was reduced by half a point (from 6.50% to 6.00%) and capitalisation rates were increased by 0.75 points, from 34.25% to 35.00%.

The combination of both factors resulted in a reduction of 0.43%, from 46.41% to 46.21%, partially offsetting the increase derived from the application of the 2016 CPI.

In the Retirement, Widowhood and Permanent Incapacity allowances, the base for contribution of each index is determined by 40% of the consumption advance of the LagunAro, EPSV Contribution Rates, while in the rest of the allowances it coincides with the monthly consumption advance allocated to the policyholder in their cooperative, and therefore their percentages cannot be added when applied to different bases.

Regarding the contribution to the RETA, the contribution base for each index is determined by 60% of the consumption advance from 14 to 12 in the LagunAro, EPSV Contribution Rates.

In any case, all of these percentages are applied to twelve monthly payments, compared to the fourteen that are usually received in the consumption advance: (4) = [(1) + (2) x 40%] x 12/14 + [(3) x 60%]

31

Health Assistance Special Beneficiaries

Group This group of Special Beneficiaries includes those people who, while not meeting the requirements for access to the LagunAro, EPSV mutualised Health Assistance allowances, maintain an association with this Entity (pensioners and their family members, as well as family members of active policyholders) and they are voluntary members of this system by paying a monthly fee. At year-end, the number of Special Beneficiaries reached 15,377, representing a slight increase of 528 beneficiaries compared to the previous year-end (+3.56%). In order to interpret the graph presented below, it should be noted that, as of January 2008, and as a result of the entry into force of the current Health Assistance model, many of the people who did not met the requirements established to become beneficiaries of full right thereafter were given access to the item of Special Beneficiaries.

Evolution of Special Beneficiaries 2006-2017

32 Allowances

This cover basically includes specialist care, both out-patient and in-patient. The total spending in 2017 by this Special Beneficiaries group reached €11.87 million, which represents an increase compared to 2016 of 7.20%.

Special Beneficiaries Allowance -Thousand euros- Item 2016 2017 % Variation

Allowance 11,073 11,870 7.20

33 4. Investments

34  Investments

General Report

Economic and Political Environment

The confirmation of the synchronised global economic recovery has undoubtedly been the highlight of 2017. The world economy has grown at its highest rate in the last 6 years, surpassing the expectations of the beginning of the year, thanks to the acceleration of the developed countries, the resistance of the Chinese economy and the recovery of the price of raw materials, which has helped Russia and Brazil exit their recession.

In the United States, the term of President Donald Trump began, being marked by controversy and the inability to reach agreements, with both the Democrats and his own party, to fulfil his electoral promises. Thus, it was not until December that the tax reform was agreed, which critics consider to benefit, in particular, the higher classes and certain business sectors, which could intensify the growing and worrying social inequality. Although most economists believe that it will not be able to raise only the potential growth, it will have a positive economic impact in the short term and in business results. Regarding international trade, despite abandoning the TPP, the threats against China and Mexico did not materialise, although the renegotiation of NAFTA remains pending. The Federal Reserve continued its slow process of monetary normalisation with the beginning of the reduction of its balance and agreement on three increases of the official rate until it stood at 1.375%.

The economy of the Eurozone recorded its highest growth in 10 years, far exceeding expectations, thanks to the continuous improvement of the labour market, the lax financial conditions, and the recovery of global trade. The outlook for 2018 is favourable, with the main confidence indicators reaching 17-year highs. At a political level, the overwhelming victory of Macron in France, along with the defeat of the far right in the Netherlands, restored optimism regarding the European project, which expects the establishment of a new government in Germany, led by Merkel. In Spain and Italy, political uncertainty was increased by the tensions in Catalonia, in the first case, and the call for elections in March 2018, in the second. The moment of strength of the Eurozone caused a notable appreciation of the euro and allowed the ECB to announce a reduction in the volumes of monthly purchases of assets when it agreed to extend its programme until September 2018. On the other hand, the United Kingdom has dealt with the consequences of its decision to leave the European Union, with a worsening of its economic situation and a weakened government after losing the majority in the early elections.

In Japan, the economy accelerated significantly, thanks to the recovery of global trade and the improvement in domestic demand, hand in hand with private consumption and investment. In October, President Abe won the early elections by a wide margin and ensured the absolute majority with his government partner, which gave him more power to continue with his economic programme, with which he hopes to officially declare the end of deflation in the country.

China also had a surprisingly positive performance in 2017 by growing close to 7%, avoiding the expected orderly slowdown. The most important event was the celebration of the Chinese Communist Party congress in October, which served to increase the power of President Xi, in order to prioritise the quality and balanced character of growth, downplaying the quantitative objectives and to reiterate his commitment to the reforms. In fact, the government took a number of measures throughout the year to try to contain the financial risks in an economy whose biggest problem is still the growing indebtedness. India has been slowing down due to the negative impact of reforms, such as demonetisation and the introduction of the tax on goods and services that, despite initial difficulties, will serve to improve the foundations of its economy. Latin America has been emerging from the recession due to the return to growth in Brazil and Argentina, while in the case of Mexico, uncertainty remains high due to the

35 renegotiations of NAFTA and the upcoming elections in July. Russia has been emerging from recession partly thanks to the recovery of the price of oil and all this despite the maintenance of economic sanctions by the Western powers.

General Report

Financial Markets

Fixed Income

As expected based on the minimum starting levels of the IRRs (internal rates of return) and the desire of central banks to move forward with the normalisation of their monetary policies, 2017 has been a more complex year for fixed income and unequal depending on the type of asset, with a higher performance of corporate debt against public debt.

The behaviour of the German Bund has been determined by the strength of the main indicators of activity in the Eurozone (which has not yet been reflected in inflation), due to its quality as a haven asset in times of uncertainty and due to interventions by the European Central Bank (ECB). Thus, the IRR reached minimum levels in the year (0.16%) days before the first round of the French presidential elections, but the victory of Macron and his strong commitment to the common European project caused a price correction. Another important aspect is the strong reaction of the IRR of Germany’s 10-year debt (which reached a maximum of 0.6%) to the statements of the President of the ECB in the June, warning of a “gradual adjustment of its monetary policy” when the economic situation justifies it. The Bund yield was at 0.4% at the end of the year after rebounding due to the expectations of a US tax agreement. In turn, the differential of the Spanish debt with Germany has moved from 95 bp in the summer months to 152 bp in the days before the first round of the French elections, for fear of a break in the euro that may harm, especially, peripheral areas. It also exceeded 130 bp after the October referendum in Catalonia, to later relax to close the year at 114 bp. As for the highly rated European credit, it showed a better performance, benefited by the ECB asset purchase programme and its decision to extend it over time.

In the United States, the IRR of the US 10-year Treasury bonds reached a peak of 2.6% in March, due to the expectations of Trump’s reflationary movement. Nevertheless, his defeat in the Healthcare Reform increased doubts about his ability to reach a fiscal agreement, which allowed a rise in price. On the other hand, the weakening of the inflation and activity data, alongside tensions with North Korea, led the IRR of the US debt in September to an annual minimum close to 2%. Subsequently, an intense improvement of macroeconomic indicators, as well as the fiscal reform agreement, returned, at the end of the year, the profitability of the debt to levels around 2.4%, with which it started 2017.

Finally, the emerging debt has benefited from the search for profitability by global investors, the acceleration of growth in these countries, and the broad liquidity of the system.

36 Variable Income

The behaviour of equities was very positive in 2017, due to the support of central banks in an environment of surprisingly low inflation and the strength of the global macroeconomic situation. By geographic areas, it is worth mentioning the increases (in local currency) of the emerging markets of the United States, with indices reaching new historical highs, as well as Japan, while Europe has been behind due to the strength of the euro. Another notable aspect of this upward movement of the markets has been the low volatility and absence of significant correction phases, as well as the extraordinary evolution of the technology sector, which has benefited, in particular, Asia and the United States, where its weight is greater.

In the United States (S&P500 + 19%), neither the uncertainties brought by the Trump presidency nor the advances in the monetary normalisation by the Federal Reserve have managed to stop the upward cycle initiated in 2009, which is already the longest in the past 50 years. Additionally, US companies have benefited from the significant depreciation of the dollar.

In Europe (Stoxx600 + 8%), after experiencing moments of tension due to the threat of Le Pen to the euro project, investors welcomed Macron’s victory in the presidential elections in France due to his strongly pro-European discourse. During the summer, the risk of a conflict with North Korea and the strength of the euro held back markets, which, however, accelerated again in the final part of the year after the victory of Merkel and the approval of the fiscal reform in the United States. In Japan, the Nikkei (+19%) reached peaks since 1991 thanks to the recovery of global trade, the weakness of the yen, and the victory of the Prime Minister in the elections.

Emerging markets (MSCI EM+34%) have experienced an extraordinary year, benefited by the strength of global macroeconomic data, China’s resilience, the recovery of commodity prices, the weakness of the dollar, and advances in structural reforms in countries such as India, Brazil, and Argentina.

In any case, it should be noted that the excellent returns reached in the equities of the United States, Japan and emerging countries have been significantly reduced by their conversion to euro, due to the strength shown by the single currency in 2017.

Investment Management

As we pointed out in the previous pages, it should be noted that the macroeconomic context has been generally favourable in 2017, promoting the behaviour of risk assets.

In Fixed Income, profitability reached has been moderate, above all in Europe and in the assets with the highest rating, due to the moderate upturn in interest rates, which has implied depreciations in their market value.

Regarding equities, it closed the year with excellent results, highlights including the emerging markets and the United States, while Europe was lagged somewhat behind.

A significant aspect in the behaviour of financial markets has been the depreciation of the dollar against the euro.

In this context, throughout 2017, we have increased the weight of the equity portfolio in the composition of our portfolio, reducing the weight of fixed income, which has positively affected the profitability of the Entity.

Another relevant aspect has been the active management carried out with hedges on the dollar. Our high exposure to assets rated in dollars, which gave us excellent results in previous years, had a clearly negative effect in 2017 (the dollar has decreased by 12.4% with respect to the euro). The management of these coverages, however, has enabled us to reduce the impact of this movement.

37 Following these strategies, the investment philosophy, reflected in our Statement of Investment Principles, consistent with the defined risk profile and the required profitability, which is based on the establishment of:

 An appropriate strategic distribution of its assets, that is sufficiently stable over time, without prejudice to adjustment or permanent rebalancing, within defined margins, according to the development of the markets.

 An appropriate diversification policy, between both the different types of assets in the portfolio and between the different values within each type of asset, as a basic element of risk control.

 Active management of the various portfolios, through appropriate selection of securities and use of the different opportunities continually offered by the markets.

 Global management of assets and liabilities, which takes into account the duration of both and makes it possible to obtain sufficient liquidity or cash flow to meet commitments at all times.

 Socially responsible management of investments that puts a high positive value, both in internal management and in the choice of its external managers, on the existence of an active, transparent voting policy, in order to promote Good Corporate Governance, and consideration of the social and environmental effects of business activity.

In this context, the portfolio has achieved an overall profitability of 3.69%, above that provided in the Management Plan and necessary to cover actuarial needs and maintain the solvency of the system.

38 Distribution of the Investment allocated to the Capitalisation Allowances

Fixed income, which remains the core asset of the investment portfolio (at the end of 2017 its represented 45% of the total portfolio vs 51% at the end of 2016), gives the Entity a stable line of income. Under this item, investment targets private or credit fixed income, with a focus on large multinationals and strong local companies, to public debt issued by governments and to investment funds.

In addition, the Entity at all times maintains a liquidity item, which at the end of 2017 represented 7% of the total portfolio (the same as in 2016).

In the Variable Income portfolio, which at the 2017 year-end represented 29% of the total portfolio (22% at the end of 2016), the part managed by the Institution mainly focuses on securities from domestic and European economies, with high market capitalisation and high liquidity and, to a lesser extent, on low capitalisation securities. In turn, this management is complemented, on the one hand, by other funds which, while investing in these same assets, do so with a different management style (investment due to matters of interest, activism, own investment models, etc.) and, on the other hand, by funds specialising in specific markets and sectors (emerging markets, raw materials, etc.).

Alternative investments, which at the year-end represented 17% of the total portfolio (18% in 2016), include investments such as absolute return funds (hedge funds), private equity (venture and development capital), real estate and infrastructure funds (real assets). What these investments have in common is the loose relationship between their profitability and that of traditional assets (variable income and fixed income), which is why they provide an important diversifying element for the portfolio as a whole.

Finally, in the case of the investees, their share of the overall portfolio has been the 2% like in the previous year.

Below is the evolution of the relative distribution of investment and its comparison both to what existed at the end of the previous year, and with what is included in the Entity's Statement of Investment Principles (DPI).

39 Fixed Income Liquidity Variable Income Alternative Investment Investee companies

Comparison with the distribution in the Statement of Investment Principles (DPI)

Statement of Investment Principles (DPI) Type of asset Minimum Maximum 31.12.2017 Fixed Income (1) 45% 80% 45% Liquidity (1) 2% 25% 7% Variable Income (2) 10% 35% 29% Alternative Investment (2) 5% 25% 17% Investee Companies (2) 0% 5% 2%

(1) La posición de Renta Fija se podrá situar por debajo del límite mínimo establecido del 45%, siempre que la suma de las partidas de Renta Fija y Liquidez supere el 47%.

40 Income from Investment Management: Net Income from the Profit and Loss Account, which excludes unrealised differences in market value amounted to €189.97 euros. Variations in the market value of the assets, listed directly in the Net Equity on the Balance Sheet, amounted to €41.91 million positive, which, alongside the €189.97 million in net income computed in the Profit and Loss Account gives, as the total result, revenues of €231.88 million and a return of 3.69%. Fixed Income and Liquidity reported a profitability of 3.03%, which can be considered satisfactory when taking into account the starting IRRs and the slight rise in the interest rates occurred in 2017. On the other hand, Variable Income reported a return of 10.51% in the year, while Alternative Investments, weighed down by the downward evolution of the exchange rate of the dollar against the euro, ended the year with a negative profitability of 3.28%. Finally, the investment in Investee Companies, which represents a very small percentage of the portfolio, obtained a return of 5.39%, coming from the income of the contribution in Caja Laboral.

Income from Investments and Profitability for 2017 -Thousand euros-

Profit and Loss Interest Diff. Av. LINES OF INVESTMENT Cap. Gains & Total income Return and Total Value Loss. Endow. Dividends

Fixed Income and 102,653 6,963 109,616 -6,319 103,296 3.03% Liquidity Variable Income 41,179 32,782 73,961 94,178 168,139 10.51% Alternative Investment 12,655 -2,854 9,801 -47,419 -37,617 -3.28% Investee Companies and 4,400 4,400 1,469 5,868 5.39% Loans

GROSS INCOME 160,887 36,891 197,778 41.908 239,686 3.84% Management costs -7,808 -7,808 -0.15% NET INCOME 189,970 41,908 231,878 3.69%

41 Balance sheet at 31.12.2017

The Balance Sheet of the Entity, at year-end 2017, is as follows: (Expressed in thousand euros) ASSETS Fixed Assets 5,138 Financial Investments Allow. Capitalisation 6,456,813 Fixed Income with Maturity 2,903,759 Fixed Income Available for Sale 479,759 Financial Placements and Cash 1,892,011 Variable Income 1,069,808 Alternative Investment 111.476 Investee Companies

Financial Investments Allow. Distribution 106,333 Other Debtors and Adjustments for accrual 20,212 Public Institutions - Debtors 11,187 Other Debtors 5,659 Other Adjustments for accrual 3,366 TOTAL ASSETS 6,588,496

LIABILITIES EQUITY FUND (Allow. Capitalisation) 6,477,280 Technical Provisions 5,638,088 Allocated to Solvency (with risk) 5,470,585 Not allocated to solvency (no risk) 167,503 Equity not allocated to Technical Provisions 839,192 Mutual Fund 8,000 Reserves 265,603 Market Valuation Differences 543,517 Results for Year 22,072 BALANCE ALLOWANCES DISTRIBUTED 100,146 SUNDRY CREDITORS 3,557 ADJUSTMENTS FOR ACCRUAL 7,513 TOTAL LIABILITIES 6,588,496

42

-Thousand euros-

ASSETS 2016 2017 Difference

FIXED ASSETS 5,309 5,138 -171

INVEST. FINANCIAL CAPITALISATION 6,304,225 6,456,813 152,588

Fixed Income with Maturity 3,191,214 2,903,759 -287,455 Fixed Income Available for Sale 437,857 479,759 41,902 Financial Placements and Cash 1,375,266 1,892,011 516,745 Variable Income 1,191,091 1,069,808 -121,283 Alternative Investment 108,797 111,476 2,679 Investee Companies 84,520 106,333 21,813 FINANCIAL INVESTMENTS DISTRIBUTION 22,253 20,212 -2,042

DEBTORS AND ADJUST. ACCR. 17,278 11,187 -6,091 Public Institutions - Debtors 1,594 5,659 4,065 Other Debtors 3,382 3,366 -16 Other Adjustments for accrual 5,309 5,138 -171

TOTAL ASSETS 6,416,307 6,588,496 172,189

The Balance Sheet Assets increased during the year by 172,19 million euros, which is an increase of 2.68% The reason for this increase essentially lies in the increase, in the amount of €152.59 million, of the value of the financial investments allocated to capitalisation services, as a result of the returns obtained in the management of said investments. This increase has been concentrated on variable income items, followed at a distance by that of financial placements, while the fixed income and alternative investments investment decreased. As for the investments allocated to distributed allowances, they increased during the year by 21,81 million euros as a result of increased balances available for investment, especially in relation to the Employment Subsidy Fund.

43 Evolution of Liabilities - Thousand euros- LIABILITIES 2016 2017 Difference

EQUITY FUND 6,324,659 6,477,280 152,621 Technical Provisions 5,549,447 5,638,088 88,641 Allocated to Solvency (with risk) 5,388,187 5,470,585 82,398 Not allocated to solvency (no risk) 161,260 167,503 6,243 Equity not allocated to Technical Provisions 775,212 839,192 63,980 BALANCE ALLOWANCES DISTRIBUTED 77,346 100,146 22,799 SUNDRY CREDITORS 5,944 3,557 -2,388 ADJUSTMENTS FOR ACCRUAL 8,357 7,513 -843

TOTAL LIABILITIES 6,416,307 6,588,496 172,189

Practically all Liabilities (98.31%) are accounted for by the Equity Fund accumulated as a guarantee for the pension system, which in 2016 increased, compared to 31 December of the previous year, by 527.03 million euros. This increase is due exclusively to income obtained from investment management (600.50 millions), since the balance of fees less the capitalisation allowances was negative (-73.46 millions). As regards the distribution of this Equity Fund, the Technical Provisions necessary to meet the pension commitments increased by 88.64 million euros, to 5,638.09 million euros, which represents a growth rate during the year of 1.60%. As the Equity Fund grows to a greater extent than the Technical Provisions, there is a new increase in Equity not affected by these Provisions, which results in a strengthening of the Solvency or Security Margin. The other significant item, the positive balance accumulated for the Distributed Allowances, the fundamental item of which is the Employment Subsidy Fund, increased during the year to 22.280 million euros, maintaining a significant 2017 year-end surplus of 100.15 million euros.

44 Evolution of the Equity Fund in 2017

The net balance of Fees-Capitalisation Allowances during the year came to 79.26 million negative euros: 98.77 in fees collected vs 178.03 in allowances (pensions) paid out. The fact that the balance of fees-allowances is negative has no impact on the financial and actuarial balance of a capitalisation system such as LagunAro, since the allowances from the liabilities are funded by contributions made during their lifetime by active contributors and pension entitlements of workers are adjusted according to the contributions paid in. In turn, Net Income from Investments computed in the Profit and Loss Account reached €189.97 million. After incorporating the Valuation Differences, which this year was positive €41.91 million, the total income from investment management is quantified at €231.88 million. As Investment Returns (+231.88 million) continue to be clearly higher than the negative balance of fees and allowances (-79.26 million), the Equity Fund continues to grow, registering an increase of 152.62 million in the year, to reach 6,477.28 million euros at year-end. The above-mentioned variation in the Equity Fund (+152.62 million) was higher than that recorded by the Technical Provisions (+88.64 million), resulting in a positive impact on the non- committed Equity (+63.98 million) and the Solvency Margin.

EVOLUTION OF THE EQUITY FUND, TECHNICAL PROVISIONS AND NET EQUITY

-Thousand euros- Technical Equity Fund Net Equity Provisions

Situation at start of year 6,324,659 5,549,447 775,212

Capitalisation fees 98,777 98,777 Capitalisation allowances 178,034 178,034 Balance Fees-Capitalisation Allowances -79,257 -79,257

Net Investment Income (P & L) 189,970 Market Value Differences (Equity) 41,908 Net Income from Investment Management 231,878 167,898 63,980 Annual Net Variation 152,621 88,641 63,980 Situation at year-end 6,477,280 5,638,088 839,192

45 Actuarial Requirements

Regarding actuarial needs, the main component is the technical interest, which has amounted to €183.76 million. Additionally, regarding the technical interest, we must also take into account the inflation rate, as well as the evolution of the group itself (deaths, disabilities, marriage rates, retirement, etc.). Specifically, with regard to the updating of pension rights, the inflation rate of 1.1%, which closed the year 2016, reduced the need for technical provisions in the pension model of the group of the Rate 1 for an amount of €2.49 million. In turn, the above-mentioned inflation rate requires an additional allocation of €18.70 million in Rates 2 and 3 to offset the difference between the 1% update implied in the technical interest rate and the 1.6% indicated in real CPI in 2016. To a lesser extent, the evolution of the group has also meant less need for the provision of Technical Provisions amounting to 10.54 million euros.

Thousand euros ACTUARIAL REQUIREMENTS

Technical Provisions 167,898 Technical Interest 183,759

Actuarial deviation for update of Rates 2 and 3 3,311 (Difference between 1% update guarantee and 2017 CPI: 1.1%.)

Actuarial deviation for CPI of Rate 1 -8,637 (Difference between the inflation hypothesis of 1.4% compared to 2017 update: 1.1%)

Actuarial deviation due to group evolution -10,535

46 Solvency or Security Margin

The Security or Solvency Margin, which measures the level of commitment-free Assets available to absorb deviations in the Technical Provisions, which assume biometric or profitability risks, was 15.2% at the close of 2017 for these Technical Provisions with risk. This ratio has increased since the beginning of the year by 0.9 points (from 14.3% at the beginning of the year to 15.2%) as a consequence of the increase in the Net Asset Value not committed, since the Equity Fund has grown to a greater extent than the Technical Provisions.

-Thousand euros- Variation ITEM 31-Dec-16 31-Dec-17 for Year

(+) Equity Fund 6,324,659 6,477,280 152,621

(-) Total Technical Provisions -5,549,447 -5,638,088 -88,641

(=) NET EQUITY 775,212 839,192 63,980 (+) Net Equity -5,309 -5,138 171

(-) Building for own use -209 -209

NET EQUITY ALLOCATED TO SOLVENCY = EXCESS (=) COVER FROM TECH. PROV. (1) 769,903 833,844 63,941

(+) Total Technical Provisions 5,549,447 5,638,088 88,641

(-) Technical Provisions without risk -161,260 -167,503 -6,243 TECHNICAL PROVISIONS WITH RISK (=) ALLOCATED TO SOLVENCY (2) 5,388,187 5,470,585585 82,398

SOLVENCY MARGIN (1)/(2) 14.3% 15.2% 0.9 p.p.

47 History of Formation of the Equity Fund

Thousand ITEM % Euros

Capitalisation fees 2,679,182 31.3 Net Income from Capitalisation Investments 5,328,039 62.3 Differences in Market Valuation of Equity Fund 543,517 6.4 8,550,738 100.0 FUNDS GENERATED 2,073,458 24.2 Application of Capitalisation Allowances 6,477,280 75.8 EQUITY FUND AT 31.12.2017 2,679,182 31.3

The accumulated history of the formation of the Equity Fund over the past 51 years reflects the generation of 8,551 million euros. 31.3% of the funds come from the revenue generated by Capitalisation Fees, 68.7% from Net Investment Income (62.3% from income already recorded in the Profit and Loss Account and the remaining 6.4% from positive differences in market value, i.e. from unrealised latent capital gains). 24.2% of the funds generated have been used to cover the capitalisation allowances (pensions) paid to date, which amount to 2,073.46 million. The rest, 6,477.28 million, remains in Entity as the Equity Fund to meet future commitments for pensions.

Evolution of the Equity Fund 1967-2017

48 Historical Returns

The nominal historical Return, calculated at an interest rate accrued in IRR terms on the contribution of fees during the past 51 years, reached a rate of 9.27%.

Regarding the more recent past, the return was 6.96% in the last five years (2013-2017) and 5.24% in last decade (2008-2017)

The following table shows the nominal returns and the CPI since the Entity began operating:

Historical Returns

Return Inflation

Returns

2017 Five-year period (2013-2017) Decade (2008-2017) Historical (since 1967)

3.69% 6.96% 5.24% 9.27%

49