“RESO” Insurance Closed Joint-Stock Company

Financial Statements and Independent Auditor’s Report For the Year Ended 31 December 2015

Contents

STATEMENT OF MANAGEMENT’S RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2015 ...... 2 INDEPENDENT AUDITORS’ REPORT ...... 3 STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2015 ...... 5 STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2015 ...... 6 STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2015 ...... 7 STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2015 ...... 8 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2015 ...... 9-45

STATEMENT OF MANAGEMENT'S RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER2015

Management is responsible for the preparation of the financial statements that present fairly the financial position of"RESO" Insurance Closed Joint-Stock Company (the Company) as of31December2015, and the results of its operations, cash flows and changes in shareholders' equity for the year then ended, in compliance with International Financial Reporting Standards ("IFRS").

In preparing the financial statements, management is responsible for:

• properly selecting and applying accounting policies; • presenting information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; • providing additional disclosures whel!_ compliance with the specific requirements in IFRSs is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Company's financial position and financial performance; • making an assessment of the Company' s ability to continue as a going concern.

Management is also responsible for:

• Designing, implementing and maintaining an effective and sound system of internal controls, throughout the Company; • Maintaining adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company, and which enable them to ensure that the financial statements of the Company comply with IFRS; • Maintaining statutory accounting records in compliance with legislation and accounting standards of the Republic of Armenia; • Taking such steps as are reasonably available to them to safeguard the assets of the Company; and • Preventing and detecting fraud and other irregularities.

The financial statements of the Company for the year ended 31December2015 were authorized for issue by the Management Board of the Company on 29 April 2016.

On behalf of the Management Board:

Samvel Grigoryan Alina Khachatryan Executive Director Acting Chief accountant

29 April 2016 Yerevan, Republic of Armenia KPMG Armenia cjsc Te lephone + 374 (101 566 762 gth floor, Erebuni Plaza Business Center, Fax + 374 (1 OJ 566 762 26/1 Vazgen Sargsyan Street Internet www.kpmg.am Yerevan 0010, Armenia

Independent Auditors' Report

To the Shareholders and the Board of Directors of "RESO" Insurance CJSC

We have audited the accompanying financial statements of"RESO" Insurance CJSC (the Company), which comprise the statement of financial position as at 31 December 2015 , and the statements of profit or loss and other comprehensive income, changes in equity and cash flows for the year then ended, and notes, comprising a summary of significant accounting policies and other explanatory information.

Management 's Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditors ' Responsibility

Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as at 31 December 2015, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards.

KPMG Armenia cjsc, a compa ny incorporated under the Laws of the Republic of Armen ia, a member firm of the KPMG network of inde pendent member firms aff iliated w ith KPMG Internationa l Cooperative ("KPMG International"}. a Swiss entity. Independent Auditors' Report Page2

Emphasis ofMatter

We draw attention to the fact that the corresponding figures presented, excluding the adjustments described in note 4 to the financial statements, are based on the financial statements of the Company as at and for the year ended 31 December 2014, which were audited by other auditors whose report dated 30 April 2015 expressed an unmodified opinion on those statements. As part of our audit of the 2015 financial statements, we have audited the adjµstments described in note 4 to the financial statements that were applied to restate the 2014 financial statements. In our opinion, such adjustments are appropriate and have been properly applied. We were not engaged to audit, review, or apply any procedures to the 2014 financial statements of the Company other than with respect to the adjustments and, accordingly, we do not express an opinion or any other form of assurance on the 2014 financial statements taken as a whole. Our opinion is not qualified in respect of this matter.

Tigran Gasparyan Managing Partner, Dire

KPMG Armenia cjsc 29 April 2016 "RESO" Insurance Closed Joint-Stock Company

Statement of profit or loss and other comprehensive income for the year ended 31 December 2015

In AMD thousand Notes 2015 2014 Restated

Gross premiums written 5 2,585,156 2,616,844 Written premiums ceded to reinsurers 5 (118,892) (124,088) Net premiums written 2,466,264 2,492,756 Cancelled premiums and provision for insurance receivables 5 (265,809) (384,655) Change in the gross provision for unearned premiums 5 (125,668) 831,693 Reinsurers' share of change in the gross provision for unearned premiums 5 (5,973) (13,423) Net earned premiums 2,068,814 2,926,371 Claims settled, net of reinsurance 5 (1,174,453) (2, 110, 785) Change in insurance contract provisions, net of reinsurance 5 50,163 458,686 Net claims incurred (1,124,290) (1,652,099) Subrogation and recoveries, net of provision for impairment losses 5 57,876 (2,783) Acquisition costs 5 (611,359) (631,399) Change in deferred acquisition costs 5 54,077 (89,036) Net reinsurance commission income 5 26,778 30,986 Other insurance expenses 5 (68,798) (124,502) Insurance activity result 403,098 457,538 Interest income 6 (a) 273,574 352,260 Interest expense 6 (b) (64,095) (145,655) Other investment expense 6 (c) (12,171) (14,880) Other operating income 4,997 5,401 Administrative expenses 7 (597,731) (781,478) (Impairment loss )/recovery of provisions 8 (24,171) 3,610 Loss before tax (16,499) (123,204) Income tax expense 9 (79,500) Loss and total comprehensive loss for the year (16,499) (202,704)

The financial statements as set out on pages 5 to 45 were approved by management on 29 April 2016 and were signed on its behalf by:

Samvel Grigoryan Alina Khachatcyan Executive Director Acting Chief Accountant

The notes on pages 9 to 45 form an integral part of these financial statements. 5 "RESO" Insurance Closed Joint-Stock Company

Statement of financial position as at 31 December 2015

In AMD thousand Notes 31 December 2015 31 December 2014 Assets Restated Cash and cash equivalents 10 28,475 22,566 Bank deposits 11 1,940,374 1,483,754 Financial instruments at fair value through profit or loss 12 - Held by the Company 87,662 715,819 - Pledged under sale and repurchase agreements 299,002 397,347 Loans issued 13 23,221 54,221 Insurance and reinsurance receivables 14 418,917 578,538 Reinsurers' share of insurance contract provisi9ns 17 64,135 72,269 Deferred acquisition costs 276,219 222,142 Property, equipment and intangible assets 15 498,248 173,653 Other assets 16 53,117 94,757 Current tax asset 138,560 141 ,309 Total assets 3,827,930 3,956,375

Liabilities and shareholders' equity Liabilities Insurance contract provisions 17 1,258,100 1,184,756 Liabilities under repurchase agreements 18 286,763 394,434 Insurance and reinsurance payables 19 201,033 219,912 Other liabilities 20 157,607 202,711 Subordinated debt 21 512,232 1,005,868 Total liabilities 2,415,735 3,007,681

Shareholders' equity Share capital 23 2,350,000 1,870,000 Accumulated loss (937,805) (921,306) Total shareholders' equity 1,412,195 948,694 Total liabilities and shareholders' equity 3,827,930 3,956,375

Samvel Grigoryan Alina Khac'fmtryan Executive Director Acting Chief Accountant

The notes on pages 9 to 45 form an integral part of these financial statements. 6 "RESO" Insurance Closed Joint-Stock Company

Statement of changes in equity for the year ended 31December2015

In AMD thousand Notes Share capital Accumulated loss Total

Balance at 1 January 2014 1,870,000 (676,662) 1,193,338 Total comprehensive loss Loss for the year (restated) (202,704) (202,704) Transactions with owners Dividends on preference shares 23 (41,940) (41,940) Balance at 31 December 2014 (restated) 1,870,000 (921,306) 948,694 Total comprehensive loss Loss for the year (16,499) (16,499) Transactions with owners Shares issued 23 480,000 480,000 Balance at 31 December 2015 2,350,000 (937,805) 1,412,195

Alina Khachatryan Acting Chief Accountant

The notes on pages 9 to 45 form an integral part of these financial statements. 7 "RESO" Insurance Closed Joint-Stock Company

Statement of cash flows for the year ended 31 December 2015

In AMD thousand Notes 2015 2014 Cash flows from operating activities Insurance premiums received 2,428,656 2,960,422 Reinsurance premiums paid, net of commission income (98,851) (76,689) Claims and benefits paid (1,162,201) (1,919,455) Acquisition costs paid (572,818) (413,100) Subrogation and recoveries 45,337 32,894 Other insurance expenses (60,897) (295,242) Administrative expenses (559,861) (758,096) Changes in operating assets and liabilities: Decrease in other assets 38,873 14,069 Decrease in loans issued 9,918 8,584 Decrease in other liabilities ( 45,136) (8,982) Net cash from/( used in) operating activities before income taxes paid 23,020 (455,595) Income taxes paid (20,344) Net cash from/( used in) operations 23,020 (475,939)

Cash flows from investing activities Interest income 311,035 413,968 Transferred to bank deposits (2,348,310) (1, 736,368) Proceeds from bank deposits 1,881,174 3,849,260 Acquisition of financial assets at fair value through profit or loss (384,042) Proceeds from financial assets at fair value through profit or loss 1,086,000 Purchases of property, equipment and intangible assets (362,622) (30,481) Proceeds from disposal of property, equipment and intangible assets 18,559 Net cash from investing activities 183,235 2,514,938

Cash flows from financing activities Interest paid (91 ,256) (219,263) Cash paid on repurchase agreements (107,958) (502,454) Borrowings and subordinated debt repaid (571) (1,240,820) Dividends paid on preference shares 23 (125,890) Net cash used in financing activities (199,785) (2,088,427)

Net increase/(decrease) in cash and cash equivalents 6,470 (49,428) Effect of changes in exchange rates on cash and cash equivalents (561) 1,356 Cash and cash equivalents at beginning of the year 22,566 70,638 Cash and cash equivalents at end of the year 10 28,475 22,566

The notes on pages 9 to 45 form an integral part of these financial statements. 8 “RESO” Insurance Closed Joint-Stock Company Notes to the financial statements for the year ended 31 December 2015

Notes to the financial statements for the year ended 31 December 2015

1. Background a) Organisation and operations

“RESO” Insurance Closed Joint-Stock Company (the Company) was established in 2008 in the Republic of Armenia as a closed joint-stock company. The Company has a non-life insurance license to provide 10 types of insurance services in the Republic of Armenia. The activities of the Company are regulated by the Central Bank of Armenia (“CBA”) and the Armenian Motor Insurers Bureau.

The Company conducts business throughout the Republic of Armenia from its head office and through its agents’ network. The Company’s registered address of the head office is 62/93 Komitas Avenue, Yerevan 0014, Republic of Armenia.

At 31 December 2015 the Company employed 97 full time employees and had 256 commission based agents (2014: 102 full time employees and 1,919 commission based agents).

The Company's shareholders are: “Polygraphia” CJSC (50%) and “CIS Equity Partners Limited” LLC (50 %). The Company is ultimately controlled by three individuals Sergey Sarkisov (25%), Nikolay Sarkisov (25%) and Gagik Zakaryan (50%). b) Armenian business environment

The Company’s operations are located in Armenia. Consequently, the Company is exposed to the economic and financial markets of Armenia, which display emerging-market characteristics. The legal, tax and regulatory frameworks continue to develop, but are subject to varying interpretations and frequent changes that, together with other legal and fiscal impediments, contribute to the challenges faced by entities operating in the Armenia. The financial statements reflect management’s assessment of the impact of the Armenian business environment on the operations and the financial position of the Company. The future business environment may differ from management’s assessment.

2. Basis of preparation a) Statement of compliance

These financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”). b) Basis of measurement

These financial statements have been prepared on the historical cost basis except for financial instruments at fair value through profit and loss that are measured at fair values. c) Presentation currency

The national currency of the Republic of Armenia is the Armenian Dram (“AMD”), which is the Company’s functional currency and the currency in which these financial statements are presented. Financial information presented in AMD has been rounded to the nearest thousand.

9 “RESO” Insurance Closed Joint-Stock Company Notes to the financial statements for the year ended 31 December 2015

d) Use of estimated and judgements

Management has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with IFRS. Actual results could differ from these estimates.

In particular, information about significant areas of estimation uncertainty and critical judgments in applying accounting policies are described in the following notes:

 Provision for insurance receivables – note 14;  Insurance contract provisions – note 17;  Deferred tax assets – note 22.

3. Significant accounting policies

The following significant accounting policies have been applied in the preparation of the financial statements. The accounting policies have been consistently applied. a) Foreign currency transactions

Transactions in foreign currencies are translated to the respective functional currency at the foreign exchange rate at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the foreign exchange rate at that date. Non-monetary assets and liabilities denominated in foreign currencies, which are stated at historical cost, are translated to the functional currency at the foreign exchange rate ruling at the date of the transaction. Exchange differences are recognised in profit or loss in the period in which they arise. The relevant exchange rates are as follows:

Average rate Spot rate 2015 2014 31 December 2015 31 December 2014 AMD/1 US Dollar 477.95 415.75 483,75 474.97 AMD/1 Euro 529.39 552.09 528,69 577.47 b) Insurance contracts

(i) Classification of contracts

Contracts under which the Company accepts significant insurance risk from another party (the “policyholder”) by agreeing to compensate the policyholder or other beneficiary if a specified uncertain future event (the “insured event”) adversely affects the policyholder or other beneficiary are classified as insurance contracts. Insurance risk is risk other than financial risk. Financial risk is the risk of a possible future change in one or more of a specified interest rate, security price, commodity price, foreign exchange rate, index of prices or rates, a credit rating or credit index or other variable, provided in the case of a non-financial variable that the variable is not specific to a party to the contract. Insurance contracts may also transfer some financial risk. Insurance risk is significant if, and only if, an insured event could cause the Company to pay significant claims. Once a contract is classified as an insurance contract, it remains classified as an insurance contract until all rights and obligations are extinguished or expire. Contracts under which the transfer of insurance risk to the Company from the policyholder is not significant are classified as financial instruments.

10 “RESO” Insurance Closed Joint-Stock Company Notes to the financial statements for the year ended 31 December 2015

(ii) Recognition and measurement of contracts

General insurance contracts

Premiums

Gross premiums written comprise premiums on contracts entered into during the year, irrespective of whether they relate in whole or in part to a later accounting period. Premiums are disclosed gross of commission payable to intermediaries, insurance premium taxes, levies and similar mandatory contributions. The earned portion of premiums received is recognised as revenue. Premiums are earned from the date of attachment of risk, over the indemnity period using the daily pro-rata method. Outward reinsurance premiums are recognised as an expense in accordance with the daily pro-rata method. The portion of outward reinsurance premiums not recognised as an expense is treated as a prepayment.

Policy cancellations

Policies are cancelled if there is objective evidence that the policyholder is not willing or able to continue paying policy premiums. Cancellations therefore affect mostly those policies where policy premiums are paid in instalments over the term of the policy. Cancellations are reported separately from gross written premiums.

Unearned premium provision

The provision for unearned premiums comprises the proportion of gross premiums written which is estimated to be earned in the following or subsequent financial years, computed separately for each insurance contract using the daily pro-rata method. The provision for unearned premiums is recognized net of estimated cancellations of policies in force as of the reporting date.

Claims

Net claims incurred comprise claims settled during the financial year together with the movement in the provision for outstanding claims. Outstanding claims reserve (OCR) comprise provisions for the Company’s estimate of the ultimate cost of settling all claims incurred but unpaid at the statement of financial position date, whether reported or not, and provisions for related external claims handling expenses.

Claims outstanding are assessed by reviewing individual claims and making allowance for claims incurred but not yet reported (IBNR), the effect of both internal and external foreseeable events, such as changes in external claims handling expenses, legislative changes and past experience and trends. Provisions for claims outstanding are not discounted.

IBNR is established to recognize the estimated amount of losses that have already been incurred but not yet reported to the Company. Both IBNR and OCR are established to recognize estimated costs (including expenses) on full settlement of losses. As no information on incurred losses is available, the Company relies on its experience taking into account current trends and other relevant factors. IBNR is estimated based on actuarial and statistical forecasts of expected expenses for full settlement of losses and management thereof. The analysis is performed based on present facts and conditions, forecasts, estimation of future inflation and other social and economic factors. Factors used for determining the projected amount of incurred but not reported loss reserve also include, for instance, data on dynamics in frequency of loss events as well as time delay in loss reporting. From time to time, as new information (including information on actual losses) becomes available, the IBNR reserve is analyzed and reviewed.

The estimation of claims incurred but not reported (“IBNR”) is generally subject to a greater degree of uncertainty than the estimates of claims already notified, where more information is available. IBNR claims may often not be apparent to the Company until sometime after the occurrence of the event giving rise to the claim. Due to the short tail nature of the Company’s portfolio a substantial amount of claims are settled within one year after the occurrence of the event giving rise to the claim.

The cost of outstanding claims and the IBNR provisions are estimated using a range of statistical methods. Such methods extrapolate the development of paid and incurred claims, average cost per claim and ultimate claim numbers for each accident year based upon observed development of earlier years and expected loss ratios.

11 “RESO” Insurance Closed Joint-Stock Company Notes to the financial statements for the year ended 31 December 2015

The key statistical methods used are:

 Chain ladder methods, which use historical data to estimate the paid and incurred to date proportions of the ultimate claim cost;  Expected loss ratio methods, which use the Company’s expectation of the loss ratio for a class of business; and  Benchmarking methods, which use the experience of comparable, more mature, classes to estimate the cost of claims.  Bornhuetter-Ferguson methods, which is a combination of chain ladder methods and expected loss ratio methods.

The actual method or blend of methods used varies by the class of insurance contract based on observed historical claims development.

Large claims are generally assessed separately and are measured on a case by case basis or projected separately in order to allow for the possible distorting effects on development and incidence of these large claims.

IBNR provisions and provisions for outstanding claims are initially estimated at a gross level and a separate calculation is carried out to estimate the size of reinsurance recoveries. The method uses historical data, gross IBNR estimates and the terms and conditions of the reinsurance contracts to estimate the carrying value of the IBNR reinsurance asset.

Anticipated reinsurance and subrogation recoveries are recognised separately as assets. Reinsurance and subrogation recoveries are assessed in a manner similar to the assessment of claims outstanding.

Adjustments to the amounts of claims provisions established in prior years are reflected in the financial statements for the period in which the adjustments are made, and disclosed separately if material. The methods used, and the estimates made, are reviewed regularly.

Assumptions

The assumptions that have the greatest effect on the measurement of general insurance contract provisions are the expected loss ratios for the most recent accident years. The expected loss ratio is the ratio of expected claims to earned premiums. When determining the total liability, the projection of future cash flows includes the estimated values of parameters that can affect the amount of an individual claim (e.g. frequency of claims, recovery time, time between date of occurrence of the insured event and the settlement date).

(iii) Reinsurance

The Company cedes reinsurance in the normal course of business for the purpose of limiting its potential net loss through the partial transfer of risk to reinsurers. Reinsurance arrangements do not relieve the Company from its direct obligations to its policyholders.

Premiums ceded and benefits reimbursed are presented in profit or loss and statement of financial position on a gross basis.

Reinsurance assets include balances due from reinsurance companies for ceded insurance liabilities. Amounts recoverable from reinsurance are estimated in a manner consistent with the outstanding claims provision or settled claims associated with the reinsured policy.

Premiums on reinsurance assumed are recognised as revenue and accounted for as if the reinsurance was considered direct business, taking into account the product classification of the reinsured business.

Amounts recoverable under reinsurance contracts are assessed for impairment at each statement of financial position date. Such assets are deemed impaired if there is objective evidence, as a result of an event that occurred after its initial recognition, that the Company may not recover all amounts due and that the event has a reliably measurable impact on the amounts that the Company will receive from the reinsurer. Only rights under contracts that give rise to significant transfer of insurance risk are accounted for as reinsurance assets. Rights under contracts that do not transfer significant insurance risk are accounted for as financial instruments.

12 “RESO” Insurance Closed Joint-Stock Company Notes to the financial statements for the year ended 31 December 2015

(iv) Deferred acquisition costs

Acquisition costs, representing commissions, which vary with and are incurred in connection with the acquisition or renewal of insurance policies, are deferred and amortised over the period in which the related written premiums are earned. Deferred acquisition costs are calculated separately for each line of business and are reviewed by line of business at the time of the policy issue and at the end of each accounting period to ensure they are recoverable based on future estimates.

(v) Liability adequacy test

At each statement of financial position date, liability adequacy tests are performed to determine if the insurance contract provisions, less deferred acquisition cost and any related intangible assets, such as those acquired in a business combination or portfolio transfer, are adequate. Current best estimates of all future contractual cash flows and related expenses, such as claims handling expenses, and investment income from assets backing the insurance contract provisions are used in performing these tests. If a shortfall is identified the related deferred acquisition cost and related intangible assets are written down and, if necessary, an additional provision is established. The deficiency is recognised in profit or loss for the year. The test is performed on a total portfolio basis.

(vi) Insurance receivables and payables

Amounts due to and from policyholders, agents and reinsurers are financial instruments and are included in insurance receivables and payables, and not in insurance contract provisions or reinsurance assets. Amounts due from policyholders are recognized net of estimated cancellations of policies in force as at the reporting date. The Company reviews its insurance receivables to assess impairment on a regular basis. c) Cash and cash equivalents

The Company considers cash, current account balances and demand deposits to be cash and cash equivalents. d) Financial instruments

(i) Classification

Financial instruments at fair value through profit or loss are financial assets or liabilities that are:

 acquired or incurred principally for the purpose of selling or repurchasing in the near term;  part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking;  a derivative (except for a derivative that is a designated and effective hedging instrument); or,  upon initial recognition, designated by the entity as at fair value through the profit or loss.

The Company may designate financial assets and liabilities at fair value through profit or loss where either:

 the assets or liabilities are managed, evaluated and reported internally on a fair value basis;  the designation eliminates or significantly reduces an accounting mismatch which would otherwise arise; or,  the asset or liability contains an embedded derivative that significantly modifies the cash flows that would otherwise be required under the contract

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than those that the Company:

 intends to sell immediately or in the near term;  upon initial recognition designates as at fair value through profit or loss;  upon initial recognition designates as available-for-sale; or,  may not recover substantially all of its initial investment, other than because of credit deterioration

13 “RESO” Insurance Closed Joint-Stock Company Notes to the financial statements for the year ended 31 December 2015

(ii) Recognition

Financial assets and liabilities are recognized in the statement of financial position when the Company becomes a party to the contractual provisions of the instrument. All regular way purchases of financial instruments are accounted for at the settlement date.

(iii) Measurement

A financial asset or liability is initially measured at its fair value plus, in the case of a financial asset or liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial asset or liability.

Subsequent to initial recognition, financial assets, including derivatives that are assets, are measured at their fair values, without any deduction for transaction costs that may be incurred on sale or other disposal, except for loan sand receivables which are measured at amortized cost using the effective interest method.

All financial liabilities, other than those designated at fair value through profit or loss and financial liabilities that arise when a transfer of a financial asset carried at fair value does not qualify for derecognition, are measured at amortised cost.

Amortized cost is calculated using the effective interest rate method. Premiums and discounts, including initial transaction costs, are included in the carrying amount of the related instrument and amortized based on the effective interest rate of the instrument.

(iv) Fair value measurement principles

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal, or in its absence, the most advantageous market to which the Company has access at that date. The fair value of a liability reflects its non-performance risk.

When available, the Company measures the fair value of an instrument using quoted prices in an active market for that instrument. A market is regarded as active if transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis.

When there is no quoted price in an active market, the Company uses valuation techniques that maximise the use of relevant observable inputs and minimise the use of unobservable inputs. The chosen valuation technique incorporates all the factors that market participants would take into account in these circumstances

The best evidence of the fair value of a financial instrument at initial recognition is normally the transaction price, i.e., the fair value of the consideration given or received. If the Company determines that the fair value at initial recognition differs from the transaction price and the fair value is evidenced neither by a quoted price in an active market for an identical asset or liability nor based on a valuation technique that uses only data from observable markets, the financial instrument is initially measured at fair value, adjusted to defer the difference between the fair value at initial recognition and the transaction price. Subsequently, that difference is recognised in profit or loss on an appropriate basis over the life of the instrument but no later than when the valuation is supported wholly by observable market data or the transaction is closed out.

Assets and long positions are measured at a bid price; liabilities and short positions are measured at an asking price. Where the Company has positions with offsetting risks, mid-market prices are used to measure the offsetting risk positions and a bid or asking price adjustment is applied only to the net open position as appropriate. Fair values reflect the credit risk of the instrument and include adjustments to take account of the credit risk of the Company and the counterparty where appropriate. Fair value estimates obtained from models are adjusted for any other factors, such as liquidity risk or model uncertainties, to the extent that the Company believes a third-party market participant would take them into account in pricing a transaction.

The Company recognizes transfers between levels of the fair value hierarchy as of the end of the reporting period during which the change has occurred.

14 “RESO” Insurance Closed Joint-Stock Company Notes to the financial statements for the year ended 31 December 2015

The Company measures fair values using the following fair value hierarchy, which reflects the significance of the inputs used in making the measurements:

 Level 1: quoted market price (unadjusted) in an active market for an identical instrument.  Level 2: inputs other than quotes prices included within Level 1 that are observable either directly (i.e., as prices) or indirectly (i.e., derived from prices). This category includes instruments valued using: quoted market prices in active markets for similar instruments; quoted prices for similar instruments in markets that are considered less than active; or other valuation techniques where all significant inputs are directly or indirectly observable from market data.  Level 3: inputs that are unobservable. This category includes all instruments where the valuation technique includes inputs not based on observable data and the unobservable inputs have a significant effect on the instrument’s valuation. This category includes instruments that are valued based on quoted prices for similar instruments where significant unobservable adjustments or assumptions are required to reflect differences between the instruments.

(v) Gains and losses on subsequent measurement

A gain or loss arising from a change in the fair value of a financial asset or liability classified as at fair value through profit or loss is recognized in profit or loss.

For financial assets and liabilities carried at amortised cost, a gain or loss is recognized in profit or loss when the financial asset or liability is derecognized or impaired, and through the amortization process.

(vi) Derecognition

A financial asset is derecognised when the contractual rights to the cash flows from the financial asset expire or when the Company transfers substantially all of the risks and rewards of ownership of the financial asset. Any rights or obligations created or retained in the transfer are recognized separately as assets or liabilities. A financial liability is derecognised when it is extinguished. e) Repurchase and reverse repurchase agreements

Securities sold under sale and repurchase (“repo”) agreements are accounted for as secured financing transactions, with the securities retained in the statement of financial position and the counterparty liability included in amounts payable under repo transactions. The difference between the sale and repurchase prices represents interest expense and is recognized in profit or loss over the term of the repo agreement using the effective interest rate method.

Securities purchased under agreements to resell (“reverse repo”) are recorded as amounts receivable under reverse repo transactions. The difference between the purchase and resale prices represents interest income and is recognized in profit or loss over the term of the repo agreement using the effective interest rate method.

If assets purchased under agreement to resell are sold to third parties, the obligation to return securities is recorded as a trading liability and measured at fair value. f) Offsetting

Financial assets and liabilities are offset and the net amount reported in the statement of financial position when there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously. g) Property and equipment

(i) Owned assets

Items of property and equipment are stated at cost less accumulated depreciation and impairment losses.

Where an item of property and equipment comprises major components having different useful lives, they are accounted for as separate items of property and equipment.

15 “RESO” Insurance Closed Joint-Stock Company Notes to the financial statements for the year ended 31 December 2015

(ii) Depreciation

Depreciation is charged to profit or loss on a straight-line basis over the estimated useful lives of the individual assets. Depreciation commences on the date of acquisition or, in respect of internally constructed assets, from the time an asset is completed and ready for use. The estimated useful lives are as follows:

Useful life Buildings 40 years Office equipment 3-5 years Communication devices and computers 3-5 years Vehicles 5 years Capital improvements on leasehold property 20 years h) Intangible assets

Intangible assets, which are acquired by the Company, are stated at cost less accumulated amortisation and impairment losses.

Amortisation is charged to profit or loss on a straight-line basis over the estimated useful lives of intangible assets. The estimated useful lives are 10 years. i) Impairment

(i) Financial assets carried at amortized cost

Financial assets carried at amortized cost consist principally of financial instruments at amortized cost (“financial instruments at amortized cost”) and loans and receivables (“loans and receivables”).

The Company reviews its financial instruments at amortized cost, to assess impairment on a regular basis. A financial instrument at amortized cost is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the financial instrument at amortized cost (a loss event) and that event (or events) has had an impact on the estimated future cash flows of the financial instrument at amortized cost that can be reliably estimated.

If there is objective evidence that an impairment loss on a financial instrument at amortized cost has been incurred, the amount of the loss is measured as the difference between the carrying amount of the financial instrument at amortized cost and the present value of estimated future cash flows. Contractual cash flows adjusted on the basis of relevant observable data that reflect current economic conditions provide the basis for estimating expected cash flows.

The Company reviews its loans and receivables, to assess impairment on a regular basis. A loan is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the loan and that event (or events) has had an impact on the estimated future cash flows of the loan that can be reliably estimated.

The Company first assesses whether objective evidence of impairment exists individually for loans that are individually significant, and individually or collectively for loans that are not individually significant.

If the Company determines that no objective evidence of impairment exists for an individually assessed loan, whether significant or not, it includes the loan in a Group of loans with similar credit risk characteristics and collectively assesses them for impairment. Loans that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment.

If there is objective evidence that an impairment loss on a loan has been incurred, the amount of the loss is measured as the difference between the carrying amount of the loan and the present value of estimated future cash flows including amounts recoverable from guarantees and collateral discounted at the loan’s original effective interest rate. Contractual cash flows and historical loss experience adjusted on the basis of relevant observable data that reflect current economic conditions provide the basis for estimating expected cash flows.

16 “RESO” Insurance Closed Joint-Stock Company Notes to the financial statements for the year ended 31 December 2015

(ii) Non financial assets

Other non financial assets, other than deferred taxes, are assessed at each reporting date for any indications of impairment. The recoverable amount of non financial assets is the greater of their fair value less costs to sell and their 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. For an asset that does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the cash-generating unit to which the asset belongs. An impairment loss is recognised when the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount.

All impairment losses in respect of non financial assets are recognized in profit or loss and reversed only if there has been a change in the estimates used to determine the recoverable amount. Any impairment loss reversed is only reversed to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. j) Provisions

A provision is recognised in the statement of financial position when the Company has a legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle 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. k) Share capital

(i) Ordinary shares

Ordinary shares are classified as equity. Incremental costs directly attributable to issue of ordinary shares are recognised as a deduction from equity, net of any tax effects.

(ii) Preference share capital

Preference share capital is classified as equity if it is non-redeemable, or redeemable only at the Company’s option, and any dividends are discretionary. Dividends thereon are recognised as distributions within equity upon approval by the Company’s shareholders.

Preference share capital is classified as a liability if it is redeemable on a specific date or at the option of the shareholders, or if dividend payments are not discretionary. Dividends thereon are recognised as interest expense in profit or loss as accrued.

(iii) 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 decrease in equity.

(iv) Dividends

The ability of the Company to declare and pay dividends is subject to the rules and regulations of Armenian legislation.

Dividends in relation to ordinary shares are reflected as an appropriation of retained earnings in the period when they are declared. l) Taxation

Income tax comprises current and deferred tax. Income tax is recognised in profit or loss except to the extent that it relates to items recognised directly in equity, in which case it is recognised within other comprehensive income or in equity.

17 “RESO” Insurance Closed Joint-Stock Company Notes to the financial statements for the year ended 31 December 2015

Current tax expenses is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the reporting date, and any adjustment to tax payable in respect of previous years.

Deferred tax is provided using the balance sheet liability method for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantially enacted at the reporting 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 temporary differences, unused tax losses and credits 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. m) Interest income and expenses and fee and commission income

Interest income and expense are recognised in profit or loss as they accrue, taking into account the effective interest rate of the asset/liability or an applicable floating rate. Interest income and 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 on an effective interest rate basis.

Other fee and commission income is recognised when the corresponding service is provided. n) New standards and interpretations not yet adopted

A number of new standards, amendments to standards, and interpretations are not yet effective as at 31 December 2015, and are not applied in preparing these financial statements. Of these pronouncements, potentially the following will have an impact on the financial position and performance. The Company plans to adopt this pronouncements when they become effective.

New or amended Possible impact on standard Summary of the requirements financial statements IFRS 9 Financial IFRS 9, published in July 2014, replaces the existing guidance in The Company has not yet Instruments IAS 39 Financial Instruments: Recognition and Measurement. analysed the likely impact IFRS 9 includes revised guidance on the classification and of changes on its financial measurement of financial instruments, including a new expected statements resulting from credit loss model for calculating impairment on financial assets, the application of IFRS 9. and the new general hedge accounting requirements. It also carries forward the guidance on recognition and derecognition of financial instruments from IAS 39. IFRS 9 is effective for annual reporting periods beginning on or after 1 January 2018, with early adoption permitted.

IFRS 15 Revenue from IFRS 15 establishes a comprehensive framework for determining The Company is assessing Contracts with whether, how much and when revenue is recognised. It replaces the potential impact on its Customers existing revenue recognition guidance, including IAS 18 Revenue, financial statements IAS 11 Construction Contracts and IFRIC 13 Customer Loyalty resulting from the Programmes. application of IFRS 15. The core principle of the new standard is that an entity recognises revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard results in enhanced disclosures about revenue, provides guidance for transactions that were not previously addressed comprehensively and improves guidance for multiple-element arrangements. IFRS 15 is effective for annual reporting periods beginning on or after 1 January 2018, with early adoption permitted.

18 “RESO” Insurance Closed Joint-Stock Company Notes to the financial statements for the year ended 31 December 2015

New or amended Possible impact on standard Summary of the requirements financial statements IFRS 16 Leases IFRS 16 replaces the existing lease accounting guidance in IAS 17 The Company is assessing Leases, IFRIC 4 Determining whether an Arrangement contains a the potential impact on its lease, SIC-15 Operating Leases – Incentives and SIC-27 financial statements Evaluating the Substance of Transactions Involving the Legal Form resulting from the of a Lease. It eliminates the current dual accounting model for application of IFRS 16. lessees, which distinguishes between on-balance sheet finance leases and off-balance sheet operating leases. Instead, there is a single, on-balance sheet accounting model that is similar to current finance lease accounting. Lessor accounting remains similar to current practice – i.e. lessors continue to classify leases as finance and operating leases. IFRS 16 is effective for annual reporting periods beginning on or after 1 January 2019, early adoption is permitted if IFRS 15 Revenue from Contracts with Customers is also adopted.

4. Correction of errors

In preparation of these financial statements the management has restated certain comparative information in order to make correction of errors as explained below.

In preparing the 2015 financial statements the Company identified errors in the assessment of impairment loss for insurance and reinsurance receivables. As a result, additional impairment allowance was recognized as at 31 December 2014 in respect of insurance and reinsurance receivables.

The impact of the restatements are presented in the following tables. The changes did not have an impact on the statement of financial position as at 31 December 2013.

Statement of financial position

Insurance and reinsurance Deferred tax Accumulated AMD’000 receivables liability loss Amount as previously reported at 31 December 2014 884,973 (19,600) (634,471) Restatement (306,435) 19,600 (286,835) Restated amount at 31 December 2014 578,538 - (921,306)

Statement of profit or loss and other comprehensive income

Cancelled premiums Subrogation and and provision for recoveries, net of provision Income tax AMD’000 insurance receivables for impairment losses expense Amount as previously reported for 2014 (188,916) 107,913 (99,100) Restatement (195,739) (110,696) 19,600 Restated amount for 2014 (384,655) (2,783) (79,500)

19 “RESO” Insurance Closed Joint-Stock Company Notes to the financial statements for the year ended 31 December 2015

5. Insurance activity result

2015 Motor insurance Medical Property In AMD thousand CMTPL (Casco) insurance insurance Other Total

Gross premiums written 1,892,068 213,212 193,367 151,754 134,755 2,585,156 Written premiums ceded to reinsurers - (54,220) - (37,476) (27,196) (118,892) Net premiums written 1,892,068 158,992 193,367 114,278 107,559 2,466,264 Cancelled premiums and provision for insurance receivables (250,656) (5,994) (4,139) (3,681) (1,339) (265,809) Change in the gross provision for unearned premiums (67,687) (16,472) (43,016) (12,506) 14,013 (125,668) Reinsurers’ share of change in the gross provision for unearned premiums - (1,542) - (5,278) 847 (5,973) Net earned premiums 1,573,725 134,984 146,212 92,813 121,080 2,068,814 Claims settled (959,519) (112,649) (63,679) (6,682) (6,898) (1,149,427) External claim handling expenses (46,305) (62) (13,432) (123) (424) (60,346) Reinsurers’ share of claims settled - 34,158 - 1,043 119 35,320 Claims settled, net of reinsurance (1,005,824) (78,553) (77,111) (5,762) (7,203) (1,174,453) Change in provisions for incurred but not reported claims (26,566) 690 16,345 (292) 49 (9,774) Change in provisions for reported but not settled claims 45,245 6,977 11,911 (2,459) 424 62,098 Change in reinsurers’ share in claims provisions - (2,093) - (68) - (2,161) Change in insurance contract provisions, net of reinsurance 18,679 5,574 28,256 (2,819) 473 50,163 Net claims incurred (987,145) (72,979) (48,855) (8,581) (6,730) (1,124,290) Subrogations and recoveries, net of provision for impairment losses 57,876 - - - - 57,876 Acquisition costs (468,861) (49,008) (35,762) (25,112) (32,616) (611,359) Change in deferred acquisition costs 12,699 23,394 8,046 4,789 5,149 54,077 Net reinsurance commission income - 17,791 - 5,859 3,128 26,778 Other insurance expenses (67,178) - (1,620) - - (68,798) Insurance activity result 121,116 54,182 68,021 69,768 90,011 403,098

20 “RESO” Insurance Closed Joint-Stock Company Notes to the financial statements for the year ended 31 December 2015

2014 Motor insurance Medical Property In AMD thousand CMTPL (Casco) insurance insurance Other Total Restated

Gross premiums written 2,006,388 215,445 58,599 154,636 181,776 2,616,844 Written premiums ceded to reinsurers - (60,570) - (38,022) (25,496) (124,088) Net premiums written 2,006,388 154,875 58,599 116,614 156,280 2,492,756 Cancelled premiums and provision for insurance receivables (306,376) (11,047) (46,171) (6,732) (14,329) (384,655) Change in the gross provision for unearned premiums 57,572 20,074 758,929 10,913 (15,795) 831,693 Reinsurers’ share of change in the gross provision for unearned premiums - (6,381) - (3,526) (3,516) (13,423) Net earned premiums 1,757,584 157,521 771,357 117,269 122,640 2,926,371 Claims settled (1,174,764) (171,294) (601,140) (3,262) (8,174) (1,958,634) External claim handling expenses (66,344) (156) (137,726) - (129) (204,355) Reinsurers’ share of claims settled - 51,001 - 1,110 93 52,204 Claims settled, net of reinsurance (1,241,108) (120,449) (738,866) (2,152) (8,210) (2,110,785) Change in provisions for incurred but not reported claims (5,324) (162) 228,278 (169) (1,246) 221,377 Change in provisions for reported but not settled claims 112,018 2,672 120,485 (311) 2,839 237,703 Change in reinsurers’ share in claims provisions - (696) - 302 - (394) Change in insurance contract provisions, net of reinsurance 106,694 1,814 348,763 (178) 1,593 458,686 Net claims incurred (1,134,414) (118,635) (390,103) (2,330) (6,617) (1,652,099) Subrogations and recoveries, net of provision for impairment losses (14,456) 8,716 2,651 - 306 (2,783) Acquisition costs (427,214) (20,808) (143,963) (21,708) (17,706) (631,399) Change in deferred acquisition costs (51,699) (3,793) (26,394) (4,196) (2,954) (89,036) Net reinsurance commission income - 20,287 - 9,227 1,472 30,986 Other insurance expenses (99,282) (3,000) (20,220) - (2,000) (124,502) Insurance activity result 30,519 40,288 193,328 98,262 95,141 457,538

21 “RESO” Insurance Closed Joint-Stock Company Notes to the financial statements for the year ended 31 December 2015

6. Net finance income

In AMD thousand 2015 2014 (a) Interest income Placements with banks 193,143 219,119 Financial instruments at fair value through profit or loss 77,365 121,461 Loans issued 3,066 11,680 273,574 352,260 (b) Interest expense Liabilities under repurchase agreements (25,063) (73,311) Subordinated debt (39,032) (72,344) (64,095) (145,655) (c) Other investment (expense)/income Foreign exchange (loss)/gain (857) 7,086 Net loss on operations with financial instruments at fair value through profit or loss (11,314) (21,966) (12,171) (14,880) 197,308 191,725

In the statement of cash flows the Company has classified interest received in the cash flows from investing activities. Further, the interest paid was presented in the cash flows used in financing activities. Comparative information for 2014 has been reclassified accordingly to conform to current year presentation. Such classification provides more relevant information for the Company’s business.

7. Administrative expenses

In AMD thousand 2015 2014 Employee compensation 360,271 456,299 Rent and security 96,717 111,844 Depreciation and amortisation 30,126 47,712 Software maintenance 20,160 20,005 Audit, consulting and information services 15,755 20,048 Renovation and repairs 12,302 13,625 Advertising 11,065 14,054 Communication 10,965 22,346 Transport and travel 7,572 5,277 Membership expenses 6,789 11,694 Stationery and general 5,830 5,570 Fines and penalties 5,347 6,060 Utilities 3,078 5,674 Other administrative expenses 11,754 41,270 597,731 781,478

22 “RESO” Insurance Closed Joint-Stock Company Notes to the financial statements for the year ended 31 December 2015

8. Charge/(recovery) for provision for impairment losses

In AMD thousand 2015 2014 Charge/(recovery) for provision for impairment losses on loans issued (note 13) 21,405 (3,610) Charge for provision for impairment losses on other assets 2,766 - 24,171 (3,610)

9. Income tax expense

The Company’s applicable tax rate is the corporate income tax of 20% (2014: 20%).

In AMD thousand 2015 2014 Restated Current tax Current tax expense - - Deferred tax Origination and reversal of temporary differences 41,944 (12,602) Change in unrecognized deductible temporary differences (41,944) 92,102 Total income tax expense - 79,500

Reconciliation of effective tax rate:

In AMD thousand 2015 2014 Loss before income tax (16,499) (123,204)

Income tax benefit at applicable tax rate (3,300) (24,641) Non-deductible expense 45,244 12,039 Change in unrecognized deductible temporary differences (41,944) 92,102 - 79,500

10. Cash and cash equivalents

In AMD thousand 31 December 2015 31 December 2014 Current accounts with Armenian banks 28,422 22,513 Cash on hand 53 53 28,475 22,566

11. Bank deposits

In AMD thousand 31 December 2015 31 December 2014 Largest 10 Armenian banks 897,418 1,185,444 Other Armenian banks 1,042,956 298,310 1,940,374 1,483,754

No bank deposits are past due or impaired.

23 “RESO” Insurance Closed Joint-Stock Company Notes to the financial statements for the year ended 31 December 2015

Concentration of bank deposits

As at 31 December 2015 the Company has six banks (31 December 2014: five banks), whose balances exceeded 10% of equity. The gross value of these balances as at 31 December 2015 was AMD 1,635,039 thousand (31 December 2014: AMD 1,418,109 thousand).

12. Financial instruments at fair value through profit or loss

In AMD thousand 31 December 2015 31 December 2014 Government treasury bonds of the Republic of Armenia Held by the Company 87,662 715,819 Pledged under sale and repurchase agreements 299,002 397,347 386,664 1,113,166

Financial instruments at fair value through profit or loss comprise financial instruments designated at fair value through profit or loss at initial recognition as the assets are managed, evaluated and reported internally on a fair value basis. Fair value determination of these securities are classified into level 2 in the fair value hierarchy. The Company has transactions to sell securities under agreements to repurchase. Sale and repurchase agreements are transactions in which the Company sells a security and simultaneously agrees to repurchase it (or an asset that is substantially the same) at a fixed price on a future date. The securities sold under agreements to repurchase are transferred to a third party and the Company receives cash in exchange. These financial assets may be repledged or resold by counterparties in the absence of any default by the Company, but the counterparty has an obligation to return the securities when the contract matures. The Company has determined that it retains substantially all the risks and rewards related to these securities and therefore has not derecognised them. These securities are presented as “pledged under sale and repurchase agreements” in note 12. A financial liability is recognised for the obligation to repay the purchase price for this collateral, and is included in liabilities under repurchase agreements (note 18). Because the Company sells the contractual rights to the cash flows of the securities, it cannot use the transferred assets during the term of the agreement. These transactions are conducted under terms that are usual and customary to standard lending, and securities borrowing and lending activities.

13. Loans issued

In AMD thousand 31 December 2015 31 December 2014 Loans to employees 24,207 35,277 Loans to individuals 715 20,474 24,922 55,751 Provision for impairment (1,701) (1,530) 23,221 54,221

Analysis of movements in the provision for loans:

In AMD thousand 2015 2014 Balance at the beginning of the year (1,530) (1,478) (Charge)/recovery for the year (21,405) 3,610 Write offs/(recoveries) 21,234 (3,662) Balance at the end of the year (1,701) (1,530)

24 “RESO” Insurance Closed Joint-Stock Company Notes to the financial statements for the year ended 31 December 2015

14. Insurance and reinsurance receivables

In AMD thousand 31 December 2015 31 December 2014 Restated Receivables arising out of direct insurance operations - Not overdue and overdue less than 6 months 275,716 188,340 - Overdue more than 6 months and less than 1 year 1,378 65,924 - Overdue more than 1 year 578,493 629,269 Total receivables arising out of direct insurance operations 855,587 883,533 Receivables from subrogations - Not overdue and overdue less than 6 months 53,365 94,022 - Overdue more than 6 months and less than 1 year 54,893 75,767 - Overdue more than 1 year 226,826 90,846 Total receivables from subrogations 335,084 260,635 Prepaid commission to agents - 79,201 Advances on claims 27,556 53,412 Receivables arising out of reinsurance operations 2,315 4,599 1,220,542 1,281,380 Provision for impairment of receivables arising out of direct insurance operations (526,855) (489,982) Provision for impairment of receivables from subrogations (274,770) (212,860) 418,917 578,538

At 31 December 2015 included in insurance receivables is AMD 113,095 thousand receivable from the Government of the Republic of Armenia in relation to the compulsory medical insurance program (31 December 2014: 169,444 thousand).

Analysis of movements in the provision for insurance receivables:

Movements in the impairment allowance for the year ended 31 December 2015 are as follows:

Receivables arising out of direct insurance Receivables from In AMD thousand operations subrogations Total Balance at the beginning of the year 489,982 212,860 702,842 Net charge for the year 173,415 59,767 233,182 (Write-offs)/recoveries (136,542) 2,143 (134,399) Balance at the end of the year 526,855 274,770 801,625

Movements in the loan impairment allowance for the year ended 31 December 2014 are as follows:

Receivables arising out of direct insurance Receivables from In AMD thousand operations subrogations Total Balance at the beginning of the year 166,623 87,725 254,348 Net charge for the year 249,618 179,728 429,346 (Write-offs)/recoveries 73,741 (54,593) 19,148 Balance at the end of the year 489,982 212,860 702,842

25 “RESO” Insurance Closed Joint-Stock Company Notes to the financial statements for the year ended 31 December 2015

15. Property, equipment and intangible assets

Capital Communication improvements Office devices and Intangible on leasehold In AMD thousand Buildings equipment computers Vehicles assets property Total Cost At 1 January 2015 - 110,554 130,059 44,882 17,774 58,278 361,547 Additions 400,000 2,666 4,946 - 4,500 1,908 414,020 Write-offs - (7,314) (791) - (7,060) (59,483) (74,648) At 31 December 2015 400,000 105,906 134,214 44,882 15,214 703 700,919

Depreciation At 1 January 2015 - 59,545 99,011 16,533 7,947 4,858 187,894 Depreciation and 1,697 12,130 8,947 6,639 5,378 3,236 38,027 amortisation charge Write-offs - (7,314) (791) - (7,060) (8,085) (23,250) At 31 December 2015 1,697 64,361 107,167 23,172 6,265 9 202,671

Net book value At 31 December 2015 398,303 41,545 27,047 21,710 8,949 694 498,248 At 31 December 2014 - 51,009 31,048 28,349 9,827 53,420 173,653

Capital Communication improvements Office devices and Intangible on leasehold Buildings equipment computers Vehicles assets property Total Cost At 1 January 2014 - 101,075 127,231 46,145 13,274 49,035 336,760 Additions - 11,578 3,298 18,957 4,500 9,243 47,576 Disposals - (2,099) (470) (20,220) - - (22,789) At 31 December 2014 - 110,554 130,059 44,882 17,774 58,278 361,547

Depreciation At 1 January 2014 - 35,658 92,694 15,583 2,388 1,293 147,616 Depreciation and amortisation charge - 24,366 6,513 11,151 5,559 3,565 51,154 Disposals - (479) (196) (10,201) - - (10,876) At 31 December 2014 - 59,545 99,011 16,533 7,947 4,858 187,894

Net book value At 31 December 2014 - 51,009 31,048 28,349 9,827 53,420 173,653 At 31 December 2013 - 65,417 34,537 30,562 10,886 47,742 189,144

Depreciation charge amounting to AMD 7,901 thousand and AMD 3,442 thousand are included in other insurance expenses in the statement of profit or loss and other comprehensive income for the years ended 31 December 2015 and 31 December 2014, respectively (see note 5).

26 “RESO” Insurance Closed Joint-Stock Company Notes to the financial statements for the year ended 31 December 2015

16. Other assets

In AMD thousand 31 December 2015 31 December 2014 Advances to employees 14,933 4,380 Claim prepayments 12,401 - Tax prepayments 9,816 17,405 Advances to suppliers 8,525 33,693 Materials and supplies 7,442 27,429 Other non-financial assets 53,117 82,907 Other receivables - 11,850 Other financial assets - 11,850 53,117 94,757

17. Insurance contract provisions

In AMD thousand 31 December 2015 31 December 2014 Gross Reinsurance Net Gross Reinsurance Net Provision for unearned premiums 1,045,802 (60,661) 985,141 920,134 (66,634) 853,500 Provision for incurred but not reported claims 69,468 - 69,468 59,694 - 59,694 Outstanding claims reserve 142,830 (3,474) 139,356 204,928 (5,635) 199,293 Total insurance contract provisions 1,258,100 (64,135) 1,193,965 1,184,756 (72,269) 1,112,487

(a) Analysis of movements in provisions for unearned premiums (gross of reinsurance)

In AMD thousand 2015 2014 Balance at 1 January 920,134 1,751,827 Gross premiums written (note 5) 2,585,156 2,616,844 Cancelled premiums (92,394) (135,038) Gross earned premiums (2,367,094) (3,313,499) Balance at 31 December 1,045,802 920,134

(b) Analysis of movements in claims provisions (gross of reinsurance)

In AMD thousand 2015 2014 Balance at 1 January 264,622 723,702 Expected cost of current year claims 1,149,898 1,627,219 Change in estimates in respect of prior year claims (52,795) (127,665) Claims paid during the year (note 5) (1,149,427) (1,958,634) Balance at 31 December 212,298 264,622

27 “RESO” Insurance Closed Joint-Stock Company Notes to the financial statements for the year ended 31 December 2015

Process used to determine the assumptions

The assumptions used in the estimation of insurance assets and liabilities are intended to result in provisions which are sufficient to cover any liabilities arising out of insurance contracts so far as can reasonably be foreseen.

However, given the uncertainty in establishing a provision for outstanding claims, it is likely that the final outcome will prove to be different from the original liability established.

Provision is made at the reporting 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 external claims handling expenses, less amounts already paid.

The provision for claims is not discounted for the time value of money.

The sources of data used as inputs for the assumptions are typically internal to the Company, using detailed studies that are carried out at least annually. The assumptions are checked to ensure that they are consistent with observable market information or other published information.

The Company uses actuarial methods in calculating IBNR. The methods used for calculation of IBNR reserve include actuarial methods such as the chain ladder method, or in some cases, the expected loss ratio method is applied in order to ensure reasonable estimations when the statistical method fails. The actuaries carry out estimations using data regarding claims payments, numbers of claims reported and case-reserves. See below for more details.

For the purpose of valuing outstanding claims the Chain ladder actuarial model has been used in conjunction with various assumptions. The Chain ladder method is based on the development of historical claims (development of payments and/or development of amount of claims, development of the number of claims, etc.), in order to evaluate the anticipated development of existing and future claims. The use of this method is mainly suitable after a sufficient period since the event occurred or the policy is written, when there is enough information from the existing claims in order to evaluate the total anticipated claims.

Large claims for all lines of business except for CMTPL are generally assessed separately and are measured on a case by case basis or projected separately in order to allow for the possible distorting effects on development and incidence of these large claims. The RBNS provision for CMTPL is assessed based on average values method for each range of claims.

IBNR provisions and provisions for outstanding claims are initially estimated at a gross level and a separate calculation is carried out to estimate the size of reinsurance recoveries.

Sensitivity analysis

Management believes that, due to short-tailed nature of the Company’s business, the performance of the Company’s portfolio is sensitive mainly to changes in expected loss ratios and the expected average claim amount. The Company adjusts its insurance tariffs on a regular basis based on the latest developments in these variables so that any emerging trends are taken into account.

Management believes that a reasonably possible change in the expected loss ratio and the expected average claim amount will not have a material impact on the insurance contract provisions.

28 “RESO” Insurance Closed Joint-Stock Company Notes to the financial statements for the year ended 31 December 2015

18. Liabilities under repurchase agreements

In AMD thousand 31 December 2015 31 December 2014 Amounts payable under repurchase agreements with Armenian banks 286,763 394,434

Collateral given as security and offsetting

The Company gives collateral in the form of marketable securities in respect of sale and repurchase agreements. Such collateral is subject to the standard industry terms. This means that securities given as collateral can be pledged or sold during the term of the transaction but must be returned on maturity of the transaction.

These transactions are conducted under terms that are usual and customary to standard lending, and securities borrowing and lending activities.

The table below shows financial liabilities subject to offsetting as at 31 December 2015:

AMD’000 Related amounts not Gross amount of Net amount of offset in the statement of recognized financial financial position Gross amounts financial assets liabilities Financial of recognized offset in the presented in the instruments Cash Types of financial financial statement of statement of (non-cash collateral liabilities liability financial position financial position collateral) received Net amount Amounts payable under repurchase agreements (286,763) - (286,763) 286,763 - -

The table below shows financial liabilities subject to offsetting as at 31 December 2014:

The gross amounts of financial liabilities and their net amounts as presented in the statement of financial position that are disclosed in the above tables are measured in the statement of financial position on the amortized cost basis.

19. Insurance and reinsurance payables

In AMD thousand 31 December 2015 31 December 2014 Premiums received in advance 141,675 104,480 Agents’ fees payable 26,223 66,883 Reinsurance premiums payable 13,144 21,952 Claims payable 12,572 26,474 Payable on cancelled premiums 7,419 123 201,033 219,912

29 “RESO” Insurance Closed Joint-Stock Company Notes to the financial statements for the year ended 31 December 2015

20. Other liabilities

In AMD thousand 31 December 2015 31 December 2014 Amounts payables to employees 58,040 69,096 Preference dividends payable (note 23) 41,940 41,940 Settlements with suppliers and contractors 26,488 51,448 Amounts payable to Arm Motor Insurers Bureau 14,677 8,601 Other financial liabilities 141,145 171,085 Taxes other than on income 16,462 31,626 Other non-financial liabilities 16,462 31,626 157,607 202,711

21. Subordinated debt

This note provides information about the contractual terms of the Company’s subordinated debt, which is measured at amortised cost. In the event of bankruptcy or liquidation of the Company, repayment of subordinated debt is subordinate to the repayments of the Company’s liabilities to all other creditors.

Terms and debt repayment schedule

Terms and conditions of outstanding loans are as follows:

31 December 201 31 December 2014 Nominal Year of Face Carrying Face Carrying AMD’000 Currency interest rate maturity value amount value amount Entity with significant influence USD 7.0% 2022 256,116 256,116 502,934 502,934 Other related parties USD 7.0% 2022 256,116 256,116 502,934 502,934 512,232 512,232 1,005,868 1,005,868

30 “RESO” Insurance Closed Joint-Stock Company Notes to the financial statements for the year ended 31 December 2015

22. Deferred tax asset and liability

Temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes give rise to deferred tax assets and liabilities as of 31 December 2015 and 2014. Movements in temporary differences during the years ended 31 December 2015 and 2014 are presented as follows. The tax rate applicable for deferred taxes was 20% (2014: 20%).

In AMD thousand Assets Liabilities Net 2015 2014 2015 2014 2015 2014 Restated Restated Restated Assets Cash and cash equivalents - - (57) (45) (57) (45) Bank deposits - - (3,881) (2,968) (3,881) (2,968) Financial assets at fair value through profit or loss 139 --(4,410) 139 (4,410) Loans issued - - (31) (3,899) (31) (3,899) Insurance and reinsurance receivables 7,112 84,891 --7,112 84,891 Property, equipment and intangible assets - - (11,934) (7,164) (11,934) (7,164) Deferred acquisition costs 12,679 4,887 - 12,679 4,887 Other assets 984 - - (165) 984 (165) Tax loss carry-forwards 52,456 ---52,456 - Liabilities Insurance contract provisions - - (69,323) (82,096) (69,323) (82,096) Other liabilities 11,856 10,969 - - 11,856 10,969 Net tax asset/(liability) 85,226 100,747 (85,226) (100,747) - -

Movement in temporary differences during the year ended 31 December 2015 were as follows:

Balance Recognized in Balance In AMD thousand 1 January 2015 profit or loss 31 December 2015 Restated Assets Cash (45) (12) (57) Bank deposits (2,968) (913) (3,881) Financial assets at fair value through profit or loss (4,410) 4,549 139 Loans issued (3,899) 3,868 (31) Insurance and reinsurance receivables 84,891 (77,779) 7,112 Property, equipment and intangible assets (7,164) (4,770) (11,934) Deferred acquisition costs 4,887 7,792 12,679 Other assets (165) 1,149 984 Tax loss carry-forwards - 52,456 52,456

Liabilities Insurance contract provisions (82,096) 12,773 (69,323) Other liabilities 10,969 887 11,856 Net deferred tax - - -

31 “RESO” Insurance Closed Joint-Stock Company Notes to the financial statements for the year ended 31 December 2015

Movement in temporary differences during the year ended 31 December 2014 were as follows:

Balance Recognized in Balance In AMD thousand 1 January 2014 profit or loss 31 December 2014 Restated Restated Assets Cash (141) 96 (45) Bank deposits (6,992) 4,024 (2,968) Financial assets at fair value through profit or loss (15,120) 10,710 (4,410) Loans issued (4,935) 1,036 (3,899) Insurance and reinsurance receivables 76,905 7,986 84,891 Property, equipment and intangible assets (5,994) (1,170) (7,164) Deferred acquisition costs - 4,887 4,887 Other assets (2,268) 2,103 (165) Tax losses carry-forwards 27,105 (27,105) -

Liabilities Insurance contract provisions 676 (82,772) (82,096) Other liabilities 10,264 705 10,969 Net deferred tax 79,500 (79,500) -

Deferred tax assets had not been recognized as at 31 December 2015 in respect of the following items because of uncertainties related to the availability of future taxable profits against which the Company could utilize the benefits there from.

In AMD thousand 31 December 2015 31 December 2014 Tax loss carry-forwards 294,538 431,348 Insurance and reinsurance receivables - 72,910 294,538 504,258

23. Share capital

The issued share capital of the Company comprises 1,764 thousand ordinary shares and 586 thousand preference shares. All shares have a par value of AMD 1,000,000. Total share capital equals to AMD 2,350,000 thousand as at 31 December 2015 (31 December 2014: 1,404 thousand ordinary shares and 466 thousand preference share). All shares are authorized, issued and fully paid as at 31 December 2015. During 2015 the Company issued 360 additional ordinary shares and 120 preference shares (2014: nil). All the additional shares were issued by conversion of the subordinated debt.

Ordinary shares

All ordinary shares rank equally with regard to the Company’s residual assets.

The holders of ordinary shares are entitled to receive dividends as declared from time to time, and are entitled to one vote per share at meetings of the Company.

Non-redeemable preference shares

The holders of preference shares have no right of conversion or redemption, but are entitled to an annual dividend equal to 9% of face value. If the dividend is not paid, preference shares carry the right to vote until the following Annual Shareholders’ Meeting. However, the dividend is not cumulative.

32 “RESO” Insurance Closed Joint-Stock Company Notes to the financial statements for the year ended 31 December 2015

In the event of liquidation, preference shareholders first receive any declared unpaid dividends and the par value of the preference shares. Thereafter all shareholders, ordinary and preference, participate equally in the distribution of the remaining assets.

Dividends

Dividends payable are restricted to the maximum retained earnings of the Company, which are determined according to legislation of the Republic of Armenia. In accordance with the legislation of the Republic of Armenia, as at the reporting date, the Company did not have distributable reserves.

No dividend has been declared as at 31 December 2015. A dividend of AMD 41,940 thousand had been declared as at 31 December 2014.

24. Financial risk management

Management of risk is fundamental to the insurance business and is an essential element of the Company’s operations. The major risks faced by the Company are those related to credit risk, liquidity risk and market risk, which includes foreign exchange, interest rate and equity price risks. a) Risk management policies and procedures

The Company’s risk management policies aim to identify, analyze and manage the risks faced by the Company, to set appropriate risk limits and controls, and to continuously monitor risk levels and adherence to limits. Risk management policies and procedures are reviewed regularly to reflect changes in market conditions, products and services offered and emerging best practice.

The Board of the Company has overall responsibility for the oversight of the risk management framework. The Management of the Company is responsible for the management of key risks, designing and implementing risk management and control procedures as well as approving large exposures.

Both external and internal risk factors are identified and managed throughout the Company’s organizational structure. b) Market risk

Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk arises from open positions in interest rate, currency and equity financial instruments, which are exposed to general and specific market movements and changes in the level of volatility of market prices.

The objective of market risk management is to manage and control market risk exposures within acceptable parameters, whilst optimizing the return on risk.

33 “RESO” Insurance Closed Joint-Stock Company Notes to the financial statements for the year ended 31 December 2015

(i) Interest rate risk

The table below displays the Company’s interest bearing assets and liabilities as at 31 December 2015 and 2014 and their corresponding average effective interest rates as at that date. These interest rates are an approximation of the yields to maturity of these assets and liabilities.

2015 2014 In AMD thousand Carrying Average effective Carrying Average effective value interest rate value interest rate Interest bearing assets Bank deposits - AMD 1,413,191 15.5% 429,991 12.8% - USD 527,183 8.7% 1,053,763 7.8% Loans issued - AMD 23,221 15.0% 54,221 16.6% Financial instruments at fair value through profit or loss Unpledged - AMD 87,662 14.5% 715,819 11.6% Pledged - AMD 299,002 14.5% 397,347 11.6%

Interest bearing liabilities Liabilities under repurchase agreements - AMD 286,763 10.8% 394,434 24.0 % Subordinated debt - USD 512,232 7.0% 1,005,868 7.0%

Interest rate risk is the risk that movements in interest rates will affect the Company’s income or the value of its portfolios of financial instruments.

Interest rate risk arises when the actual or forecasted assets of a given maturity period are either greater or less than the actual or forecasted liabilities in that maturity period.

Interest rate sensitivity analysis

An analysis of sensitivity of the Company’s net profit or loss and equity as a result of changes in fair value of financial instruments at fair value though profit or loss due to changes in the interest rates based on positions existing as at 31 December 2015 and 2014 and a simplified scenario of a 100 basis point (bp) symmetrical fall or rise in all yield curves is as follows:

In AMD thousand 2015 2014 100 bp parallel increase (5,738) (2,922) 100 bp parallel decrease 5,738 2,922

34 “RESO” Insurance Closed Joint-Stock Company Notes to the financial statements for the year ended 31 December 2015

(ii) Currency risk

The Company has assets and liabilities denominated in several foreign currencies. Foreign currency risk arises when the actual or forecasted assets in a foreign currency are either greater or less than the liabilities in that currency. The following table shows the foreign currency exposure structure of financial assets and liabilities at 31 December 2015:

In AMD thousand AMD USD EUR Total Financial assets Cash and cash equivalents 27,476 811 188 28,475 Bank deposits 1,413,191 527,183 - 1,940,374 Financial instruments at fair value through profit or loss 386,664 -- 386,664 Loans issued 23,221 -- 23,221 Insurance and reinsurance receivables 416,603 2,314 - 418,917 Total financial assets 2,267,155 530,308 188 2,797,651

Financial liabilities Liabilities under repurchase agreements 286,763 - - 286,763 Insurance and reinsurance payables 56,780 2,578 - 59,358 Other financial liabilities 139,464 1,643 38 141,145 Subordinated debt - 512,232 - 512,232 Total financial liabilities 483,007 516,453 38 999,498 Net financial position as at 31 December 2015 1,784,148 13,855 150 1,798,153

The following table shows the foreign currency exposure structure of financial assets and liabilities at 31 December 2014:

In AMD thousand AMD USD EUR Total Financial assets Cash and cash equivalents 22,056 490 20 22,566 Bank deposits 429,991 1,053,763 - 1,483,754 Financial instruments at fair value through profit or loss 1,113,166 - - 1,113,166 Loans issued 54,221 - - 54,221 Insurance and reinsurance receivables 573,939 4,599 - 578,538 Other financial assets 7,415 4,435 - 11,850 Total financial assets 2,200,788 1,063,287 20 3,264,095 Financial liabilities Liabilities under repurchase agreements 394,434 - - 394,434 Insurance and reinsurance payables 110,992 5 4,435 115,432 Other financial liabilities 170,987 37 61 171,085 Subordinated debt - 1,005,868 - 1,005,868 Total financial liabilities 676,413 1,005,910 4,496 1,686,819 Net financial position as at 31 December 2014 1,524,375 57,377 (4,476) 1,577,276

35 “RESO” Insurance Closed Joint-Stock Company Notes to the financial statements for the year ended 31 December 2015

An analysis of sensitivity of the Company’s profit or loss and equity to changes in the foreign currency exchange rates based on positions existing as at 31 December 2015 and 2014 and a simplified scenario of a 10% change in USD and Euro to AMD exchange rates is as follows:

In AMD thousand 2015 2014 10% appreciation of USD against AMD 1,386 5,738 10% depreciation of USD against AMD (1,386) (5,738) 10% appreciation of EUR against AMD 15 (448) 10% depreciation of EUR against AMD (15) 448 c) Credit risk

The Company’s portfolio of fixed income securities, placement with banks, current accounts, insurance and reinsurance receivables and loans issued are subject to credit risk. This risk is defined as the potential loss in value resulting from adverse changes in a borrower’s ability to repay the debt. The objective of the Company is to earn competitive returns by investing in a diversified portfolio of securities.

The Company reinsures certain risks with reinsurance companies. The selection of reinsurance companies is based on criteria related to solvency and reliability and, to a lesser degree, diversification (the spreading of risk across counterparties).

The Company also has other receivable balances subject to credit risk. The most significant of these balances are receivable from agents and premiums receivable. To mitigate the risk of policyholders not paying amounts due all policies issued contain provisions that cancel the policy in the event of non-payment of the premium on the due date.

To mitigate the credit risk of placements with banks, the Company aims to diversify its placements and mainly invests its funds with those Armenian banks whose credibility is assessed as high by the management. The Company manages the credit risk of securities by buying only State securities.

The maximum exposure to credit risk is generally reflected in the carrying amounts of financial assets on the statement of financial position.

The Company’s maximum exposure to credit risk is presented in the following table. The impact of possible netting of assets and liabilities to reduce potential credit exposure is not significant.

In AMD thousand 2015 2014 Cash and cash equivalents, except for cash on hand 28,422 22,513 Bank deposits 1,940,374 1,483,754 Financial instruments at fair value through profit or loss 386,664 1,113,166 Loans issued 23,221 54,221 Insurance and reinsurance receivables 418,917 578,538 Other financial assets - 11,850 2,797,598 3,264,042

36 “RESO” Insurance Closed Joint-Stock Company Notes to the financial statements for the year ended 31 December 2015

23. Financial risk management (continued) d) Liquidity risk Liquidity risk is the risk that the Company will encounter difficulty in raising funds to meet its commitments.

The Company maintains liquidity management with the objective of ensuring that funds will be available at all times to honor all cash flow obligations as they become due. The Company’s liquidity policy is reviewed and approved by the management.

The following table shows financial liabilities of the Company by their remaining contractual maturity as at 31 December 2015 based on undiscounted cash flows on the basis of their earliest possible contractual maturity.

Less than 1 year to More than Carrying In AMD thousand 1 year 5 years 5 years Total value Financial liabilities Liabilities under repurchase agreements 287,702 --287,702 286,763 Insurance and reinsurance payables 59,358 --59,358 59,358 Subordinated debt 33,863 135,450 551,475 720,788 512,232 Other financial liabilities 141,145 --141,145 141,145 Total financial liabilities 522,068 135,450 551,475 1,208,993 999,498

The following table shows financial liabilities of the Company by their remaining contractual maturity as at 31 December 2014 based on undiscounted cash flows on the basis of their earliest possible contractual maturity.

Less than 1 year to More than Carrying In AMD thousand 1 year 5 years 5 years Total value Financial liabilities Liabilities under repurchase agreements 394,909 - - 394,909 394,434 Insurance and reinsurance payables 115,432 - - 115,432 115,432 Other financial liabilities 171,085 - - 171,085 171,085 Subordinated debt 66,496 1,149,427 1,215,923 1,005,868 Total financial liabilities 747,922 1,149,427 - 1,897,349 1,686,819

e) Fair value of financial assets and liabilities

The Company estimates the fair value of financial assets and liabilities to be not materially different from their carrying values.

37 “RESO” Insurance Closed Joint-Stock Company Notes to the financial statements for the year ended 31 December 2015

25. Insurance risk management a) Risk management objectives and policies for mitigating insurance risk

The primary insurance activity carried out by the Company assumes the risk of loss from individuals or organisations that are directly subject to the risk. Such risks may relate to property, liability, accident, health, cargo or other perils that may arise from an insurable event. As such the Company is exposed to the uncertainty surrounding the timing and severity of claims under the insurance contract. The principal risk is that the frequency and severity of claims is greater than expected. Insurance events are, by their nature, random, and the actual number and size of events during any one year may vary from those estimated using established statistical techniques.

The Company manages its insurance risk through the use of established statistical techniques, reinsurance of risk concentrations, underwriting limits, approval procedures for transactions, pricing guidelines and monitoring of emerging issues.

(i) Underwriting strategy

The Company’s underwriting strategy seeks diversity so that the Company’s portfolio at all times includes several classes of non-correlating risks and that each class of risk, in turn, is spread across a large number of policies. Management believes that this approach reduces the variability of the outcome.

The underwriting strategy is set out in the business plan that stipulates the classes and subclasses of business to be written and the territories in which business is to be written. The strategy is implemented through underwriting guidelines that determine detailed underwriting rules for each type of product. The guidelines contain insurance concepts and procedures, descriptions of inherent risk, terms and conditions, rights and obligations, documentation requirements, template agreement/policy examples, rationale of applicable tariffs and factors that would affect the applicable tariff. The tariff calculations are based on accident probability and variation, loss ratio, loading for contingencies, expense loading and profit loading. Adherence to the underwriting guidelines is monitored by Management on an on-going basis.

(ii) Reinsurance strategy

The Company reinsures a portion of the underwritten risks in order to control its exposures to losses, ensure the financial stability of the company and protect capital resources. The Company mainly buys proportional reinsurance on quota share and surplus reinsurance contracts bases to reduce the net exposure to the Company for every individual contract or in other specified circumstances depending on the line of business.

Ceded reinsurance could contain credit risk in connection with the individual reinsurance contract and the reinsurers’ rules and preferences. The Company monitors the financial conditions of reinsurers on an ongoing basis and reviews its reinsurance arrangements periodically.

The Company does not utilize any non-proportional reinsurance. b) Terms and conditions of insurance contracts and nature of risks covered

The terms and conditions of insurance contracts that have a material effect on the amount, timing and uncertainty of future cash flows arising from insurance contracts are set out below. In addition, the following gives an assessment of the Company’s main products and the ways in which it manages the associated risks.

38 “RESO” Insurance Closed Joint-Stock Company Notes to the financial statements for the year ended 31 December 2015

(i) Motor

Product features

Around 8% of Company’s insurance portfolio during 2015 relates to Motor insurance, including fully comprehensive insurance (“Casco”), Motor personal accident (“MPA”) and motor third party liability insurance (“CMTPL”). Under Casco contracts, corporate entities and individuals are reimbursed for any loss of, or damage caused to their vehicles. MTPL contracts provide indemnity cover to the owner of the motor vehicle against compensation payable to third parties for property damage, death or personal injury. Motor insurance therefore includes both short and longer tail coverages. Claims that are typically made quickly are those that indemnify the policyholder against motor physical damage or loss. Claims that take longer to finalise, and are more difficult to estimate, relate to bodily injury claims.

Management of risk

In general, motor claims reporting lags are minor, and claim complexity is relatively low. Overall the claims liabilities for this line of business create a moderate estimations risk. The Company monitors and reacts to trends in repair costs, injury awards and the frequency of theft and accident claims.

The frequency of claims is affected by adverse weather conditions, and the volume of claims is higher in the winter months.

Motor lines of insurance are underwritten based on the Company’s proprietary accident statistics database. The Company reinsures its Casco risks by way of quota share treaties, which limit the Company’s exposure to 30% ultimate net loss for each and every loss occurrence.

(ii) Medical insurance

Product features

Around 3% of Company’s insurance portfolio during 2015 relates to Medical insurance. These contracts pay benefits for medical treatment and hospital expenses. The portfolio consists predominantly of collective corporate policies. The Company does not actively promote individual medical insurance contracts in order to avoid adverse selection of the insured.

Management of risk

Health insurance cover is subject to the primary peril of the need for a medical treatment. The Company manages its risks through writing predominantly corporate policies and through the use of medical screening so that pricing considers current health conditions and family medical history of the insured.

(iii) Compulsory medical insurance

Product features

Around 4% of Company’s insurance portfolio during 2015 relates to Compulsory Medical Insurance. These represent the remaining effects of this insurance type as the Company discontinued this line of business due to legislative changes in the Republic of Armenia.

Management of risk

The compulsory medical insurance is developed by the Government through the mediation of insurance companies. The package cannot be changed by insurance company. By using the exceptions of covers, the Company makes the supplemental packages to intend risk control mechanism.

39 “RESO” Insurance Closed Joint-Stock Company Notes to the financial statements for the year ended 31 December 2015

Additionally the Company actively promote predominantly of collective policies form same Government body employees in order to avoid adverse selection of the insured.

(iv) Property

Product features

The Company writes property insurance. This includes both private property insurance and industrial property insurance. Property insurance indemnifies the policyholder, subject to any limits or excesses, against the loss or damage to their own tangible property.

The event giving rise to a claim for damage to buildings or contents usually occurs suddenly (as for fire and burglary) and the cause is easily determinable. The claim will thus be notified promptly and can be settled without delay. Property business is therefore classified as short-tailed.

Management of risk

The key risks associated with this product are underwriting risk, competitive risk and claims experience risk (including the variable incidence of natural disasters). The Company is also exposed to the risk of exaggeration and dishonest action by claimants.

Underwriting risk is the risk that the Company does not charge premiums appropriate for the different properties it insures. For private property insurance, it is expected that there will be large numbers of properties with similar risk profiles. However, for commercial business this may not be the case. Many commercial property proposals comprise a unique combination of location, type of business, and safety measures in place. Calculating a premium commensurate with the risk for these policies will be subjective, and hence risky.

These risks are managed primarily through the pricing and reinsurance processes. The Company uses strict underwriting criteria to ensure that the risk of losses is acceptable to the Company. The Company reinsures its property risks by way of surplus treaties and also facultative reinsurance contracts. The treaties limit the Company’s exposure to AMD 60,000 thousand for mutually related risks.

(v) Compulsory motor third party liability insurance

Product features

On January 2011 the Government of Armenia introduced Compulsory motor third part liability insurance. This type of insurance is regulated by the Government in terms of premium rate and amount of coverage. 73.2% of Company’s insurance portfolio of 2015 relates to CMTPL. These contracts provide indemnity cover to the owner of the motor vehicle against compensation payable to third parties for property damage, death or personal injury. CMTPL insurance therefore includes both short and longer tail coverage. Claims that are typically made quickly are those that indemnify the third party against motor or other property physical damage or loss. Claims that take longer to finalise, and are more difficult to estimate, relate to bodily injury claims.

Concentrations of insurance risk

A key aspect of the insurance risk faced by the Company is the extent of concentration of insurance risk which may exist where 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 with similar risk features, and relate to circumstances where significant liabilities could arise. An important aspect of the concentration of insurance risk is that it may arise from the accumulation of risks within a number of individual classes or contract tranches.

Concentrations of risk can arise in both high-severity, low frequency events, such as natural disasters and in situations where underwriting is biased towards a particular Company, such as a particular geography.

40 “RESO” Insurance Closed Joint-Stock Company Notes to the financial statements for the year ended 31 December 2015

The Company’s key methods in managing these risks are two-fold. Firstly, the risk is managed through appropriate underwriting. Underwriters are not permitted to underwrite risks unless the expected profits are commensurate with the risks assumed. Secondly, the risk is managed through the use of reinsurance. The Company purchases reinsurance coverage for various classes of its motor and property business. The Company assesses the costs and benefits associated with the reinsurance programme on an ongoing basis. c) Reinsurance risk

The Company cedes insurance risk to limit exposure to underwriting losses under various agreements that cover individual and portfolio risks. These reinsurance agreements spread the risk and minimise the effect of losses. The amount of each risk retained in facultative reinsurance depends on the Company’s evaluation of the specific risk, but in treaty reinsurance any event does not exceed AMD 60,000 thousand for mutually related risks.

Under the terms of the treaty reinsurance agreements, the reinsurers pay their share of losses in the event the claim is paid. However, the Company remains liable to its policyholders with respect to ceded insurance if any reinsurer fails to meet the obligations it assumes.

When selecting a reinsurer the Company considers their financial strength ratings and relative creditworthiness. The creditworthiness of the reinsurer is assessed from public rating information, financial statements and from internal investigations. d) Claims development

Claims development information is disclosed in order to illustrate the insurance risk inherent in the Company. The tables compare the claims paid on an accident year basis with the provisions established for these claims. The top part of the table provides a review of current estimates of cumulative claims and demonstrates how the estimated claims have changed at subsequent reporting or accident year-ends. The estimate is increased or decreased as losses are paid and more information becomes known about the frequency and severity of unpaid claims. The lower part of the table provides a reconciliation of the total provision included in the statement of financial position and the estimate of cumulative claims.

This section also includes separate claims development tables for CMTPL.

While the information in the table provides a historical perspective on the adequacy of unpaid claims estimates established in previous years, readers of these financial statements are cautioned against extrapolating redundancies or deficiencies of the past on current unpaid loss balances. The Company believes that the estimate of total claims outstanding at the end of 2015 is adequate. However, due to the inherent uncertainties in the provisioning process, it cannot be assured that such balances will ultimately prove to be adequate.

Analysis of claims development (gross) – Total

Accident year 2011 and In AMD thousand earlier 2012 2013 2014 2015 Total Estimate of cumulative claims At end of accident year 1,124,880 2,091,380 3,371,302 1,627,219 1,149,898 9,364,679 - one year later 1,116,584 2,118,076 3,239,608 1,588,554 - - - two years later 1,115,985 2,121,010 3,227,213 - - - - three years later 1,117,080 2,119,275 - - - - - four and more years later 1,117,080 - - - - - Estimate of cumulative claims 1,117,080 2,119,275 3,227,213 1,588,554 1,149,898 9,202,020 Cumulative payments to date (1,117,080) (2,115,052) (3,224,395) (1,578,777) (954,418) (8,989,722) Gross outstanding claims liabilities - 4,223 2,818 9,777 195,480 212,298

41 “RESO” Insurance Closed Joint-Stock Company Notes to the financial statements for the year ended 31 December 2015

Analysis of claims development (gross) – CMTPL

Accident year 2011 and In AMD thousand earlier 2012 2013 2014 2015 Total Estimate of cumulative claims At end of accident year 870,366 1,272,319 1,539,813 1,132,702 952,880 5,768,080 - one year later 839,150 1,262,743 1,476,333 1,106,720 - - - two years later 838,310 1,260,743 1,488,072 - - - - three years later 839,159 1,262,943 - - - - - four and more years later 839,159 - - - - - Estimate of cumulative claims 839,159 1,262,943 1,488,072 1,106,720 952,880 5,649,774 Cumulative payments to date (839,159) (1,258,738) (1,485,395) (1,099,041) (795,457) (5,477,790) Gross outstanding claims liabilities - 4,205 2,677 7,679 157,423 171,984

Analysis of claims development (gross) – Non-CMTPL

Accident year 2011 and In AMD thousand earlier 2012 2013 2014 2015 Total Estimate of cumulative claims At end of accident year 254,514 819,061 1,831,489 494,517 197,018 3,596,599 - one year later 277,434 855,333 1,763,275 481,834 - - - two years later 277,675 860,267 1,739,141 - - - - three years later 277,921 856,332 - - - - - four and more years later 277,921 - - - - - Estimate of cumulative claims 277,921 856,332 1,739,141 481,834 197,018 3,552,246 Cumulative payments to date (277,921) (856,314) (1,739,000) (479,736) (158,961) (3,511,932) Gross outstanding claims liabilities - 18 141 2,098 38,057 40,314

26. Capital management

The CBA sets and monitors capital requirements for the Company.

The Company defines as capital those items defined by statutory regulation as capital for insurance companies. Under the current capital requirements set by the CBA, insurance companies have to maintain a minimum total capital of AMD 1,500,000 thousand (31 December 2014: AMD 1,500,000 thousand). The Company was not compliant with this minimum level capital requirement based on average daily capital balances for December 2015. The breach was remedied in February 2016.

Also under the current capital requirements set by the CBA, the Company has to maintain a ratio of capital to risk weighted assets (statutory capital ratio) above the prescribed minimum level. As at 31 December 2015, this minimum level is 1 (2014: 1). The Company’s statutory capital ratio of 0.69 was reported based on average daily capital balances for December 2015 (1.78 as at 31 December 2014). The breach was remedied as at 31 December 2015 through additional share capital issued, for which the Charter was amended on 29 December 2015.

No fines or other measures are expected to be applied by the CBA due to above breaches.

42 “RESO” Insurance Closed Joint-Stock Company Notes to the financial statements for the year ended 31 December 2015

The calculation of statutory capital ratio based on requirements set by the CBA as at 31 December 2015 and 2014 is as follows:

31 December 2015 31 December 2014 In AMD thousand Unaudited Unaudited Charter capital 2,350,000 1,870,000 General reserve - - Retained earnings per CBA accounting principles, less deductions under CBA regulations (1,733,227) 18,298 Total capital 616,773 1,888,298 Risk weighted assets 893,874 1,060,841 Statutory capital ratio 0.69 1.78

The risk-weighted assets are measured by means of a hierarchy of risk weights classified according to the nature and reflecting an estimate of credit, market and other risks associated with each asset and counterparty, taking into account any eligible collateral or guarantees.

There were no changes in the Company’s approach to capital management during the year.

27. Contingencies a) Litigation

From time to time and in the normal course of business, claims against the Company are received. On the basis of own estimates and internal and external professional advice the Management is of the opinion that no material losses will be incurred, which are not already recorded as a provision in these financial statements. b) Taxation contingencies

The taxation system in the Republic of Armenia is relatively new and is characterized by frequent changes in legislation, official pronouncements and court decisions, which are often unclear, contradictory and subject to varying interpretation by different tax authorities. Taxes are subject to review and investigation by a number of authorities, which have the authority to impose severe fines, penalties and interest charges. In the event of a breach of tax legislation, no liabilities for additional taxes, fines or penalties may be imposed by tax authorities once three years have elapsed from the date of the breach.

These circumstances may create tax risks in the Republic of Armenia that are substantially more significant than in other countries. Management believes that it has provided adequately for tax liabilities based on its interpretations of applicable Armenian tax legislation, official pronouncements and court decisions. However, the interpretations of the relevant authorities could differ and the effect on these financial statements, if the authorities were successful in enforcing their interpretations, could be significant.

43 “RESO” Insurance Closed Joint-Stock Company Notes to the financial statements for the year ended 31 December 2015

28. Related party transactions a) Transactions with directors and senior management

Total remuneration of the Board of directors and senior management included in administrative expenses (note 7):

In AMD thousand 2015 2014 Salary compensation 67,690 80,806 Total remuneration 67,690 80,806

The outstanding balances and respective average interest rates as at 31 December 2015 and 2014 with directors and senior management are as follows:

Average interest Average interest In AMD thousand 31 December 2015 rate 31 December 2014 rate Loans issued 3,451 12% 3,990 12% Other assets 260 - 380 - Total 3,711 - 4,370 -

The results of transactions with directors and senior management for the year ended 31 December 2015 and 2014 are as follows:

In AMD thousand 2015 2014 Statement of profit or loss and other comprehensive income Gross premiums written 343 258 Interest income 374 360 b) Transactions with entities with significant influence

Transactions with entities with significant influence include transactions with shareholders of the Company. The outstanding balances as at 31 December 2015 and 2014 with entities with significant influence are as follows:

31 December 2015 31 December 2014 Average effective Average effective ’000 AMD interest rate, % ’000 AMD interest rate, % Statement of financial position Liabilities Subordinated debt 256,116 7.0% 502,934 7.0% Other liabilities (dividend payable) 41,940 - 41,940 -

The results of transactions with entities with significant influence for the year ended 31 December 2015 and 2014 are as follows:

In AMD thousand 2015 2014 Statement of profit or loss and other comprehensive income Interest expenses (19,516) (36,120)

44 “RESO” Insurance Closed Joint-Stock Company Notes to the financial statements for the year ended 31 December 2015

c) Transactions with other related parties

Transactions with other related parties mainly include transactions with companies under common control. The outstanding balances as at 31 December 2015 and 2014 with other related parties are as follows:

31 December 2015 31 December 2014 Average effective Average effective ’000 AMD interest rate, % ’000 AMD interest rate, % Statement of financial position Assets Cash and cash equivalents 12,179 - 11,832 - Bank deposits 282,849 11.0% 251,647 7.0% Liabilities Subordinated debt 256,116 7.0% 502,934 7.0% Insurance and reinsurance payables (commission accrued) 7,405 - 22,648 -

The results of transactions with other related parties for the year ended 31 December 2015 and 2014 are as follows:

In AMD thousand 2015 2014 Statement of profit or loss and other comprehensive income Written premiums ceded to reinsurers (82,858) (78,836) Gross written premiums 40,329 4,927 Interest expenses (19,516) (36,120) Interest income 23,842 18,465 Net reinsurance commission income 22,843 23,563 Cancelled premiums and provision for insurance receivables (1,552) (400) Claims settled, net of reinsurance (reinsurance share) (826) 18,064 Acquisition costs (15,005) (245)