years AnnuAl report 2010 CONTENTS MESSAGE TO THE SHAREHOLDERS 3 BULGARIA IN 2010 5 Economy Overview 5 Bulgarian Insurance Market 6 ARMEEC IN 2010 9 About the Company 9 Business Results 12 Key Financial Data 17 New Products and Initiatives 19 Corporate Social Responsibility 19 Future Development 20 FINANCIAL STATEMENTS 21 Statement of Financial Position 21 Statement of Comprehensive Income 23 Statement of Changes in Equity 24 Statement of Cash Flows 26 INDEPENDENT AUDITOR’S REPORT 27 DISTRIBUTION AND BRANCH NETWORK 29 2 ANNUAL REPORT 2010 MESSAGE TO THE SHAREHOLDERS rumen Georgiev tsvetanka Krumova Chairman of Member of the Management Board the Management Board and Executive Director and Executive Director Dear Shareholders, The year 2010 was among the best in the history of Armeec JSC in terms of business performance – the company reported gross written premiums over BGN 155 million and at the year-end ranked third on the Bulgarian insurance market, which is the highest position reached over the years. At the same time the company image and credibility improved, which was evidenced by the appraisal of the rating agencies. The objectives set by the management over the years, has been related to gaining a competitive advantage in the insurance market through an effective combination of basic insurance business 3 ANNUAL REPORT 2010 MESSAGE TO THE SHAREHOLDERS processes, rational use of assets and enhancing value for customers. The results, especially in the last year, when the entire economy was affected by the economic crisis, proved that the chosen approach was correct – against the general decline of the market Armeec JSC achieved a growth and gained the confidence of a wide range of clients and partners. After a period of expansive imposition of new products on the market, in 2010 Armeec JSC entered a new stage of development both in product offering and customer service. The company launched on the market such products, which were specifically designed to meet the customer needs in difficult economic conditions. The combined products Armeec Solidarity and Armeec Summer were accepted very well last year, as well as the cover of road assistance abroad, which was included free of charge in the motor casko policy of Armeec. The adjustment of our products to the requirements of the clients is applied also to the methods of sale, by implementation of interactive conclusion of policies via internet and telephone, along with online payments. The focus of our work is placed on the service, because the customer satisfaction is paramount for our success. We continuously increase the points of sale both by establishing new agencies and representative offices and through partnerships with the companies from Chimimport Holding, especially with Central Cooperative Bank. Our policies can be taken out in all offices of the bank and since the year 2010 we have our employees in many branch offices of CCB. Our achievements over the years make us proud, because from a small company with less than 2% market share and 12th position in the ranking by premium income, Armeec JSC is now number 3 in the Bulgarian insurance market with more than 11 per cent market share. Our aim is to increase the efficiency and sustainability of sales by continuous enhancement of our services, improvement and flexibility of the product portfolio, better accessibility of services, highest optimization of the underwriting and claims handling processes, which will lead the company to the top positions in all lines of business in the coming years. Although the year 2011 is expected to be a difficult one and full of regulatory changes, we are optimistic about the successful future of the company, because the challenges generate new effective solutions. In Armeec we have a clear vision how to achieve new results by further expansion of the opportunities for obtaining profits, professional risk management and use of the advantages of synergy. Rumen Georgiev Tsvetanka Krumova Chairman of the Management Board and Member of the Management Board and Executive Director Executive Director 4 BULGARIA IN 2010 ECONOMy OvERvIEW In 2010 the Bulgarian economy started a gradual recovery. The GDP increased by 0.2 per cent, reaching BGN 70 474 million, for which the export of goods and services contributed most. Over the year exports rose 16.2 per cent, exceeding pre-crisis levels in real terms. Higher domestic demand pushed goods and services imports, whose real growth for the year 2010 came to 4.5%. Uncertainty about world economic recovery curbed fixed asset investment by 16.5% in 2010. Slowing foreign direct investment, weak domestic demand and cautious bank lending constricted investment additionally. In 2010 final household consumption declined by 1.3%. The consumer confidence index was on the rise over the year but uncertainty about labour market and household income improvement held back consumer expenditure. Gross value added in 2010 rose 0.2% (having dipped 3.3% in 2009) and the adjustment of economy varied by sectors. The labour market did not improve in 2010 despite the gradual recovery of economic activity. The employment fell 5.9 per cent (mainly through cuts in services), and the rate of unemployment continued rising, and reached 11.2% at the end of the year. After falling 2.9 per cent in 2009, labour productivity increased 6.4% in 2010 due to decreased number of employed and gradual recovery of economic activity. Rising global commodity prices were the major driver of inflation in Bulgaria. By the end of 2010 cumulative inflation reached 4.4 per cent (2.8 percentage points higher than in December 2009), and the average annual inflation was 3%. 5 ANNUAL REPORT 2010 BULGARIA IN 2010 The overall current and capital account deficit in 2010 contracted to Eur 65.4 million (0.2% of GDP) against Eur 2640.6 million (7.6% of GDP) in 2009. This improvement stemmed mainly from the trade deficit drop to Eur 2412.5 million in 2010, representing a decrease of Eur 1761.1 million compared to 2009. Net direct investment inflow into Bulgaria was positive at Eur 1458.9 million (4% of GDP) in 2010. It went mainly into manufacturing (35.9%), electricity and heating generation and distribution (16.5%), transport and communications (15.4%), real estate operations (11.1%) and financial intermediation (9.84%). In the period January-December 2010 the gross external debt dropped by Eur 1045 million to Eur 36.7 billion (101 per cent of GDP), decreased bank debt contributing most. Source: Bulgarian National Bank Bulgarian Insurance Market In 2010 the insurance market continued to shrink as a result of the strong impact of the world financial crisis on the Bulgarian economy. Among the main factors, which influenced the lower demand for insurance products, were the decreasing business activity, shrinking household consumption, the decline in sales of both new and used cars, the reduction of lease purchases and the limited lending by banks. However, unlike many other countries, in Bulgaria no insurer required support from the state to ensure its financial stability. The consumer confidence in the insurance business was preserved. At the end of 2010 the total number of licensed insurers domiciled in the Republic of Bulgaria was 35, of which 19 were non-life insurance companies, 14 - life insurance companies and 2 were mutual insurance cooperatives. During the reporting period the non-life reinsurance business was carried out by GP Reinsurance EAD, which was licensed in 2008. In 2010 the gross premium income generated by the Bulgarian insurers amounted to BGN 1623 million, down 3.5% on an annual basis, compared to BGN 1681 million in 2009, when a larger decrease of 5.9% was reported. The insurance penetration (gross premium income as percentage of GDP) over the last year decreased to 2.3%, and was back to its pre-2006 level. The insurance density (gross premium income per capita) also fell from BGN 222 in 2009 to BGN 216 over the last year. In 2010 the insurance market in Bulgaria was still dominated by general insurance, whose share went down from 87% at the end of 2009 to 84.9% in 2010. 6 BULGARIA IN 2010 PREMIUM INCOME OF THE NON-LIFE Insurance MARKET FOR THE PERIOD 2006 – 2010 (BGN ‘000) BG’000 1,600,000 1 532 438 1 456 840 1 374 787 1,400,000 +263 856 1 268 582 1,200,000 1 060 138 +208 444 1,000,000 +140 949 1 532 438 1 456 840 800,000 1 060 138 600,000 919 189 1 268 582 400,000 200,000 0 -75 598 -82 053 -200,000 2006 2007 2008 2009 2010 The reported gross premium income from non-life insurance amounted to BGN 1375 million in 2010, down 5.6% on an annual basis. The insurance penetration index in general insurance was 2% compared to 2.1% in 2009. The insurance density was BGN 185.6 per capita against BGN 192.9 in 2009. The market share of the four companies, which reported highest premium income at the end of 2010 (Bulstrad vienna Insurance Group, DZI General Insurance, Armeec and Bul Ins) was 47.1% compared to 49.9% at the end of 2009. Over the last few years a trend of an increased competition and lower concentration was registered on the non-life market. It was a positive trend for the industry that the incurred non-life claims fell by 1.6% on an annual basis and came to BGN 749 million. The amount of indemnities paid in the non-life sector also decreased by 0.2% and was BGN 678 million in 2010. 7 BULGARIA IN 2010 Breakdown OF PREMIUM INCOME By LINE OF BUSINESS IN 2010 Marine 1% Cargo 1% Aviation 2% Financial Risks 2% Personal Accident 2% Liabilities 2% Property 19% Motor Casko 36% Motor TPL 35% The main market driver in 2010 was the motor business.