Independent Auditor’s Report on Separate Financial Statements for 2016

To the Shareholder of Česká pojišťovna a.s.:

Opinion

We have audited the accompanying financial statements of Česká pojišťovna a.s. (hereinafter also the “Company”) prepared in accordance with International Financial Reporting Standards as adopted by the European Union (EU-IFRS), which comprise the statement of financial position as at 31 December 2016, and the income statement, statement of comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies and other explanatory information. For details of the Company, see Note A.1 to the financial statements.

In our opinion, the accompanying financial statements give a true and fair view of the financial position of Česká pojišťovna a.s. as at 31 December 2016, and of its financial performance and its cash flows for the year then ended in accordance EU-IFRS.

Basis for Opinion

We conducted our audit in accordance with the Act on Auditors and Auditing Standards of the Chamber of Auditors of the Czech Republic, which are International Standards on Auditing (ISAs), as amended by the related application clauses. Our responsibilities under this law and regulation are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Company in accordance with the Act on Auditors and the Code of Ethics adopted by the Chamber of Auditors of the Czech Republic and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Key Audit Matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

We have fulfilled the responsibilities described in the Auditor‘s responsibilities for the audit of the financial statements section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the financial statements. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying financial statements.

Fair value of Level 2 and Level 3 financial instruments

The Company’s investment portfolio, including derivatives, disclosed in Note F.3 to the financial statements, represents a major part of the Company’s total assets. These investments are either valued at fair value in accordance with IAS 39 or such fair value is disclosed in the Notes to the separate financial statements. A significant part of the investment portfolio consists of illiquid or non-quoted instruments, classified under IFRS as Level 2 and Level 3. Fair values of these instruments are based on valuation models that use inputs and assumptions other than quoted prices included within Level 1 that are either observable or unobservable (as described in Note C.1.31.8 Fair value measurement). The determination of the fair value of these investments involves higher degree of management judgment and estimate applied in the valuation models and due to this fact this area requires significant audit effort and was assessed as a key matter for our audit.

Our audit procedures considered both the positions that are presented at fair value in the Statement of financial position and those positions carried at amortized cost in the Statement of financial position but for which the fair value is required to be disclosed.

We assessed the management of and process over the valuation of Level 2 and Level 3 financial instruments. We tested design and operating effectiveness of the Company`s internal controls over the valuation process. With the assistance of our valuation specialists we evaluated the models, inputs and assumptions used by the Company in determining fair values. We compared the observable market inputs into valuation models, such as quoted prices, to externally available market data to assess whether appropriate inputs were used in the valuation. In case of non-observable inputs we performed an expert assessment of their reasonableness. For a sample of instruments, we compared the fair values derived from our internal valuation model to the fair values determined by the Company. We also considered the adequacy of the Company`s disclosures about the valuation basis, methodologies and inputs used in the fair value measurement in accordance with EU-IFRS.

Estimates used in calculation of insurance liabilities and Liability Adequacy Test

The Company’s insurance contract liabilities, disclosed in Note F.10 in the financial statements represent a significant part of the Company’s total liabilities. Insurance contract liabilities are valued in accordance with IFRS 4. Consistent with the insurance industry, the Company uses actuarial models to support the valuation of the insurance contract liabilities. The complexity of the models may give rise to errors as a result of inadequate/incomplete data or design or application of the models. Economic and actuarial assumptions, such as investment return, costs, interest rates, mortality, morbidity, claims settlement expectations and patterns and customer behavior (as disclosed in Note E.7 in the financial statements) are key inputs used to estimate these long-term liabilities.

This area involves significant management estimate and judgement over uncertain future outcomes, including primarily the timing and ultimate full settlement of long term policyholder liabilities, which requires involvement of our internal actuarial specialists and significant audit effort. As a consequence we considered it a key audit matter for our audit.

We used our internal actuarial specialists to assist us in performing our audit procedures. Our audit focused on the models considered more complex and/or requiring significant judgement in the setting of assumptions such as mortality, morbidity and claims development.

We assessed the design and tested the operating effectiveness of internal controls over the actuarial process including governance and approval process for setting of economic and actuarial assumptions.

We also assessed the process over the Company’s actuarial analyses including estimated versus actual results and experience studies. For the assumption setting process, we assessed the experience analyses performed by the Company. Our assessments also included, as necessary, review of specified economic and actuarial assumptions considering management’s rationale for the actuarial judgments applied along with comparison to applicable industry experiences.

We evaluated actuarial judgements used in the models, which may vary depending on the product and/or the specifications of the product, and also the compliance of the models with the applicable accounting standards. Furthermore we performed audit procedures to determine the models were calculating the insurance contracts liabilities accurately and completely.

We verified the validity of management’s liability adequacy testing which is a key test performed to check that the liabilities are adequate as compared to the expected future contractual obligations. Our work on the liability adequacy tests included review of the projected cash flows and of the assumptions adopted in the context of both the Company and industry experience and specific product features.

Review of documentation for actuarial assumptions and expert judgment involved is an essential and integral part of our assessment.

We also assessed the adequacy of the disclosures regarding these liabilities in the financial statements to determine they were in accordance with EU-IFRS.

First time implementation of Solvency II

In 2016 the Company had to comply, for the first time, with the requirements of Solvency II framework. In the Note E.10.1 to the financial statements, the Company disclosed its compliance with regulatory capital requirement under the Solvency II framework. This statement is based on the preliminary calculation as the final solvency position according to the Solvency II requirements will be available after the date of the financial statements and will be published as a part of the Solvency and Financial Condition Report (SFCR) at the end of May 2017.

The Company uses Solvency II internal model. Consistently with the Solvency II framework, the Company uses specific valuation models and assumptions to calculate Solvency Capital Requirement and Market Value Balance Sheet, in particular insurance contract liabilities. With respect to the complexity of the models, significant judgment applied and the importance to meet the capital requirement we considered this area as a key audit matter.

We verified that the local supervisor approved the use of internal model for Solvency II purposes and this model was used by the Company. We have performed, in cooperation with our actuarial specialists, additional procedures on Market Value Balance Sheet which included among others evaluation of key assumptions used. The procedures were designed to verify whether the Solvency position meets the requirement as disclosed in the Note E.10.1 to the financial statements.

Other Information

Other information comprises information included in the annual report other than the financial statements and our auditor’s report thereon. Management is responsible for the other information. In connection with our audit of the financial statements, our responsibility is to report on the other information.

As described in Note A.4 to the financial statements, at the date of preparation of the accompanying financial statements, Česká pojišťovna a.s. has not prepared the annual report and intends to include the information in the consolidated annual report. Accordingly, our comments on the other information do not form part of the independent auditor’s report.

Responsibilities of the Company’s Board of Directors and Audit Committee for the Financial Statements

The Board of Directors is responsible for the preparation and fair presentation of the financial statements in accordance with EU-IFRS and for such internal control as the Board of Directors determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, the Board of Directors is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Board of Directors either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.

The Audit Committee is responsible for overseeing the Company’s financial reporting process.

Auditor’s Responsibilities for the Audit of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with above regulations will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

As part of an audit in accordance with the above law or regulation, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:
– Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
– Obtain an understanding of internal control relevant to the audit 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 Company’s internal control.
– Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Board of Directors.
– Conclude on the appropriateness of the Board of Directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern.
– Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

We communicate with the Audit Committee regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide the Audit Committee with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with the Audit Committee all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with the Audit Committee, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

Ernst & Young Audit, s.r.o.
License No. 40

17 March 2017
Prague, Czech Republic
 
 
 
A member firm of Ernst & Young Global Limited
Ernst & Young Audit, s.r.o. with its registered office at Na Florenci 2116/15, 110 00 Prague 1 – Nove Mesto,
has been incorporated in the Commercial Register administered by the Municipal Court in Prague,
Section C, entry no. 88504, under Identification No. 26704153.