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Annual report 2012

MANDAL GENERAL INSURANCE

ANNUAL REPORT 2012

Designed by Creative Mind LLC

3


Content

7

Our Philosophy

13

Mongolian Risk Report

35

Social Impact

41

Mandal Achievements

45

AUDITED FINANCIAL STATEMENT


Annual report 2012

People for People

OUR MiSSION

To bring a positive change to people through the best professional conduct

OUR GOAL

To improve the understanding of risk management in society and provide high quality insurance products

OUR VISION

To create a Mongolian brand that competes globally by establishing a world class financial services franchise

5


CEO and board members

jordan calonego

U.GANZORIG

Board Chairman

President, Board Member

M.DAVAANYAM

D.JARGALSAIKHAN

Chief Executive Officer

Board Member

HARRIS KUPPERMAN

Jim Dwyer

Board Member

Board Member


Annual report 2012

OUR PHiLOSOPHY

7


Corporate Citizenship It was January 20th, 2013, when we received a call from the Ministry of Health in Mongolia. The officials at the ministry had long been planning to make the “The Checklist Manifesto” by Atul Gawande, a New York Times bestseller, available to every doctor in Mongolia. This was before they realized that Mandal had already translated the book, and given 1,000 copies of it to Mongolian surgeons as a part of its corporate social responsibility program. In his book Doctor Gawande shows how the simplest method of risk management - a checklist - can be effectively used by organizations ranging from investment banks to hospitals, to save thousands of lives and billions of dollars. The World Health Organization adopted Gawande’s ideas, and prepared a simple surgical checklist, which has been adopted in more than twenty countries. It is a new standard for care, and has been heralded as “the biggest clinical invention in thirty years” – improving the practice of preventing patients from acquiring hospital infections. In Mongolia, the traffic accident related fatality rate per capita is 3 times higher than Norway. This means that everyday there is a fatal accident from a road risk in Mongolia. Alarmingly, there are many similar risk statistics existing, which point to the urgent needs for improved risk management practices in Mongolia. Every morning at Mandal, we come to our desks with a passion to create ways to reduce risks, which surround Mongolian people in order to improve their living standards, and create a better environment. Moreover, it is our objective to help some 30,000 companies, which shoulder the Mongolian economy by creating jobs and products. We wish to work with them to effectively combat with all different risks in their operations. In 2012 we heavily invested in public risk education projects, which are unprecedented in terms of scale in the history of the Mongolian insurance sector. We also introduced innovative risk management products, and have engaged and educated our present and future customers, by extensively drawing on social media, PR, and viral marketing. Among other things, our staff have created video lessons on YouTube, organized risk forums and risk seminars, written weekly risk analysis, published books, and have run TV shows proving that an independent commercial enterprise can actually create a large and positive impact through the way it conducts its business activities.

Mandal Pride Eight hundred years ago Mongolians established the largest land mass country ever to exist. Since then, Mongolia has had a rich history of wins and losses. At some point in history, it even looked as if Mongolia would never be able to replicate its earlier successes. The modern, globalized world, with its free trade, free markets and free technology gives us a new opportunity for prosperity and for claiming our honor back in the global arena.


Annual report 2012

Today, many analysts believe, that Asia as a continent will be a global leader in economic prowess in the near future. Mongolia, with its young population and vast mineral resources, is ready to be part of that development. It is essential that Mongolia takes this opportunity and becomes a prominent player in the global marketplace. The word “Mandal” is an ancient Sanskrit word explaining the concept of attractiveness of all good things. This notion has been deeply instilled in the languages of Buddhist cultures around Asia. It’s no coincidence that we chose our name Mandal with a longterm vision of laying the foundations of a Pan-Asian financial services brand over the next 50 years. Mandal can be one of the stewardships leading Mongolia into prosperity, creating benchmark examples for other Mongolian companies, generating high ambitions in Mongolian people and cementing national pride.

Our People Free enterprises bring prosperity to the nation. Educated, hard working people with high ethical values and integrity are the backbone of a strong, innovating enterprise. Unfortunately, over the course of Mongolia’s political and economic transition period in the 1990s, our education system has been falling short of its objective of preparing a strong workforce. This has added more challenges to Mongolia based companies. Mandal’s human resource policy is centered on developing globally competitive people, who share a common vision and common values. We have spent 263 hours in human development in 2012, equipping our people with the necessary skills and knowledge in many areas – from financial management to better communication skills. In 2012, we also put special emphasis on strengthening our corporate culture, which is centered on hard-work and professionalism. The Buddha said “The meaning of your life is measured by not how much you had taken from it, but by how much you have given to it.” In his book, The Theory of Moral Sentiment, Adam Smith famously said “How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortunes of others, and render their happiness necessary to him, though he derives nothing from it, except the pleasure of seeing it.” In other words, the meaning of life is fulfilled when people create something for the good of other people, and get satisfaction from that. The entire philosophy of our organization is based upon establishing a platform where people can collaborate, synergize and together produce something that creates a positive impact; where people can be proud of their endeavors; and where people can find happiness after all.

Highlight Within only 16 months of commencing operations, Mandal, a Canadian-Mongolian joint company, has underwritten insurance policies for over 100,000 retail customers, and expanded its customer base to include many of Mongolia’s top companies. With an average annual growth rate of 30%, and with its astounding future potential, the Mongolia insurance industry is perfectly placed for receiving and working with our business in 2013 and beyond.

9


Management team

From left: B.Enkhtuvshin /Chief Financial Officer/, Ch.Bat-Ider /Vice President/, D.Dolgor /Vice President/, B.Zaya /Vice President/, B.Javkhlan /Head of Retail Insurance/, B.Bayasal /Senior Insurance Manager/ D.Dorjderem /Chief Underwriter/


Annual report 2012

OUR people bring in rich experiences that enrich our culture and promote professionalism. Mr. U.Ganzorig | President Ganzorig has extensive experience in trading, risk management, banking, insurance and private equity. He has held senior management positions at Tenger Insurance, Ulaanbaatar City Bank, Xac Bank and Trade and Development Bank before founding Mandal. He has a postgraduate degree in Financial management from MSM in Netherlands and BBA in accounting from National University of Mongolia. Ms. M.Davaanyam | Chief Executive Officer After obtaining a bachelor degree majoring in insurance from National University of Mongolia, Ms.Davaanyam Myagmar had spent 16 successful years of career in Mongolian insurance industry. She has held senior and executive management positions at various large insurance companies including Tenger Insurance, Mongol Daatgal and Nomin Insurance. Ms.Davaanyam has a BSc in Financial management from National University of Mongolia.

Mr. Jim Dwyer | Board Member Mr.Jim Dwyer is a financial professional with twenty five years of experience in investment banking with senior responsibilities for over 100 completed assignments. He has founded two merger and acquisition departments in New York City for major global investment banking firms. Jim Dwyer currently heads the Business Council of Mongolia, an influential business community. Jim graduated with an MBA from the Columbia Graduate School of Business and a BBA from the University of Notre Dame. Mr. D.Jargalsaikhan | Board Member Mr.Jargalsaikhan is a well-known economist, financial sector professional and publicist with 30 years of management experience. He is the host of a famous weekly TV talk show, DeFacto. Among his many assignments he had served as CEO of Xac Leasing and Capital bank and Head of Foreign Invesmtent and Foreign Trade agency of Mongolia. He obtained his MBA from University of Denver, his bachelor in economics from Moscow State University. Ms. B.Zaya| Vice President Ms. Zaya is in charge of the Business development and Reinsurance of Mandal General Insurance. Previously, she has been Vice President at Tenger Insurance, Head of Marketing at MCS Anungoo in Mongolia and General Manager at Teavana Corporation in Florida, U.S.A. Zaya has 11 years of business management experience. She has BA in Marketing and International Business from University of South Florida. Ms. D.Dorjderem | Chief Underwriter Ms. Dorjderem is Chief Underwriter of Mandal General Insurance. Previously she has been Chief Risk Officer at Tenger Insurance, senior administrator at IT department of Zoos Bank, and taught mathematics in Moscow. She has 11 years of research and analytical experience, mostly within financial sector. She has Masters degree in Finance from G.V.Plehanov University of Russia and Masters degree in Mathematics from Moscow City Pedagogical University. Mr. B.Javkhlan | Head of Retail Insurance Before joining Mandal Mr.Javkhlan had undertaken a successful career in insurance and IT sector. Since 2000 he had accomplished numerous IT projects aimed at increasing the efficiency of business organizations by enabling state of the art technologies for end users. Javkhlan had spent 5 years in Tokyo, Japan as a project leader at international IT company. Javkhlan had graduated from Mongolian Technical University with cum laude specializing in computer science.

11


Mr. B.Enkhtuvshin | Chief Financial Officer Enkhtuvshin is a Chief Financial Officer at Mandal General Insurance. Before joining Mandal in 2011 he has spent 7 years in the banking sector. Enkhtuvshin has worked as a Head of Treasury Department, Head of International Settlement Department and Head of Settlement Department at a Mongolian bank. Enkhtuvshin holds a MBA Degree from National University of Mongolia and BBA from ICB on Mongolia. Mr. Ch. Bat-Ider | Vice President Bat-Ider Chinbat has 18 years of experience in finance, human resources management and general administration. His career has spunned through commercial banks, international organizations and more recently aviation sector. Prior to joining Mandal, he has spent 4 years at Eznis Airways, the largest private airline in Mongolia, as Chief Financial Officer. Bat-Ider earned his MBA degree from Shidler College of University of Hawaii, USA and BBA in accounting from ICB, Mongolia. Mr. Jordan Calonego | Board Chairman Jordan Calonego is an entrepreneur, focused mainly on real estate and businesses related to real estate. He has over a decade of experience investing in public and private businesses with a focus on property and casualty insurance, real estate and various operating businesses. Mr. Calonego is also a board member and COO of Mongolia Growth Group Ltd. Mr. Calonego graduated from the Unitversity of Ottawa with an HBCom in Finance. He is also a Chartered Financial Analyst. Mr. Harris Kupperman | Board Member Harris Kupperman is the founder of Praetorian Capital, a hedge fund focused on using long-term macro trends to guide stock selection. Mr. Kupperman is also the Chairman and CEO of Mongolia Growth Group (YAK: Canada and MNGGF: USA). Mr. Kupperman graduated from Tulane University College in New Orleans, USA. Ms. Dolgor | Vice president Ms. Dolgor is in charge of the corporate business portfolio and team development. Her career in insurance industry started at a Japanese life insurer, Dai-Ichi and progressed to senior management positions of General Manager and Chief Underwriter at Mongol Daatgal, where she spent 12 years. Dolgor has furthered her insurance industry know-how through advanced level insurance courses of Luxemburg ATTF agency and Malaysian Insurance Institute. She has BA degree in Japanese study from University of Foreign Language and Culture. Mr. B.Bayasal | Senior manager Mr. Bayasal has joined Mandal Insurance after 10 years of successful career in trading ventures and telecommunications business. A talented entrepreneur, Bayasal had created number of successful business ventures during his career. He has a bachelor in Linguistics from Ulaanbaatar University, bachelor in Japanese studies from University of Bonn in Germany and masters in International relations from National University of Mongolia. Mr. Ch. Ankhbayar | Senior risk manager Mr. Ankhbayar had spent 10 years specializing in risk management, mathematical modeling, actuary and econometrics in banking and insurance. Before joining Mandal he has been Head of Risk department at Transport Development Bank and Senior risk manager at Savings Bank of Mongolia. He obtained his BSc in economics from IFE and currently studying for MSc in Applied mathematics at National University of Mongolia.


Mongolian Risk Report

‌Life is a Risky Proposition‌ RISK is an uncertain future event that may result in a loss. A loss is a destruction/reduction of the value of something and may come in a variety forms. It could either be an economic loss that can be expressed in monetary terms or a health hazard that claims lives and threatens the well being of people. People experience and encounter risk in their daily businesses and living environment, and always try to manage it either consciously or subconsciously. Over the past few thousand years, people have successfully created sets of risk management institutions that systematically combat risk in order to improve the living environment and reduce future uncertainty. At Mandal we have classified risks that are universal to people and organizations throughout the environment as macro risks. Each country should have a robust, proactive and institutionalized risk management system at a macro level in order to identify, measure, mitigate and transfer any macro risks that threatens lives and the economic interests of people and organizations. We have further divided macro risks into environmental and macroeconomic risks. Mandal has scrutinized different macro risks, which in our opinion are prevalent and worthy of consideration. These are risk which pertain to Mongolia specifically, and include risks from an individual and institutional aspect. In this report we examine ten major macro risks which are of significant importance and focus on them in our report accordingly The Risk Practice at Mandal Insurance is pleased to present to you the first ever report on MACRO RISK in Mongolia. Our next publication in 2013 will present POLITICAL RISK as a special topic.


Annual report 2012

Economic Risks Macroeconomic risks

U.Ganzorig

Macroeconomic risks can have many multiple factors. However in the case of Mongolia and based on the previous crisis, it can be concluded that very few factors play a crucial role, and put a pressure on economic interests of individuals and businesses. As for 2013, key risks for economic crisis are linked to global prices of major export commodities and to the international economic environment. Additionally, we have covered market volatility as one of the key macroeconomic risks.

President, Mandal Insurance

...In the short term, the prevailing macroeconomic risks for Mongolia will be an over dependence on China, an over concentration in Mining ...

Economic Crisis As the year 2012 unfolded, China’s economy started to show signs of a slow down, which in turn had a negative impact on main commodity prices. As result, in 2012 Mongolian export revenues decreased by 9% and FDI was down by over 17%. In addition, the worsening European Union Debt crisis and a deepening US fiscal problem led to a deteriorating external environment for Mongolia.

Export composition, 2012 By products, %

By country, %

Mineral goods

89%

Russia

2%

Other goods

11%

China

93%

Canada

2%

Other

3%

Source: National Statistics Office

In 2008, the global financial crisis resulted in 2O% of global annual GDP or 12 trillion dollars of losses around the world. When economic crisis do occur, the entire population, businesses, and countries are affected. Between 2008-2010 in the case of Mongolia’s banking sector alone, a total of over 800 billion tugrugs worth of loan portfolios were adversely affected. Also, a sharp decline in copper prices led to a fiscal deficit of over 300 billion tugrug, forcing Mongolia to ask for IMF standby support of $229 million USD.

1,200,000

Banking sector credit quality /mln MNT, 2004-2011/ Bad loan Doubtful loan

800,000

Non-performing loan Overdue loan Past-due loan

600,000

400,000

200,000

0

2004

2008.12

2009.12

Source: Mongol Bank

15


Mongolian Risk Report

The Mongolian economy as a whole, is extremely dependent on export revenues and on China in particular. China is the sole buyer of all of our exports. Apart from this, all major developments were financed by foreign direct investment as well. Thus, we learned that the Chinese economic situation, global commoditiy prices and foreign investment inflow really do impact upon us. In 2013, global commodity prices and China’s economic situation define short term macroeocnomic risks.

Global Economy China’s economy has been growing at high single digits during the last 2 decades. No other such economy has performed in this fashion in the past. A huge population of 1.3 billion people, coupled with a tight communist regime, creates a totally new economic paradigm for economists. For a country of China’s size, economists have long worried about the risk of a hard landing and started speculating that the time may have come in 2012.

China GDP

8.1%

7.7%

7.4%

7.6%

8.1%

8.9%

9.1%

9.5%

9.7%

China GDP growth, annual

2012-2013 forecast, % China GDP World Bank forecast

Q1 11

Q2 11

Q3 11

Q4 11

Q1 12

Q2 12

Q3 12

12*

13*

Source: Reuters, WB

During the middle of 2012, several economic indicators showed some early signs of a hard landing for the Chinese economy. In reaction to this, the Chinese government took immediate measures ranging from fiscal expansion to confidence building to stimulate the economy. The economy starterd to show signs of recovery at the end of 2012. Therefore, it is generally viewed that in 2013 the Chinese economy will be relatively stable. On the other hand, the next largest consumers - the US and EU economies, will also influence the performance of China and therefore global commodity prices. At the end of January 2013, when thousands of US companies started to report their earnings, 75% of all companies surpassed analyst forecasts. Overall, profits in 2012 grew by 5.2 %. However, according to January 2013 statistics, in quarter four of 2012 the US economy fell by 0.1 %. We believe that this is a temporary decline, and expect that the economy will grow in 2013 by mere 1.5%-2.5%.

Copper, coal and iron ore prices Copper, coal and iron ore make up 74 % of Mongolia’s total exports. Therefore, global demand and prices will have a major influence on the economy of Mongolia. Price volatility of these three commodities is one of the main risks for Mongolia. Commodity exports of Mongolia in 2012 2012 exports, commodities, % Coal

43%

Copper

19%

Iron

12%

Other

26%

Source: Mongol Bank


Annual report 2012

In reaction to concerns over the Chinese economy in the second half of 2012, copper prices started to drop slightly and the commodity forward curve became negative. In 2009, when international copper prices had a sharp fall, our national budget ran into a deficit of about 300 billion tugrug. With the advent of 2013, copper sentiment has slightly improved. According to a forecast produced by Thomson Reuters and reflecting the views of major commodities traders, average prices for copper will be set around USD$8,100 per ton in 2013. Also, the copper forward curve became positive, reflecting relative confidence about the prices. We conclude that copper prices will stay around current levels if there are no surprising changes in the Chinese and US economies. Forward copper prices on the exchange, USD

10,000

Copper 3 month forward price 9,000

12 months trailing average

8,000

7,000

6,000

5,000

4,000

3,000

2013 М01

2012 М08

2012 М03

2011 М10

2011 М05

2010 М12

2010 М07

2010 М02

2009 М09

2009 М04

2008 М11

2008 М06

2008 М01

2007 М08

2007 М03

2006 М10

2006 М05

2005 М12

2005 М07

2005 М02

2004 М09

2004 М04

2,000

Source: LME

In 2012, Mongolian coal export prices continuously fell through the year, but stabilized towards the end of the year. If Chinese growth remains steady in 2013, it is possible for coal prices to remain at high levels and for coal trade volumes to increase. However, coking coal is only used in the steel industry. In other words, while the overall Chinese economy performs well, the construction sector may take a hit, and this will have an adverse effect on coal prices. Therefore, we think that in 2013 there will still be risks associated with the demand for coal exports, as China has already started to take a number of measures to limit the real estate market from bubbling.

Coal export volume, average prices $87.17

$86.45

$85.69

$78.98

Coal exported from Mongolia to China, border prices Coking coal, mln tons

6.38

3.98

5.31

3.48

Coking cola prices, USD

Q4 11

Q1 12

Q2 12

Q3 12

Source: Reuters

17


Mongolian Risk Report

Coal prices on Australian market , USD

200

Australian coal prices 12 months moving average 150

100

50

2012 М12

2012 М05

2011 М10

2011 М03

2010 М08

2010 М01

2009 М06

2008 М11

2008 М04

2007 М09

2007 М02

2006 М07

2005 М12

2005 М05

2004 М10

2004 М03

0

Source: World Bank

In 2012, iron ore prices fell on global markets and had a conitnious downfall. The trend reversed at the end of the year. If in September 2012, the price level was at USD $90 per ton and in January 2013 it reached USD$155 per ton. This reflects the impact of stimulus policy introduced by the Chinese government. Almost 50% of all iron ore consumption in China is used in the construction sector. In circumstances where the Chinese government makes policy shifts in favor of containing housing prices, there is the risk that the demand for iron ore will be unfavourable. It should also be mentioned that the bulk of Chinese housing demand is created on speculative interests. We think that in 2013, there will be risk for a further fall in demand, and therefore a fall in price levels for iron ore. 210

Iron ore prices, USD Iron ore

170

130

90

2013 М03

2013 М05

2012 М11

2013 М01

2012 М07

2012 М09

2012 М03

2012 М05

2011 М11

2012 М01

2011 М07

2011 М09

2011 М05

2011 М01

2011 М03

2010 М11

2010 М09

2010 М07

2010 М05

2010 М01

2010 М03

2009 М11

2009 М09

2009 М07

2009 М05

2009 М03

2008 М11

2009 М01

50

Source: Mandal Insurance

China iron ore consumption, 2010, % Transportation

5%

Construction

48%

Light industry

6%

Petrochemical industry

2%

Automotive

7%

Ship building

5%

Equipment manufacturing

19%

Other

8%

Source: China Statistics Organization


Annual report 2012

Exchange rate risk Foreign exchange volatility could incur heavy losses on balance sheets. Economic uncertainty or the sudden shift in macroeconomic fundamentals increases volatility. In the early 2000’s many Mongolian companies suffered from the steady appreciation of the EUR and USD. They had borrowed EUR because of its relatively cheap interest rate at the time. During the crisis of 2008, when the USD/MNT exchange rate catastrophically broke through the roof, history repeated itself for companies who had earlier sought cheaper funding denominated in USD.

180 day volatility, the last half of 2012 2.17% 8.27% 8.09% 6.36% 8.59%

USDMNT EURUSD USDJPY GBPUSD AUDUSD

Source: Mandal Insurance

USD/MNT had much lower volatility compared to other major currency pairs during much of 2012. Although the exchange rate between the USD/MNT was stable in 2012, the USD appreciated against the MNT by a staggering 34% within only a few months in 2008. In 2011, the pair also abruptly surged by 15%. In addition to businesses which have funding denominated in foreign currencies (mostly USD), entire import-trading businesses like petroleum imports have a natural currency mismatch and an exposure to MNT depreciation. Also, sectors that heavily rely on imported raw materials as such as construction materials, are exposed to currency risks. On the other hand, export sectors could heavily suffer from an abrupt USD/MNT decline. Our risk database shows that the USD/MNT has increased 21 times by 25% or more within 12 months since 1996. Our numbers also tell that the pair have a much higher probability of sudden appreciation than depreciation.

1590

USDMNT

1540

USD 12 months moving average

1490 1440 1390 1340 1290 1240 1190

2013 М05

2012 М12

2012 М07

2012 М02

2011 М09

2011 М04

2010 М11

2010 М06

2010 М01

2009 М03

2009 М08

2008 М10

2008 М05

2007 М12

2007 М07

2007 М02

2006 М09

2006 М04

2005 М11

2005 М01

2004 М08

2004 М03

1140

Source: Financial Market Association

19


Mongolian Risk Report

1420

USDMNT forecast made by bank dealers by Jan. 2013

1385

1400

1378

1375

1364

1380 1360 1340 1320

2014 М01

2013 М09

2013 М09

2013 М07

2013 М05

2013 М03

2013 М01

2012 М11

2012 М09

2012 М07

2012 М05

2012 М01

2012 М03

1300

Source: Financial Market Association

The USD/MNT Trend | Our macroeconomic models show a pressure on the MNT rather than on the USD. Double digit inflation and a trade balance deficit points to a higher USD/MNT rate. Foreign direct investment decreased by 17% in 2012, giving another excuse for a weaker MNT. However, a monthly survey of bank dealers by the Financial Markets Association of Mongolia indicates a slightly stronger MNT during the next 12 months.. 1540

Foreign currency reserve of Mongol Bank

1490

foreign currency reserve, mln USD 12 months trailing average

1440 1390 1340 1290 1240 1190

2013 М01

2013 М05

2012 М09

2012 М05

2012 М01

2011 М09

2011 М05

2011 М01

2010 М09

2010 М01

2010 М05

2009 М09

2009 М05

2009 М01

2008 М05

2008 М09

2008 М01

2008 М05

2007 М09

2007 М01

2007 М05

2006 М05

2006 М09

2006 М01

1140

Source: Financial Market Association

USD/MNT Volatility | The proceeds of USD1.5 billion from government Eurobond The eurobond government and a USD0.5 billion medium term note of the Mongolian Development Bank are most likely to end up in the hands of Mongolbank as means of a foreign exchange reserve. Thus, with increased ammunition from Mongolbank and the Oyu Tolgoi project starting during the middle of the year, we do not expect any sharp fluctuations in exchange rates in 2013.

Oil price In 2012, Mongolia imported 1.4 billion USD worth of oil products or 1/5 of the total import value. Thus an abrupt price increase of either crude oil or petroleum products pose huge risks to the entire economy.


Annual report 2012

The oil price is considered to be quite volatile on the international markets, reflecting many economic variables from speculation of supply shortages to geopolitical risks in the Middle East.

-2% -7%

24% 10%

15% 38%

5% 75%

3% -50%

27% 61%

Changes in domestic diesel price and international oil price, by 12 months

A 10% sudden surge in oil prices on the international markets shall result in an economic loss of USD134 million for the Mongolian economy. Our volatility statistics show that a 10% fluctuation in oil prices is a normal expectation in any given year. 2009 M02 2008 M02

2013 M02 2010 M02

2011 M02

Companies in aviation, mining, transportation or other related sectors whose costs include a prominent share of petroleum or diesel are especially exposed to volatile prices of oil.

2012 M02

Domestic diesel price International oil price

Source: Mandal Insurance

2.100

160

Domestic diesel price and global oil price

1.900

Diesel, MNT

140

Oil barrel, USD

1.700

120

1.500 100 1.300 80

1.100

60

900

2013 М01

2012 М09

2012 М05

2012 М01

2011 М05

2011 М09

2011 М01

2010 М09

2010 М05

2009 М07

2009 М02

2008 М08

2008 М03

2007 М11

2007 М05

2006 М11

2006 М06

2005 М12

20 2005 М07

500 2005 М02

40

2004 М09

700

Source: Mandal Asset Management

Our calculated correlation rate between domestic diesel prices as a proximity to other products and crude oil prices on the international markets, shows a positive coefficient at 0.83 as at 30th of Jan, 2013. Having volatile oil prices in the international markets during the last decade as well as having a single supplier (Russia) creates enormous uncertainty for businesses and individuals. The government in conjunction with the central bank had created a long term financing program to carve out high financing costs and exchange risks from the equation of import trading businesses.

...We conclude that the international macro perspective dictates a higher oil price at current levels with the possibility of a slight increase... U.Ganzorig

President, Mandal Insurance

Conclusion: • • • •

The political instability in the oil region, specifically the situations in Iran, Libya and Egypt shall continue to affect the supply side negatively. A decade long consolidation of the Russian oil sector, making Rosneft the sole exporter to Mongolia, will create negative pressure on our side. There is news that Mongolia may have experienced a discrepancy in export pricings by as much as USD 300 a ton by Rosneft. We encourage the increased use of derivatives as a means of hedging since the correlation coefficient between local and international prices is quite high.

21


Mongolian Risk Report

Environmental Risks In Mongolia, people and businesses are living in an environment with a high risk level compared to the global average. In our report we are paying special attention to six different macro environmental risks that impose uncertainty and threaten the interests of people and businesses. From our analysis of different types of risk it becomes clear that there is need for urgent improvement of institutional infrastructure in order to manage macro risks or system wide risks effectively. There are many instances which lead to the systematic inability needed in order to address and manage macro risks. These includes; a lack of information databases, timely research and analysis, informed decision making and inadequate communiquĂŠs between social risk institutions such as the Police Department, Hospitals, the National Emergency Management Agency, the State Inspection Agency and municipal governments. Moreover, the presence of a strong private insurance sector is one of the key elements lacking that needs to be strengthened immediately.


Annual report 2012

Socio Environmental Risks Contagious diseases Although Mongolia ranks number one in the world in terms of land size per capita, nearly half of the 2.8 million population lives in Ulaanbaatar, the capital city of Mongolia. According to the World Bank approximately 70% of the city’s soil has been polluted by various types of bacteria and the level of air pollution is 20 times higher than internationally acceptable levels. In this environment, the risk of contagious disease could be high.

... According to the statistics, about forty thousand contagious diseases are registered every year in Mongolia making it one of the highest at risk countries in the world. ...

06

07

08

09

10

11

43,305

42,839

41,373

38,859

43,793

Actuary, Mandal Insurance

41,082

B.Batkhishig

36,211

Number of contagious disease cases

Share of deaths from contagious disease, % Hepatitis

16%

Tuberculosis

64%

Infection

7%

Cyphilis

4%

Other

9%

Source: National Statistical Office

12

Approximately 20% of the registered contagious disease cases was Hepatitis, 10% was Tuberculosis and 4% was sexually transmitted infectious disease. Nearly 64% of the deaths caused by contagious disease was due to Tuberculosis and 16% was hepatitis and sexually transmitted infectious disease. From this, we can conclude that there needs to be more effort in increasing public hygiene and education about these diseases.

Hepatitis Mongolia ranked 1st globally for the total death rate due to liver cancer per 100 000 people and became one of the high risks countries. In 2012, 6,856 people acquired this disease. Death rate of liver cancer per 100.000 people, % USA

3,9

Russia

4,0

Germany

4,0

France

7,0

Italy

7,1

Japan

11,1

Korea

19,5

China

27

Mongolia

86,9

Source: World Health Organization/WHO 2011/

Between 2005 and 2012, some 60,000 children aged from two to nine years old received vaccinations against Hepatitis A in Ulaanbaatar and in other high-risk provinces. Mongolia has formulated a National Strategy to prevent the spread of Viral Hepatitis from 2011 to 2015. Even if this actions was successful, about 9,500 people have still been infected every year over the last few years. A total of 21.9 % of all contagious diseases were caused by Hepatitis (87.7 % due to Hepatitis A, 9.9 % due to Hepatitis B and 1.7 % due to Hepatitis C).

23


Mongolian Risk Report

5,5

7,3

8,1

11,5

11,5

12,2

22,2

23,6

Liver desease - Death rate per 100,000 inhabitants

Tuberculosis rate per 100,000 inhabitants USA

2

Great Britain

2

Germany

5

France

6

USA

Japan

China

Danmark

Germany

Korea

India

Mongolia

Danmark

Source: National Statistical Office

6

Spain

14

Portugal

17

Japan

21

Poland

23

Korea

48

China

107

Mongolia

124

Source: United Nations Development Prorgramme

Tuberculosis Mongolia is one of eight countries in Asia (China, Mongolia, Laos, Phillipine, Cambodia, Vietnam, and Papua New Guinea) with high tuberculosis rate and ranked 45th in the world by tuberculosis rate. On average about 4,100 tuberculosis cases are newly registered each year and 100 people die from this disease each year. In 2012, a total of 3,944 new Tuberculosis cases were reported which is a slight decrease from the previous year. In 2012 a total of 69 % of all new cases affected people aged between 16 and 44.

AIDS, HIV According to research done by the World Health Organization, one reported case of HIV can translate into 500 non-reported cases. Thus, Mongolia could have about 50 000 HIV infected people according to this approximation. At the end of 2012, 127 HIV cases were registered in Mongolia. The prevalence of AIDS among adults was less than 0.1% of population and it was estimated there are likely 674 people infected with HIV in Mongolia as of 2012. Since 1990, 17 people with AIDS have died in Mongolia. Although Mongolia currently has a relatively low HIV rate per capita, the majority of cases or 74 new HIV cases, were registered just in the past 4 years and the country is located between two high-risk countries - Russia and China. Each year, 4,000 Tuberculosis and 6,000 Hepatitis C virus cases were newly registered in Mongolia. Although people with the Hepatitis C virus experience minimal or no symptoms, about 75-80 % of those exposed to the Hepatitis C virus develop a chronic infection, shortening their life expectancy as it usually propagates into liver cirrhosis or a more serious conditions. In Mongolia, an estimated 5% of the population has Tuberculosis, and 40 percent has the Hepatitis virus. Furthermore, the fact that the number of HIV cases has risen quite dramatically in recent years is pointing to a need for continued efforts towards battling these contagious diseases.


Annual report 2012

Industrial accidents

If one compares the number of industrial accidents per capita, Mongolia is at an alarming level in relation to other benchmark countries.

0,7

0,8

0,8

0,8

1,1

1,2

1,2

1,4

1,5

1,5

1,8

2,0

2,2

2,3

2,7

2,8

2,8

2,9

3,0

4,0

5,0

5,3

14,2

Netherlands

Denmark

Germany

Finland

Sweden

Switzerland

Czech

Belgium

Italy

Hungary

Europe

Spain

France

Austria

Slovenia

Estonia

Ireland

Portugal

Latvia

Romania

Poland

Mongolia

Industrial accident per 100,000 citizens

Great Britain

Source: http://www.hse.gov.uk/

When comparing the 2012 statistics of industrial accidents to previous years, Mongolia’s accident numbers have increased 1.1 times, the number of victims increased by 1.65 times, fatality increased by 3.17 times, and disability due to accidents rose by 3.07 times. Ironically, a single handed state insurance system is obsolete when the risk materializes and someone is injured or dies from an occupational accident. From our analysis, it is clear that the state-only insurance system should be developed further to include more varieties from the private insurance sector to at least cover the economic losses from accidents.

345

428

343

381

305

320

396

343

491

366

366

403

405

Industrial accident statistics 284

Actuary, Mandal Insurance

0,6

B.Batkhishig

In the last 5 years, there have been 2,027 industrial accidents, leading to loss of 350 lives and injuries to 1,200 individuals. We suspect that this statistic is likely less than the real numbers because of non-reported incidents due to out of court settlements between victims and faulty parties.

Slovakia

A checklist based risk management system coupled with effective insurance services can lead to a reduced level of occupational accidents.

During the recent period of economic growth fueled by the mining sector, a number of industrial and occupational accidents have occurred and associated economic loss has been on the rise significantly. For instance, many people were shocked to learn of the notorious construction incident which occurred in September 2012 claiming two children’s lives. Another careless construction operation in the middle of the city also collapsed, taking the life of an innocent teenager who was walking home from school.

99

00

01

02

03

04

05

06

07

08

09

10

11

12

Source: State Inspection Agency

25


Mongolian Risk Report

Many of the accidents are happening in the mining and construction sectors. Accidents, by sector, % Energy

5%

Mining

21%

Agriculture

1%

Construction

14%

Food, light industry

8%

Transportation, community

10%

Trade service

4%

Education

9%

Health

8%

Other

20%

Source: State Inspection Agency

Of the total figure, 55% of all industrial accidents are caused by falling, 22% are caused by a lack of safety and occupational hazard knowledge or the failure to follow internationally accepted safety standards. These numbers signify the fact that many organizations do not follow the safety standards and regulations. The other problem is that outdated safety standards are used in Mongolia today. The globally accepted norm for industrial accidents is 2 deaths per 100,000 people per year, while in our country this number is 7 times higher at 14 deaths a year. We conclude that the following actions need to be taken in order to decrease industrial accidents and keep the loss of life to a minimum level when accidents happen: • • • •

To implement globally recommended safety standards in Mongolia. To support safety monitoring and auditing by external parties such as professional associations and the insurance sector. To bring employee safety training up to new standards. To set up a life and health insurance system for people who are employed in risky and dangerous industries.

Earthquake Risk in Ulaanbaatar Mongolia is located in a medium risk earthquake zone. This risk report is based on our assessment of the city’s preparedness for earthquakes including resources available in the aftermath of such an emergency, an analysis of Ulaanbaatar city building structures, statistics from the Earthquake Research Sector and world earthquake statistics. Due to the construction of buildings in a haphazard manner and without consideration for earthquake resistant factors leaves our buildings prone to the risk of major damage and collapse. As a result, we are very poorly prepared to deal with such an emergency in Ulaanbaatar. Almost half of Mongolia’s population lives in high-risk areas. The country recorded 2,500 earthquakes during 1970-2010, 900 of which took place during 19702004. The remaining 1,340 earthquakes occurred during 2005-2009. During the past 15 years, the number of earthquakes near Ulaanbaatar has increased by 50% annually.

D.Dorjderem

Chief Underwriter, Mandal Insurance

...Being unprepared for an earthquake is in itself is a very serious hazard. In Ulaanbaatar we have poor infrastructure, houses and high-rises constructed with bad quality building materials, closely stacked buildings, a deficiency of fire management systems and inadequate public education. All of this could lead to a great number of casualties and economic strife should an earthquake ever hit our capital city....


Annual report 2012

20500 4200

21000 5000

13000 4800

7500 3650

5350 5250

9100 3850

14850 3050

5500 3000

5650 4100

4500 4300

4800 2500

5400 3000

2750 8000

5500 2550

2350 3000

Mongolian Earthquake statistics

Number of earthquakes earthquake near to UB earthquake far away from UB

1995

1996

1997

1998

1999

2000

2001

2002 2003

2004 2005 2006 2007

2008 2009

Source: Earthquake Research Sector

Ulaanbaatar’s earthquake exposure summary: • • • • • •

The biggest earthquakes recorded in the last 30 years: 1980 – 4.4 magnitude; 1985-3.7 magnitude; 1987-3.9 magnitude; 1995-3.4 magnitude; 1997-4.4 magnitude; 2000 – 3.6 magnitude; 2008-3.9 magnitude; 2009-4.2 magnitude; Human and technical resources during earthquake hazards are inadequate and poor. The citizens of UB are poorly educated and not well prepared for such a hazard. Buildings and infrastructures have a low resistance to earthquakes and are at risk of damage and collapse during earthquakes. The magnitude of earthquakes from 2005-2010 was around 0.8-4.4 on the Richter scale. List of earthquakes in 2012

Date

Magnitude

Place

1

11/9/2012

2.1222

32 km SW Bayantsagaan Tov

2

11/8/2012

2.2302

5 km SE Bio-Combinat UB-region

3

11/1/2012

2.7085

22 km NE n

4

10/10/2012

2.1593

7 km SE Bio-Combinat UB-region

5

9/18/2012

2.1041

24 km SW Bayantsagaan Tov

6

9/13/2012

2.0047

18 km SW Bayantsagaan Tov

7

9/8/2012

2.1597

16 km S Bayantsagaan Tov

8

7/25/2012

2.3253

26 km S Nalaikh mining

9

7/7/2012

2.1943

37 km SE Asralt UB-region

10

6/27/2012

2.4653

28 km N Tsagaandelger Dundgobi

11

6/22/2012

2.1829

22 km NE Bayantsagaan Tov

12

6/20/2012

2.5735

13 km W Asralt UB-region

13

6/13/2012

2.1943

7 km SE Bio-Combinat UB-region

14

6/6/2012

2.0706

20 km N Adaatsag Dundgobi

15

5/30/2012

2.0653

19 km NE Bayantsagaan Tov

16

5/25/2012

2.2141

17 km SE Bayanhkangai Tov

17

5/18/2012

2.2038

18 km NE Bayantsagaan Tov

18

4/29/2012

2.1286

44 km E Bayan-Unjuul Tov

19

4/29/2012

2.087

12 km NW Sharga-Morit UB-region

20

4/25/2012

2.5302

30 km SW Bayantsagaan Tov

21

4/18/2012

2.0158

26 km N Bayantsagaan Tov

22

3/30/2012

2.1124

8 km S Asralt UB-region

23

3/22/2012

2.1543

17 km NE Sharga-Morit UB-region

27


Mongolian Risk Report

24

3/11/2012

2.7552

19 km SE Bayanchandmani Tov

25

2/19/2012

2.0446

21 km NW Baga Hangai Coal mine

26

1/31/2012

2.0912

14 km E Khustai-Park UB-region

27

1/8/2012

2.2205

1 km NW Bayanhkangai Tov

28

1/7/2012

2.4047

54 km NE Bayan-Unjuul Tov

29

1/7/2012

2.116

47 km NE Bayan-Unjuul Tov Source: Earthquake Research Sector

Building structures of Ulaanbaatar Brick structure

61%

Metal structure

2%

Concrete and metal structure

16%

Wood structure

2%

Prefabricated block

18%

Other

1%

According to our estimates, 18% of buildings in Ulaanbaatar are resistant to strong earthquakes, 18% are somewhat resistant and the rest are prone to the risk of damage and collapse. A large number of buildings are currently undergoing structural changes and renovations by occupants without any consideration for engineering specifications. This in turn significantly decreases structural resistance to earthquakes. Officially, 43% of the entire Mongolian population lives in Ulaanbaatar. Roughly 50-55% of all households, which is approximately 650 thousand people, are living in apartment blocks. As a result, 230,000 people are living in semi earthquake resistant buildings, but the remaining 1 million people are working and living in earthquake-risky buildings. Furthermore, facilities with high socioeconomic importance are all located in Ulaanbaatar. Earthquake hazards not only lead to damage of buildings, but can also cause fire risk, heating system damage and electricity failure. Altogether, these risks significantly increase the probable loss of human lives and economic expense. The possibility of earthquake risk in Mongolia and most significantly, in the capital city of Ulaanbaatar, is considered to be medium high. The lack of risk reduction and recovery preparedness increases the possible loss and damage. It is essential that we build the resilience of our people and communities to such disaster. We also need to strengthen institutional and community level capacities to plan and implement earthquake risk reduction strategies. Disaster recovery preparedness is essential. Improving infrastructure and controlling building standards are also important factors in earthquake hazard mitigation strategies. Educating people about earthquakes and raising public awareness is an effective risk reduction practice. Also, improving and supporting earthquake research work and conducting new studies would be a step in the right direction and help us develop earthquake mitigation expertise.


Annual report 2012

HEATING RISK: A failure of heating infrastructure in Ulaanbaatar Power Plant Number Four single handedly delivers the necessary heating to Ulaanbaatar, home to some 1.2 million people. During the winter months, temperatures can easily reach -40 degrees Celsius. D.Dorjderem

Chief Underwriter, Mandal Insurance

Central heating and electricity systems consist of five Power Plants. Power Plant Number Four produces 73.1% of the electricity and 63% of the heating for the entire system in Ulaanbaatar. In other words, the entire system is almost solely dependent on Power Plant Number Four during the harsh and lengthy winter months. In 2010, the total demand for heating in Ulaanbaatar peaked at 1,555 gigacalories per hour, reaching the installed output capacity of 1,585 gigacalories per hour. According to Ministry of Energy analysis, if extreme cold weather conditions occur during the winter peaks, there would be a significant shortage of power in Ulaanbaatar. Also, by the year 2020, there will be an extra 1,000 gigacalories of heating and 700 megawatts of electricity required, according to “General Development Master Plan” of Ulaanbaatar city. Heating consumption and installed capacity of Ulaanbaatar 2,500

Consumption Capacity

2,000

1,500

1,000

500 2001

2002

2004

2006

2008

2010

2012

2020

Source: 2011 annual report of Мinistry of Energy

Aging technology, ineffective production and the wearing out of equipment, all pose significant risks among the active power plants. These factors all contribute to inconsistent levels of production. While Power Plant Number Three and Number Four have been used for 30 to 40 years, Power Plant Number Two is soon to expire in 2015. Although there has been much talk and many different feasibility studies conducted looking at improving the capacity of heating and electricity plants already on the verge of their limits, not much had been done until now. A decision was made to build Power Plant Number Five, with a capacity of 300 megawatts of electricity and 700 gigacalories of heat. It will take three and a half years to fully construct and complete this new power plant and it’s expected that this project will start sometime in 2013. Another project that will add to the current capacity of Power Plant Number Four is expected to be complete in 2014. It will expand capacity by 100 megawatts and is due to start in spring of 2013. For the next five years, the completion of a number of clean energy projects, notably Newcom’s wind turbine project, may result in the increase of capacity by as much as 10%. There is the possibility of saving 10%-15% of the total energy capacity by increasing the efficiency of the distribution networks and by investing in newer technologies. In conclusion, there is a significant risk of failure of heating infrastructure in Ulaanbaatar due to over capacity production at Power Plant Number Four during 2013 – 2014. If this risk materializes during the peak winter season, some 600,000 people will need to be relocated in a matter of twenty hours. This is the short time frame in which insulated wall start to lose their efficiency due to extreme temperatures. An even more alarming thing to note is that there are no “emergency plans” or a “Plan B” which could be used in the event of an emergency. Should such a risk materialize, government agencies would be unable deal with this crisis.

29


Mongolian Risk Report

Air Pollution Risk Almost half of the Mongolian population currently lives in Ulaanbaatar city, one of the most polluted cities in the world. Toxic air pollutants such as carbon dioxide, cadmium, lead, mercury, dioxin, chromium, beryllium, and nickel compounds are generated through over 200,000 chimneys, 229,000 motor vehicles, and via other heavy industries that are not suitable to be operated within the city. Large particles level reaching 279 µg/m3 has created serious health risk

Senior risk manager, Mandal Insurance

77

80

82

94

98

98

106

109

117

120

123

124

124

132

138

143

145

198

216

279

Ch.Ankhbayar

Shri Lanka

Bolivia

Tunisia

Mianmar

China

Ghana

Nepal

India

Bosni–Hercegovina

Bangladesh

Kuwait

Nigeria

Iran

United Arab Emirates

Egypt

Saudi Arabia

Senegal

Pakistan

Mongolia

Botsvwana

...In 2012, 3,239 people died due to air pollution in Ulaanbaatar...

Source: WHO

Besides smoke, the level of tiny toxic air particles that lodge deep within the lungs and can enter into a person’s bloodstreams is at alarming level. These airborne particles are 14 times higher than the internationally acceptable levels. In addition, when measured at various locations in Ulaanbaatar during the summer months, this level is already 10 times higher than the acceptable levels, signifying that air pollution in Ulaanbaatar is not only a winter problem. City residents are inhaling total of 1287 thousand tons of toxic particles annually.

279 *

3 breaths 10-6kg 0,5 0,001m * 7,5mln year * 1,23mln ppl ≈ * 3 breaths m

1287 thousand tons

It is obvious that living in such a toxic environment leads to elevated risks for cardiovascular disease and shortened life expectancy. Respiratory and cardiovascular disease cases have been on the constant increase over the last few years. Today, in Ulaanbaatar, doctors now treat bronchitis, asthma and high blood pressure in higher numbers than ever before. 420

400

Number of patients who are hospitalized , sickness per 10,000 persons Respiratory tract desease Cardiovascular disease

380

360

340

320

300 2006

2007

2008

2009

2010

2011

Resource: Statistical bulletin


Annual report 2012

According to research conducted by Canadian and Mongolian scientists, about 40% of all deaths are due to lung cancer and 29% are due to cardiovascular diseases. Both of these diseases are directly caused by air pollution. In other words, in 2012 alone, air pollution accounted for a total of 3,239 deaths or 9 deaths every day in the city of Ulaanbaatar. In his study, Ryan W. Allen, Ph.D, also shows that a total of 463 million U.S. dollars is spent on medical expenses due to air pollution related illnesses. When the least and most polluted U.S. cities are compared, the survival rate of an individual after 10 years is reduced from 0.93 (least polluted) to 0.87 (most polluted). However, we also have to note that the pollution levels in Ulaanbaatar are several times worse than that of the most polluted city in the U.S. Researchers also started to notice an increase in central nervous system disorders, various allergies, genetic disorders, birth defects, and various types of cancers in Mongolia as a result of air pollution. It is alarming to see a positive correlation between air pollution and the increased number of other related health concerns over the past few years. As discovered by research conducted by New Zealand and Mongolian researchers, the causes of air pollutants is accounted for as follows; 47% by waste, 35% by coal burning, 13% by motor vehicles, and 4% by toxic chemicals. Therefore, in order to decrease air pollution, it is crucial that we take immediate actions to raise the waste management system up to global standards, reduce coal burning, resolve road dust related tiny particles, and limit the use of old motor vehicles. Air pollution in Ulaanbaatar is a serious risk that threatens national security, and will have many dire consequences in the coming years if not addressed properly and urgently.

Crime

22,089

19,197

19,825

20,373

20,704

21,268

18,253

17,411

18,905

Number of crimes 19,934

0,4

0,8

0,9

1,0

1,1

1,2

2,6

3,4

4,8

10,2

31,8

32,2

Germany

Italy

China

France

Great Britain

Korea

India

USA

Russia

South Africa

Mongolia

In order to decrease the risk of crime in Mongolia, we need to place greater emphasis on economic factors like unemployment and education and on the improvement of environmental security factors. This can be achieved by installing surveillance cameras, nightly patrols and more lightning.

Death caused by crime, rate per 100.000 people

Japan

During the last ten years, 7,000 homicides have occurred and over 40,000 people have been injured due to criminal offences. This statistic shows that crime risk is very high in Mongolia compared to other developed countries.

Source: International society against crime, portion of car accidents and other accidents are classified as crime in Mongolia

In 2012, there were 22,089 crimes recorded and this was the highest rate in the country’s history. The categories of offences which were most common in Mongolia were personal offences at 30.4% and property related crimes at 27.4%. The number of felonies is likely to increase in the future as well.

B.Batkhishig

Actuary, Mandal Insurance 03

04

05

06

07

08

09

Source: National Statistical Office

10

11

12

31


Mongolian Risk Report

1639 1870 1999

328 261 295

1684 1873 1749

7944 7232 9023

410 434 405

6813 6462 7155

Number of crimes, by type

2010 2011 2012

Offenses against life and health of another person

Offenses against children, family and social morals

Offenses against Property

Offenses against social security (terrorist act)

Offenses against national life and health

Offenses against traffic security

Source: National Statistical Office

According to statistics for the last three years, over 8,000 people were injured and over 1,000 people were killed due to homicides. On average, a staggering 70 children were the victims of homicides each year. This number is also likely to increase over the coming years.

8436 901

8100 922

7486 1191

Number of injuries and mortality caused by crime

Number of injured people Mortality rate

2010

2011

2012

Source: National Statistical Office

In Mongolia, 60-70% of all crimes are recorded at night and from 8pm to 6am. Therefore, increased lightning, the installation of surveillance cameras and introducing more night patrols will play an important role in improving the security of property, life and the well-being of people. It has been reported that the crime rate in the USA and some European countries has decreased by 2025% simply by enhancing lighting and using surveillance cameras efficiently. Unemployment and low levels of education are the two major economic hazards for crime risk. Punishing criminals and building new prisons are definitely not the optimal solution to decrease the number of crimes. In the last 22 years, our education system has become inefficient in preparing citizens with high moral and societal values. Also, it is widely acknowledged that the higher education system has mostly failed in preparing young professionals and a skilled labor force thus creating stagnant salary levels and a false impression of the domestic job market.


Annual report 2012

Traffic accidents A modern road network was first laid out in Mongolia in 1929. Back then, only 20 vehicles were registered. The number of vehicles has grown since then to 121 in 1931, 928 in 1940, 10,835 in 1960 and 103,805 in 2002. In 2012 345,473 motor vehicles were registered nationwide. Having one car per every 8 citizens puts Mongolia slightly above the world average in terms of the number of motor vehicles used per capita.

Number of vehicles per 1’000 persons

601+ 501-600 301-500 151-300 101-150 61-100 41-60 21-40 11-20 0-10

Source: International statistics

In a recent article from one of our analysts, it has been pointed out that there is a direct correlation between an increase in the number of motor vehicles and the number of accidents on the road. However, this seems not to be the case in developed countries. Statistics reveal that some 3,500 people die and another 100,000 are injured due to road accidents each day worldwide. Similar statistics for Mongolia show that there is a one casualty and 7 injures on average each day. By comparison, if you divide the number of accidents by the number of vehicles operating in respective countries, Mongolia outranks other country fatality rates by far. When we dig into the numbers, the main cause for road accidents in the developed countries was really a road infrastructure. For instance, road condition accounts for 53% of all accidents in the US, whereas 59% in Sweden. But for our case it’s been less than 0.5% of all accidents.

Fatality rate of road accident by country

(per 10,000 motor vehicles) 4,5 3,1 6,6 4,5 2,8 11,5

Japan Great Britain Austria Germany Sweden Mongolia

Source: IRTAD (International Traffic Safety Data and Analysis Group)

33


Mongolian Risk Report

Accounts of driver’s fault, %

Cause of road accidents, % Driver’s fault

88%

Driving under influence

11%

Pedestrians fault

11%

Careless driving

10%

Malfunction in vehicle

0,24%

Failed attempt to stop

10%

Road condition

0,43%

Speeding

8%

Failure to keep safe distance

17%

Fleeing the accident scene

5%

Redlight crossing

7%

Other

31%

Source: Department of traffic police

Illustrations above show that 88% of all accidents were caused by faulty actions of the driver, and 11% of all cases were caused by pedestrians. Careless driving and unsafe distances kept accounted for 48% of all accidents caused by drivers. If this is the case, there should be a strong correlation between the number of road accidents and the number of fatalities for that reason. Unfortunately, as shown in figure above, that is not the case; a correlation coefficient of 0.17 shows no material relationship between the two. Number of road accidents vs. casualties during 2006-2012 1,600

75

1,500

65

1,400

55

Accident Casualty

1,300 45 1,200 35

1,100 1,000

25

900

15

M01 M02 M03 M04 M05 M06 M07 M08 M09 M10 M11 M12

Source: Statistical bulletin of traffic accident and violation of Mongolia

From the figure above you can notice that the fatality rate increases in the months when the number of accidents is lower and vice versa. For example, there is no clear evidence that high season of accident fatality in the months of summer and autumn is mainly caused by drivers’ fault. This is because during the summer most of the city residents stay at their summer houses. We all know that usually the condition of the road to the summer house camp is so terrible. There is a greater chance to have accident when drivers dodging the holes and damages on the road to summer house camp. What those roads seriously lack is proper cautionary signs which are standard in country roads in developed countries. Plus the road is not wide enough for a two-way traffic and not equipped with traffic separator that blocks high beam lights of opposing traffic. So the conclusion is that those cases of accidents when the drivers were blamed for careless driving and not keeping safe distance might actually, to some extent, caused by poor road condition. State budget for 2013 includes MNT 764.8 billion for road construction. 10 percent of that budget goes to city road network improvement. While this budget is by far the largest in recent few years, it may not be enough to fix all holes and damages on the roads across the city. It could get even worse, if the construction companies do a sloppy job on fixing the roads, all due to low public awareness of a real cause behind the frequent road accidents. In conclusion, we need to start determining the cause of the accidents more accurately, and find solution to improve the road infrastructure. It has been a wrong practice for a government to blame drivers bluntly for most of accidents happening, and get out of the water dry. If we learn anything from the developed countries, those countries leading with the fewest accidents consider road and infrastructure conditions for at least 50 percent of accident cases. For our case, it is unfortunately the opposite; only 0.5 percent merely gets the government attention.


Corporate Social Responsibility

Risk Management Training Mandal Insurance’s main business concept is to operate business with social responsibility, and our customer service strategy is based on sales after service, not service after sales.

“Revised Company Law of Mongolia: Directors and Officers Liability of Listed companies” Mandal Insurance and Mongolian Stock Exchange co-organized “Revised Company Law of Mongolia: Directors and Officers Liability of Listed companies” seminar.

The seminar was held on 11th October, 2012 in Independence Palace and the attendees were directors and officers of the listed companies on Stock Exchange. The goal of this seminar was to create an educational platform to discuss the increased liability of directors and officers of public companies that stated in Revised Company Law of Mongolia in 2011, and many ways to mitigate risks borne by the directors upon their acceptance to serve on a board.

Risk Management Seminar Mandal Insurance held “Risk Management Seminar” from 20th to 23rd of November in Corporate Hotel. The purpose of the seminar was to increase corporate customers’ risk management knowledge and our risk professionals gave a lecture on Macro risk, Market risk, Liquidity and solvency risk, Operational risk and Legal risk. We are the first company to hold free of charge Risk management seminars and training continuously, aiming to reduce our customers’ potential risk and increase their knowledge. Mandal Insurance’s professionals are working to re-define Risk management practice in Mongolia, and assisting our customers to manage their risk up to global standards. Moreover, Business Council of Mongolia has recognized Mandal Insurance as the best local company in Mongolia in 2012 for its Risk management endeavors.


Annual report 2012

Safer Mongolia We have established and implemented brand new Risk Consulting Service for the first time in Mongolian Insurance Market, with aim to manage risk in society and organizations. We provide Risk Evaluation, Risk Advisory and Risk management services. Our risk management advisory team has experienced professionals including actuary, safety engineer, financial risk manager, system risk manager in this area. Our professional team follows internationally accepted risk management methodologies and in-house valuation models. Within the framework of our Risk Advisory Service, Mandal is publishing monthly risk research and analysis material called Risk Letter and delivering it to executives and managers in the business market free of charge.

Checklist New York Times bestseller The Checklist Manifesto was written by famed surgeon Atul Gawande, who is general surgeon at Brigham and Women’s Hospital and associate professor at Harvard Medical School. This book is about reducing risks, improving safety and increasing efficiency in surgery and many other fields using checklists. In Mongolia, many people die or get sick because of hospital acquired diseases and this bestseller is about how to reduce the factors contributing to this. Mandal had the book translated into Mongolian and printed 1000 copies, all of which then were given free of charge to Mongolian surgeons working at 11 different hospital centers and 21 provinces around the country.

Economic news, Risk analysis (TV5, NTV) Our society is in demand for qualified financial market news based on research and expert analysis. Leaving the responsibility to deliver economic and financial market news to the society solely on the shoulders of media organizations is an act of irresponsible behaviour from the professional companies. Starting December 2012, professionals of Mandal Insurance are delivering economic, financial market and social risk analysis on TV5 and NTV televisions during rush hours on weekdays.

37


Corporate Social Responsibility

Knowledge investment Mandal Insurance understands that the investment in knowledge is one of the most important ingredients to booming economy of Mongolia. That’s why we make a focused priority on customers knowledge of economic and financial market and our main goal is not to bluntly sell our products, but to let the customers understand importance of our products and services. PurpleBook contains independent researches, opinions and analysis for corporate decision makers. Mandal has sponsored 4 PurpleBook series since 2011 and distributed 4000 copies to Mongolian Business decision makers and managers. PurpleBook series have received very positive feedback, and put a profound new example of exercising corporate social responsibility by providing valuable information for customers.

Steve Jobs This book perpetuated life of Steve Jobs, a modern genius, as a sample of leadership in business, communication of people and personnel formation. The book “Steve Jobs“ represents hard work, ceaseless contest for goal, positive motivation for people and history of fullness tastes of life. Mandal has sponsored translation and printing of the book and distributed it to our customers as a gift. It was a significant step of Mandal Insurance in instilling best ideas around the world to society.

Children’s education and development We believe providing our future generation with favourable learning environment and creating ladders of opportunity is an integral part of Corporate Responsibility.

Mandal Insurance sponsored student of Soyombo middle school B.Turbat to participate in International Mathematic Competition held in Taipei, Taiwan from July 23 to 28, 2012. Delegates and participants from 28 countries have gathered to compete alongside with four Mongolian teams. Turbat won two silver medals from the International Mathematics Competition, one by individual score, second by the team score.


Annual report 2012

Kids Asian Union Camp 2012 Mongolia hosted north-eastern Asian children’s festival “Kids Asian Union Camp 2012” aimed to promote unity, peace and friendship, to lay the basis for sustainable development in Asia. Mandal Insurance was one of the contributors and sponsors of event. 104 children from Mongolia, Japan, South Korea, China, Russia and Korea have gathered to spread their views on World peace and friendship.

Traffic Alphabet 2012 Mandal Insurance sponsored and co-organized “Traffic Alphabet 2012” together with Traffic Police department – an annual competition for preschool children to raise awareness on road safety. Competition was held in May 16, 2012 at National Recreation Center and 260 children from 36 kindergartens took part in the event. Educating children about road safety can significantly help raise awareness about the potential dangers of our streets, hopefully leaving a lasting impression in their minds and help them to become a responsible drivers in the future.

Circle of Knowledge (Shonkhor TV channel) In 2012 Mandal covered over 113 thousand students with a Personal accident insurance. During the implementation period, Mandal found out that the majority of students lacked knowledge about financial products, especially insurance products. Therefore, Mandal undertook TV reality project called “Circle of Knowledge” to improve students’ knowledge, in cooperation with Mongolian Student Association and Shonkhor channel. The quiz provided general information about financial and insurance market to the TV audience, by involving hundreds of students from all major universities.

39


Corporate Social Responsibility

Mandal created a small garden in the Bogd Khan mountain People at Mandal understand that the most important aspect of our corporate responsibility is to be involved in process of environmental protection and restoration. Mandal employees have been gardening over 1000 trees in mountain of Bogd khan since 2011. This is a first step in creating a small garden, which would enhance habitat for birds, and improve green space for public enjoyment.

Service without limit Compulsory Insurance Law has been well implemented since 2012, and almost every vehicle and machinery owners in Mongolia are covered. But the new law is facing challenges in implementation and providing necessary insurance services to customers. During the implementation of Compulsory Insurance Law, we exposed that the law has gaps that needed clarification. Mandal Insurance has followed up with necessary amendments, and filed the case to regulator. On June 6th of 2012, a female (head of a household) had unfortunatelly died of car accident according to our claim report. She had a daughter aged just about 1 year old. Because the girl is left with her grandmother only, and the two needed a new ger and steady stream of income, rather than a lump sum, that is difficult to manage for their case, we bought ger with furniture for her family from part of reimbursement. And we put another part of reimbursement in the bank account, that victims family could earn interest and monthly payments.


Mandal Achievements

Mandal Insurance team bid farewell to 2012 with many milestones achieved within its Risk Management services performed over the past year. There are still many challenges and hurdles to overcome in order to revitalize the Insurance sector of our country, which has long been regarded as just another form of taxation, a misconception formed since the Socialist era. Today, Mongolia is facing a historical opportunity to lead itself into an aggressive economic development. An insurance sector fit to support the needs of such economic development is vital for Mongolia. In 2012, Mandal Insurance added a new page to our country’s insurance sector highlights by initiating a systematic approach to analyze, draw attention to, and mitigate various risks that corporations and society in general face. As of December 2012, Mandal Insurance holds total assets of 7.7 billion MNT, which is 1.4 times more than the industry average. The company has kept its position in the leading rank by the size of owner’s equity (6.24 billion MNT) and its risk capacity, which is the ratio of equity to total risks taken on. The company’s gross premium revenue has reached 2.7 billion MNT, and it insured total liability of 4.1 trillion MNT. 262.6 billion MNT of total liability insured has been retained after ceding majority of the risks to reinsurers, and net premium revenue was at 1.4 billion MNT. This risk portfolio is made up of 79% or 205.7 billion MNT risk transferred from over 100 corporate customers, and 21% or 56.9 billion MNT total risks transferred from over 120,000 retail customers. Company had established above industry average reserves that decreased profitability. Coupled with aggressive marketing, branding and human resource expansion, led the company into loss in 2012. The company plans to be profitable in 2013, as we gain more market share.

Risk Management Risk management process starts with identification of risks. We gain insight into our customers’ business operations in order to fully understand the risks they face, and then take steps to measure the impact of those risks and seek ways to mitigate. We utilize internationally accepted risk assessment methodologies supplemented by our in-house valuation models and assessment tools to identify potential hazards and quantify the impacts of risk incidents. Within this framework, Mandal performed comprehensive risk assesments and advisory services. Our risk advisory team has no rival in Mongolian insurance sector, and consists of professionals with many years of industry experience. Mandal offered and organized seminars tailored for executives, Risk Training for Managers™, and others such as Workplace Safety™, Risk Assessment™ which were more targeted towards mid level staff of our customers. Our corporate account managers offer tailor-made insurance solutions combined with the above risk management trainings while actively coaching our customers on how to minimize risks and protect their business.

Claim Handling In 2012, our company received over 500 incident calls, of which majority were related to motor and compulsory driver’s liability insurance policies. Within this period, our claims department processed 260 separate claims incidents, and paid out 205.5 million MNT in claim payments. Mandal strived and were able to complete the process for each of these claims usually within 7 working days.

Mandal Insurance received “Best Entrepreneur of Financial Industry“ award from Mongolian National Chamber of Commerce and Industry.


Annual report 2012

Reinsurance Mandal offered new and innovative insurance and risk management products of global standards to our Mongolian customers, as we work with reputable and trusted reinsurance brokers and partners. We worked with reinsurers who have “BBB” ratings from Standard & Poors and Fitch, “BAA” rating from Moody’s and “A+” from A.M. Best agency. In 2012, Mandal made significant step towards strenghtening its partnerships within the global insurance marketplace and introducing world class insurance products to Mongolia.

Corporate Insurance

Mandal Insurance is recognized as the “Best Local Company in Mongolia in 2012” by The Business Council of Mongolia

In 2012, we had gained significant foothold in corporate market share. Due to our increased focus and service quality for corporate clients, many reputable and large corporations are now insured by Mandal. Industry leaders such as Erdenet Mining Corporation, EzNis Airways, Khan Bank, MCS International, MobiCom, Gangar Invest, CAML, Mongol Tamkhi So, PetroMatad, Sharyn Gol, Berkh-Uul, Mongolian Stock Exchange, Newcom Mining, and Lehman Lee & Xu are on our corporate clients’ roster. Having a keen sense of customers’ demands and offering innovative products and services to fit those needs are vital in withstanding the increasingly competitive environment of insurance industry of Mongolia. Mandal team had the philosophy of being “within arms reach” to their customers and offering tailor-made products within short period. Last year, Mandal became one of the few aviation insurers in Mongolia by successfully placing risks of a top aviation company on the global reinsurance market. Also, insurance product and solutions for corporate directors and C level executives, especially within the banking and financial sectors have been enhanced. First time in Mongolia, Mandal introduced, the Lloyd’s of London backed “Banker’s Blanket Bond” insurance for a major bank. In the near future, we strive to become the preferred insurance company of Mongolian financial sector, by constantly perfecting our product offerings for this sector. Our “Credit default insurance” specifically designed for dealers of heavy machinery and equipment has been well received and became one of the most in-demand products. Moreover, a medical insurance policy with provisions to receive treatment in any country has been introduced by Mandal with cooperation from LAMP, a global health insurance provider of outstanding reputation. In late 2012, Mandal decided to revamp the product offerings for construction companies, and manage their risks in a systematic approach, due to increasing spotlight on building and construction site liability. Mandal designed and introduced a complete package of risk management solutions for the construction industry, insurance products from the initial stages of blueprint drawing to handing of key to the end user. Above, we had only noted some of our achievements from past year. In the future, we will continue performing our social responsibility and work diligently to create risk free society for all.

Our company successfully participated in several expo’s and trade-fares like Luxury property Showcase, Future Mongolia, Discover Mongolia and Invest Mongolia.

43


Mandal Achievements

Retail insurance In April 2012, retail insurance department of Mandal obtained its authorization from the Financial Regulatory Committee, to start offering Driver’s compulsory liability insurance. Since then, retail insurance team has been expanding its operations aggressively. We focused on increasing customer education and risk knowledge and offering products designed to meet customers’ demand. Our research indicated that traffic accident numbers dramatically increase during winter, thus we wanted to do our part in decreasing financial loss related to accidents on icy roads. In fall 2012, Mandal introduced non-expensive, one-time reimbursement guaranteed “KISS” insurance, the first ever weather-adjusted insurance product for automobiles. Also “Safe” insurance for retailers and “Weather guarantee” insurance for travel agents had been introduced on the market. In order to reach and offer expedited service to our retail customers, Mandal had started opening its branch offices in each of the districts of Ulaanbaatar. Mandal Insurance has now presence through agents in all of the state Auto Registration and Check-up locations such as Khusug Trade building, Motor Department Office, and Motor check-up point in Bayanzurkh district. In addition, regional branches of Zuunmod Soum in Tuv aimag and Tsogttsetsii Soum in Southgobi aimag have been established last year. One of Mandal’s intentions is to provide a complete package of financial services to retail customers. Within this framework, Mandal signed partnership agreements with top banks in Mongolia in 2012. First time in Mongolia, a BANKASSURANCE service that combines banking and insurance services in one location has been initialized by Mandal and Khan Bank. This partnership will allow Mongolians to receive insurance product offerings through bank branches that are already well-established. In addition, Mandal Insurance is now present and offering its services through 24 branch offices of Golomt Bank and 18 branch offices of Capitron Bank. 18 branch office locations of Mongol Post are continually offering our products since 2011. Mandal has started offering on-call insurance service during working hours to fit our busy customers’ needs. In 2012, Mandal made it possible to pay insurance premium in installations, a first-ever service offered to customers with Khan Bank, Golomt Bank, and TDBank accounts. Last year, Mandal Insurance has been working closely with Mongolian universities and college student organizations to offer accident insurance policies and spread risk management knowledge to students.

Partnership MOU Signing Ceremony between Mandal Insurance and Khan Bank... CEO of Mandal Insurance Mrs.Davaanyam with CEO of Khan Bank Mr. Norihiko Kato Compulsory Drivers Insurance public event at Sukhbaatar square... September 22, 2012


Financial Statement


Annual report 2012

Statements of Financial Position

In thousands of Mongolian Tugriks Note

31 Dec 2012

31 Dec 2011

Cash and cash equivalents

7

639,585

1,372,101

Deposits with banks

8

5,523,827

4,669,817

ASSETS

Receivables

9

398,754

312,496

Reinsurers’ share of provision for unearned premiums

13

357,310

10,458

Reinsurers’ share of loss provision

14

584,465

-

Deferred acquisition costs

10

128,914

20,451

Other assets

11

42,011

17,945

Property and equipment

12

291,549

186,089

Intangible assets

729

345

7,967,144

6,589,702

13

1,426,703

419,104

14,19

1,756,343

68,496

16

160,095

174,087

602

25,734

2,313,832

687,421

TOTAL ASSETS LIABILITIES Provision for unearned premiums Insurance loss provision Other payables Current income tax payable TOTAL LIABILITIES EQUITY Share capital

17

6,243,016

6,243,016

Share based payments reserve

18

1,808,480

1,465, 538

Accumulated loss

(3,428,095)

(1,806,273)

TOTAL EQUITY

4,623,401

5,902,281

TOTAL LIABILITIES AND EQUITY

7,967,144

6,589,702

The notes set out on pages 51 to 79 form an integral part of these financial statements.

47


Financial Statement

Statement of Comprehensive Income

In thousands of Mongolian Tugriks 2012

From 21 April to 31 December 2011

2,715,982

521,656

Note Gross premiums written Premiums ceded

(1,204,896)

(13,210)

Change in provision for unearned premiums, gross

13

(1,007,599)

(419,104)

Change in reinsurers’ share of provision for unearned premiums

13

346,852

10,458

850,339

99,800

Net premiums earned Gross claims paid

19

(209,326)

(1,045)

Change in loss provision, gross

14

(1,687,847)

(68,496)

Change in reinsurers’ share of provision for loss

14

584,465

-

52,070

-

(1,260,638)

(69,541)

(56,529)

(1,859)

(466,828)

28,400

Subrogation income Net claims incurred Net acquisition costs

10

Insurance activity result before operating expenses Interest income

20

Cost of services received under share based payments

784,518

306,019

(342,942)

(1,465,538)

Administrative and other operating expenses

18

(1,523,268)

(647,175)

Foreign exchange translation gains, net

21

4,419

2,566

Other income Loss before tax Income tax expense

22

731

57

(1,543,370)

(1,775,671)

(78,452)

(30,602)

Loss for the year/period

(1,621,822)

(1,806,273)

Total comprehensive loss for the year/period

(1,621,822)

(1,806,273)

The notes set out on pages 51 to 79 form an integral part of these financial statements


Annual report 2012

Statement of Changes in Equity

In thousand of MongolianTugriks Note On establishment date of 21 April 2011 Total comprehensive loss for the period

Share capital

Share based payments reserve

Accumulated Loss

Total

2,000,000

-

-

2,000,000

-

-

(1,806,273)

(1,806,273)

Cost of services provided under share based payments

18

-

1,465,538

-

1,465,538

Shares issued

17

4,243,016

-

-

4,243,016

6,243,016

1,465,538

(1,806,273)

5,902,281

-

-

(1,621,822)

(1,621,822)

-

342,942

-

342,942

6,243,016

1,808,480

(3,428,095)

4,623,401

Balance at 31 December 2011 Total comprehensive loss for the year 2012 Cost of services provided under share based payments Balance at 31 December 2012

18

The notes set out on pages 51 to 79 form an integral part of these financial statements

49


Financial Statement

Statement of Cash Flows

In thousands of MongolianTugriks 2012

From 21 April to 31 December 2011

(1,543,370)

(1,775,671)

Note

Cash flows from operating activities Loss before taxation Adjustment for: Depreciation expenses

12, 21

44,833

14,426

Amortization expenses

21

1,451

95

Share based payment expense

18

342,942

1,465,538

Change in insurance loss provision

14

1,103,382

68,496

(103,569)

(4,868)

(154,331)

(231,984)

(854,010)

(4,669,817)

Net increase in deposits with banks

(86,258)

(312,496)

Net increase in receivables

(24,066)

(17,945)

Income tax paid Cash flows from operating activities before changes in operating assets and liabilities Changes in operating assets and liabilities Changes in operating assets and liabilities

Net increase in other assets

(108,463)

(20,451)

Net increase in deferred acquisition cost

(346,852)

(10,458)

(13,992)

174,087

Net increase in reinsurers’ share of provision for unearned premiums Net increase in payables Net cash used in operating activities

1,007,599

419,104

(580,394)

(4,669,960)

(150,293)

(211,554)

(1,850)

(440)

(152,122)

(200,955)

Cash flows from investing activities Acquisition of property and equipment

12

Acquisition of intangible assets Proceeds from disposal of property and equipment

11,039

Net cash used in investing activities Cash flows from financing activities Issue of share capital

17

6,243,016

Proceeds from borrowings

23

223,000

103,896

Repayment of borrowings

23

(223,000)

(103,896)

Net cash from financing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at 1 January 2012 / on establishment date Cash and cash equivalents at the end of the year/ period

7

0

6,243,016

(732,516)

1,372,101

1,372,101

-

639,585

1,372,101

The notes set out on pages 51 to 79 form an integral part of these financial statements


Annual report 2012

1. Introduction These financial statements have been prepared in accordance with International Financial Reporting Standards (hereafter –“IFRS”) for the year ended 31 December 2012 for Mandal General Daatgal LLC (hereafter the “Company“). The Company was established on 21 April 2011 as Mandal General LLC and was incorporated in accordance with the Company Law of Mongolia, other relevant regulations and the Company’s Charter. The Company changed its name into Mandal General Daatgal LLC in July 2011 after obtaining license for conducting general insurance activity in Mongolia. The Company is set up in accordance with Mongolian regulations and is domiciled in Mongolia. The immediate parent and ultimate controlling party of the Company is Mongolia Growth Group ltd, a company registered in Canada (hereafter –“Parent”). For more details refer to Note 17. Principal activity. The principal activity of the Company is provision of general (non-life) insurance services in Mongolia. The Company operates under an insurance license issued by the Financial Regulatory Commission (hereafter “FRC”) dated 2 June 2011, based on resolution (order) No.2/21. Insurance business written by the Company includes accident, property, motor, airplane, financial, and liability insurance. Registered address. The Company’s registered address is Sukhbaatar District, 1-st khoroo, Peace Avenue, Building C1, no 34, Ulaanbaatar, Mongolia. Principal place of business. The principal place of busiess is Sukhbaatar District, 2-r khoroo, Seoul Street, 7/1 building, Ulaanbaatar 14251, Mongolia. The Company has two branches in rural areas of Mongolia and one branch in Ulaanbaatar city in addition to the headquarter office at the principal place of business. The financial statements were authorized for issue by the member of the Board of Directors and executive management on XX April 2013 and the Board of Directors has authority to amend the financial statements after approval.

2. Operating Environment of the Company Mongolia displays many characteristics of an emerging market, including relatively high inflation and interest rates. After recording steady growth in 2010 and 2011, the Mongolian economy has shown signs of a slowdown in 2012 due to declining global commodities prices, concerns over slowing growth in China and recent changes to the Mongolian foreign investment law which have slowed inbound foreign investment into the country. The tax and customs legislation in Mongolia is subject to varying interpretations and frequent changes (refer to Note 26). The future economic performance of Mongolia is tied to the continuing demand from China and continuing high global prices for commodities as well as dependent upon the effectiveness of economic, financial and monetary measures undertaken by the Government together with tax, legal, regulatory and political developments. Management is unable to predict all developments that could have an impact on the Mongolian economy and consequently what effect, if any, they could have on the future financial position of the Company. Management believes it is taking all the necessary measures to support the sustainability and development of the Company’s business.

3. Summary of Significant Accounting Policies Basis of preparation. These financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) under the historical cost convention, as modified by the initial recognition of financial instruments based on fair value. The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied during the reporting periods presented unless otherwise stated. Applicable IFRS does not yet contain guidelines governing the accounting treatment and measurement of some transactions that are specific to insurance contracts. In such cases, as envisioned in the IFRS framework and IFRS 4, the Company has applied the accounting policies that comply with the IFRS framework and applicable standards. Details of the accounting policies are set out below.

51


MANDAL GENERAL INSURANCE LLC

Notes to the Financial Statements – 31 December 2012

3. Summary of Significant Accounting Policies (Continued) Presentation currency. These financial statements are presented in thousands of Mongolian Tugrik (“MNT”) which is the functional currency of the Company. Financial instruments - key measurement terms. Depending on their classification financial instruments are carried at fair value or amortised cost as described below.

Transaction costs are incremental costs that are directly attributable to the acquisition issue or disposal of a financial instrument. An incremental cost is one that would not have been incurred if the transaction had not taken place. Transaction costs include fees and commissions paid to agents (including employees acting as selling agents) advisors brokers and dealers levies by regulatory agencies and securities exchanges and transfer taxes and duties. Transaction costs do not include debt premiums or discounts financing costs or internal administrative or holding costs. Fair value is the amount for which an asset could be exchanged or a liability settled between knowledgeable willing parties in an arm’s length transaction. Fair value is the current bid price for financial assets and current asking price for financial liabilities which are quoted in an active market. A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange or other institution and those prices represent actual and regularly occurring market transactions on an arm’s length basis. Valuation techniques such as discounted cash flows models and consideration of financial data of the investees are used to fair value certain financial instruments for which external market pricing information is not available. Valuation techniques may require assumptions not supported by observable market data. Disclosures are made in these financial statements if changing any such assumptions to a reasonably possible alternative would result in significantly different profit, income, total assets or total liabilities.

Amortised cost is the amount at which the financial instrument was recognized at initial recognition less any principal repayments plus accrued interest and for financial assets less any write-down for incurred impairment losses. Accrued interest includes amortisation of transaction costs deferred at initial recognition and of any premium or discount to maturity amount using the effective interest method. Accrued interest income and accrued interest expense including both accrued coupon and amortised discount or premium are not presented separately and are included in the carrying values of related balance sheet items. The effective interest method is a method of allocating interest income or interest expense over the relevant period so as to achieve a constant periodic rate of interest (effective interest rate) on the carrying amount. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts (excluding future credit losses not yet incurred) through the expected life of the financial instrument or a shorter period if appropriate to the net carrying amount of the financial asset or financial liability. The effective interest rate discounts cash flows of variable interest instruments to the next interest repricing date except for the premium or discount which reflects the credit spread over the floating rate specified in the instrument or other variables that are not reset to market rates. Such premiums or discounts are amortised over the whole expected life of the instrument. The present value calculation includes all fees paid or received between parties to the contract that are an integral part of the effective interest. Classification of financial assets. Financial assets have the following categories: (a) loans and receivables; (b) available-for-sale financial assets; (c) financial assets held to maturity and (d) financial assets at fair value through profit or loss. Financial assets at fair value through profit or loss have two subcategories: (i) assets designated as such upon initial recognition and (ii) those classified as held for trading. All of the Company’s financial assets are classified as loans and receivables. Loans and receivables are unquoted non-derivative financial assets with fixed or determinable payments other than those that the Company intends to sell in the near term. Classification of financial liabilities. Financial liabilities have the following measurement categories: (a) held for trading which also includes financial derivatives and (b) other financial liabilities. Liabilities held for trading are carried at fair value with changes in value recognised in profit or loss for the year (as finance income or finance costs) in the period in which they arise. Other financial liabilities are carried at amortised cost. All of the Company’s financial liabilities represent other financial liabilities. Initial recognition of financial instruments. Financial instruments at fair value through profit or loss are initially recorded at fair value. All other financial instruments are initially recorded at fair value plus transaction costs. Fair value at initial recognition is best evidenced by the transaction price. A gain or loss on initial recognition is only recorded if there is a difference between fair value and transaction price which can be evidenced by other observable current market transactions in the same instrument or by a valuation technique whose inputs include only data from observable markets.


Annual report 2012

3. Summary of Significant Accounting Policies (Continued) All purchases of financial assets are recognised when the entity becomes a party to the contractual provisions of the instrument. Derecognition of financial assets. The Company derecognises financial assets when (a) the assets are redeemed or the rights to cash flows from the assets otherwise expire or (b) the Company has transferred the rights to the cash flows from the financial assets or entered into a qualifying pass-through arrangement while (i) also transferring substantially all the risks and rewards of ownership of the assets or (ii) neither transferring nor retaining substantially all risks and rewards of ownership but not retaining control. Control is retained if the counterparty does not have the practical ability to sell the asset in its entirety to an unrelated third party without needing to impose additional restrictions on the sale. Cash and cash equivalents. Cash and cash equivalents are items which are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Cash and cash equivalents include cash in hand, deposits held at call with banks and other short-term bank deposits with original maturities of three months or less, as well as bank overdrafts which are repayable on demand and represent an integral part of the Company’s cash management. Amounts which relate to funds that are of a restricted nature or are restricted for more than one day are excluded from cash and cash equivalents. Cash and cash equivalents are carried at amortised cost. Deposits with banks. Deposits with banks are recorded when the Company advances money to counterparty banks with no intention of trading the resulting unquoted non-derivative receivable. Deposits with banks are carried at amortised cost. Impairment of financial assets carried at amortised cost. Impairment losses are recognized in profit or loss when incurred as a result of one or more events (“loss events”) that occurred after the initial recognition of the financial asset and which have an impact on the amount or timing of the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. The primary factor that the Company considers in determining whether a financial asset is impaired is its overdue status. The following other principal criteria are also used to determine whether there is objective evidence that an impairment loss has occurred: • • • •

any installment is overdue and the late payment cannot be attributed to a delay caused by the settlement systems; the counterparty experiences a significant financial difficulty as evidenced by the counterparty’s financial information that the Company obtains; the counterparty considers bankruptcy or a financial reorganisation; there is adverse change in the payment status of the counterparty as a result of changes in the national or local economic conditions that impact the counterparty.

Due to relatively small number of debtors (customers and other debtors) the Company performs individual assessment on all financial assets i.e. the Company assesses whether objective evidence of impairment exists individually for all receivables and other financial assets. Impairment losses are recognized through an allowance account to write down the asset’s carrying amount to the present value of expected cash flows (which exclude future credit losses that have not been incurred) discounted at the original effective interest rate of the asset. If in a subsequent reporting period the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized the previously recognized impairment loss is reversed by adjusting the allowance account through profit or loss. Uncollectable assets are written off against the related impairment loss provision after all the necessary procedures to recover the asset have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off are credited to the impairment loss account within the profit or loss for the year. Receivables and prepayments. Receivables are accounted for on an accruals basis and are carried at amortised cost. Receivables are recorded when due under the agreement. Prepayments are recorded on the payment date and are charged to the statement of comprehensive income when the services are provided. Reinsurance receivables and payables are offset only where the legal right for this offset exists. Insurance receivables include settlements with agents, brokers, and customers. If the Company has objective evidence that the receivable and prepayments will not be collected the Company recognises impairment by setting up an allowance account decreasing the net carrying value of the receivable and prepayments to its recoverable amount. The impairment is recorded in profit or loss. The Company collects evidence of impairment of insurance receivables and prepayments using the same methods and estimations as those applied to impairment of financial assets carried at amortized cost.

53


MANDAL GENERAL INSURANCE LLC

Notes to the Financial Statements – 31 December 2012

3. Summary of Significant Accounting Policies (Continued) Inventories. Inventories are recorded at the lower of cost and net realisable value. Cost of inventory is determined on the basis of actual costs. Net realisable value is the estimated selling price in the ordinary course of business less the estimated cost of completion and selling expenses. Property and equipment. Property and equipment are stated at cost less accumulated depreciation and provision for impairment where required. Costs of minor repairs and maintenance are expensed when incurred. The cost of replacing major parts or components of property and equipment items are capitalised and the replaced part is retired. At the end of each reporting period management assesses whether there is any indication of impairment of property and equipment. If any such indication exists management estimates the recoverable amount which is determined as the higher of an asset’s fair value less costs to sell and its value in use. The carrying amount is reduced to the recoverable amount and the impairment loss is recognised in profit or loss for the year. An impairment loss recognised for an asset in prior years is reversed where appropriate if there has been a change in the estimates used to determine the asset’s value in use or fair value less costs to sell. Gains and losses on disposals are determined by comparing proceeds with carrying amount and are recognised in profit or loss for the year. Depreciation. Depreciation on items of property and equipments is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives at the following annual rates: Computer equipment Furniture and fixtures Motor vehicles

3 years; 10 years; 10 years;

The residual value of an asset is the estimated amount that the Company would currently obtain from disposal of the asset less the estimated costs of disposal if the asset were already of the age and in the condition expected at the end of its useful life. The residual value of an asset is nil if the Company expects to use the asset by the end of its physical life. The assets’ residual values and useful lives are reviewed and adjusted if appropriate at the end of each reporting period. Operating leases. Where the Company’s is a lessee in a lease which does not transfer substantially all the risks and rewards incidental to ownership from the lessor to the Company the total lease payments are charged to profit or loss for the year on a straight-line basis over the lease term. The lease term is the non-cancellable period for which the lessee has contracted to lease the asset together with any further terms for which the lessee has the option to continue to lease the asset with or without further payment when at the inception of the lease it is reasonably certain that the lessee will exercise the option. Intangible assets. All of the Company’s intangible assets have a definite useful life and primarily include capitalised computer software and are stated at cost less accumulated amortisation and provision for impairment where required. Acquired computer software is capitalised on the basis of the costs incurred to acquire and bring them to use. Intangible assets are amortised using the straight-line method over their useful lives:

Computer software

Useful lives in years 3 years

If impaired, the carrying amount of intangible assets is written down to the higher of value in use and fair value less costs to sell. Income taxes. Income taxes have been provided for in the financial statements in accordance with legislation enacted or substantively enacted by the balance sheet date. The income tax charge comprises current tax and deferred tax and is recognised in the profit or loss unless it relates to transactions that are recognised in the same or a different period in other comprehensive income or directly in equity. Current tax is the amount expected to be paid to or recovered from the taxation authorities in respect of taxable profits or losses for the current and prior periods. Taxable profits or losses are based on estimates if financial statements are authorised prior to filing relevant tax returns. Taxes other than on income are recorded within operating expenses.


Annual report 2012

3. Summary of Significant Accounting Policies (Continued) Deferred income tax is provided using the balance sheet liability method for tax loss carry forwards and temporary differences arising between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. In accordance with the initial recognition exemption deferred taxes are not recorded for temporary differences on initial recognition of an asset or a liability in a transaction other than a business combination if the transaction when initially recorded affects neither accounting nor taxable profit. Deferred tax balances are measured at tax rates enacted or substantively enacted at the balance sheet date which are expected to apply to the period when the temporary differences will reverse or the tax loss carry forwards will be utilised. Deferred tax assets and liabilities are netted by the Company. Deferred tax assets for deductible temporary differences and tax loss carry forwards are recorded only to the extent that it is probable that future taxable profit will be available against which the deductions can be utilised. Value added tax. Management has assessed that Company has no VAT liabilities arising from non-insurance activities, while insurance activities are exempted from VAT based on VAT Law. Thus, the Company was not registered for VAT as at 31 December 2012. Uncertain tax positions. The Company’s uncertain tax positions are reassessed by management at the end of each reporting period. Liabilities are recorded for income tax positions that are determined by management as more likely than not to result in additional taxes being levied if the positions were to be challenged by the tax authorities. The assessment is based on the interpretation of tax laws that have been enacted or substantively enacted by the end of the reporting period and any known court or other rulings on such issues. Liabilities for penalties, interest, and taxes other than on income are recognised based on management’s best estimate of the expenditure required to settle the obligations at the end of the reporting period. Payables. Payables are accrued when the counterparty performs its obligations under the contract and are carried at amortised cost. Reinsurance receivables and payables are offset only where the legal right for this offset exists. Provisions for liabilities and charges. Provisions for liabilities and charges are non-financial liabilities of uncertain timing or amount. They are accrued when the Company has a present legal or constructive obligation as a result of past events it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate of the amount of the obligation can be made. Share capital. Ordinary shares with discretionary dividends are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction net of tax from the proceeds. Any excess of the fair value of consideration received over the par value of shares issued is recorded as share premium in equity. Insurance contracts – classification. The Company issues contracts that transfer insurance risk or financial risk or both. Insurance contracts are those contracts that transfer significant insurance risk. Such contracts may also transfer financial risk. As a general guideline the Company defines as significant insurance risk the possibility of having to pay benefits on the occurrence of an insured event that are at least 10% more than the benefits payable if the insured event did not occur. Insurance risk exists when the Company has uncertainty in respect of the following matters at inception of the contract: occurrence of the insured event, date of occurrence of the insured event and claim value in respect of occurred insured event. Insurance contracts – recognition and measurement. All insurance contracts are classified as short-term insurance contracts, based on the duration of risk. Description of insurance products. The Company offers insurance products covering all common general insurance types. The Company’s main lines of business are as follows: • • • •

motor insurance including voluntary and obligatory motor third party liability; property insurance (including airline insurance); accident insurance; liability and financial risk insurance.

Liability insurance contracts protect the Company’s customers against the risk of causing harm to third parties as a result of their legitimate activities. Damages covered include both contractual and non-contractual events. The typical protection offered is designed for employers who become legally liable to pay compensation to injured employees (employers’ liability) and for customers (individuals and legal entities) who become liable to pay compensation to a third party for bodily harm or property damage (public liability). Financial risk insurance (financial insurance) relates to credit insurance, which protects the insured against the risk of loss arising from a customer default.

55


MANDAL GENERAL INSURANCE LLC

Notes to the Financial Statements – 31 December 2012

3. Summary of Significant Accounting Policies (Continued) The Company’s motor portfolio comprises both voluntary and obligatory third party liability (MTPL) insurance (driver liability insurance), as well as motor insurance. MTPL insurance covers bodily injury claims and property claims. Property damage under motor insurance, as well as bodily injury claims, are generally reported and settled within a short period of the accident occurring. Property insurance ensures that Company’s customers are paid compensation for the damage caused to their property or ensures their financial interests. Premiums written and earned. Upon inception of a contract premiums are recorded as written. The inception of a contract is conditional upon customer’s payment of total or partial amount of gross premium (depending on type of insurance contract and/or policy) as insurance coverage commences at the date of payment based on the terms of insurance contracts and/or policies. In accordance with the specifics of local insurance market the Company undertakes no insurance risk prior to the receipt of the amount of premium defined in the insurance contract and/or policy. Provision for unearned premiums (i.e. unearned premium reserve or “UPR”) represents the proportion of premiums written that relate to unexpired term of policies in force as at the balance sheet date. Provision for unearned premiums is calculated and recognized over the insurance coverage period using pro-rata method. Insurance coverage period is adjusted as to commence on the date of the first payment of insurance premium. Loss provision. Loss provision (insurance reserves) represents the accumulation of estimates for ultimate losses and includes provision for lossess reported but not settled (“RBNS”), provision for losses incurred but not yet reported (“IBNR”) and unexpired risk provision/reserve (“URR”). RBNS is provided in respect of claims reported but not settled as at the reporting date. The estimation is made on the basis of information received by the Company during investigation of the insured event including information received after the reporting date. If the amount of loss is not determined, the maximum possible amount of losses not exceeding the insurance limit, stated in the insurance policy, is recognised as RBNS. Refer to Note 4, 14 and 15. IBNR is determined for each line of business (i.e. type of insurance) based on earned premiums and an expected loss ratio (“ELR”) to project the ultimate losses and estimate the claim liability for IBNR on an ultimate undiscounted basis in accordance with the Expected Loss method. The ultimate undiscounted IBNR amounts are then discounted to recognize the time value of money and provisions for adverse deviation. The change in calculated amount of IBNR compared to the amount at the beginning of the reporting period is charged to profit and loss for the year. Refer to Notes 4, 14 and 15. Liability adequacy test and unexpired risk reserve (URR). At the end of each reporting period, liability adequacy tests are performed to ensure the adequacy of the contract liabilities net of related DAC. In performing these tests, current best estimates of future contractual cash flow and claims handling and administration expenses, as well as investment income from the assets backing such liabilities, are used. Any deficiency is immediately charged to profit or loss initially by writing off DAC and by subsequently establishing a provision for losses arising from liability adequacy tests as the unexpired risk reserve, which is presented as part of loss provision. Any DAC written off as a result of this test cannot subsequently be reinstated. Reinsurance contracts held. The Company cedes reinsurance in the normal course of business. Ceded reinsurance contracts do not relieve the Company from its obligations to policyholders. Contracts entered into by the Company with reinsurers under which the Company is compensated for losses on one or more contracts issued by the Company and that meet the classification requirements for insurance contracts are classified as reinsurance contracts held. The Company is engaged in outward reinsurance only i.e. it is not engaged in inward reinsurance. The benefits to which the Company is entitled under its reinsurance contracts held are recognised as reinsurance assets. These assets consist of short-term balances due from reinsurers as well as longer term receivables that are dependent on the expected claims and benefits arising under the related reinsured insurance contracts. Amounts recoverable from or due to reinsurers are measured consistently with the amounts associated with the reinsured insurance contracts and in accordance with the terms of each reinsurance contract. Reinsurance liabilities are primarily premiums payable for reinsurance contracts. Premiums ceded and related reinsurance liabilities are recognised on an accruals basis. The Company assesses its reinsurance assets for impairment on an annual basis. If there is objective evidence that the reinsurance asset is impaired the Company reduces the carrying amount of the reinsurance asset to its recoverable amount and recognises that impairment loss in the statement of comprehensive income. The Company gathers the objective evidence that a reinsurance asset is impaired using the same process adopted for financial assets held at amortised cost. The impairment loss is calculated following the same method used for these financial assets.


Annual report 2012

3. Summary of Significant Accounting Policies (Continued) Subrogation income. The Company has the right to pursue third parties for payment of some or all costs related to the claims settlement process of the Company (subrogation). Subrogation reimbursements are recognized as income at the time of claim payment when the loss on the paid claim is recoverable from third parties. The estimated subrogation receivable is considered as an allowance in the measurement of the insurance liability for claims and is the assessment of the amount that can be recovered from the action against the liable third party. The impairment provision is determined under the same method used for financial assets carried at amortized cost. Deferred policy acquisition costs (DAC). Commissions and other acquisition costs that vary with, and are related to securing new contracts and renewing existing contracts, are capitalised as an intangible asset (DAC). All other costs are recognised as expenses when incurred. Deferred acquisition costs are subsequently amortised over the life of the contracts as premium is earned i.e. using pro-rata method disclosed under accounting policy for ‘Premiums written and earned’. Deferred acquisition costs (“DAC”) 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. Claims. Claims and claims handling expenses are charged to the statement of comprehensive income as incurred based on the evaluated liability for compensation payable to the insured parties or third parties suffered from occurrence of the insured event. Commission income. The Company receives commissions for ceding premiums to reinsurers. This type of commission is recognized within the insurance activity result in the statement of comprehensive income. Commission income from ceded reinsurance transactions that represent the recovery of acquisition costs reduces the applicable unamortised acquisition costs in such a manner that net acquisition costs are capitalized and charged to expenses in proportion to net revenue recognized. Deferral of commission income on reinsurance outwards is shown net in the statement of comprehensive income i.e. it is treated as deduction of commission income on reinsurance outwards. Commission income is deferred consistently with recognition of earned premium income and amortization of DAC through use of pro-rata method disclosed under accounting policy for ‘Premiums written and earned’. Interest and other income and expenses recognition. Interest income and expense are recorded in the statement of comprehensive income on an accruals basis using the effective interest method. This method defers all fees paid or received between the parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts. Administrative operating and other expenses are generally recorded on an accruals basis when the product has been received or the service has been provided. Foreign currency translation. The functional currency of the Company is the currency of the primary economic environment in which the entity operates. Thus the Company’s functional currency and presentation currency is the national currency of Mongolia, Mongolian Tugrik (“MNT”). Monetary assets and liabilities are translated into the entity’s functional currency at the official exchange rate of the Bank of Mongolia (“BOM”) at the respective end of the reporting period. Foreign exchange gains and losses resulting from the settlement of the transactions and from the translation of monetary assets and liabilities into the entity’s functional currency at year-end official exchange rates of the BOM are recognised in profit or loss. Translation at year-end rates does not apply to non-monetary items that are measured at historical cost. Non-monetary items measured at fair value in a foreign currency including equity investments are translated using the exchange rates at the date when the fair value was determined. Effects of exchange rate changes on non-monetary items measured at fair value in a foreign currency are recorded as part of the fair value gain or loss. At 31 December 2012 the principal rate of exchange used for translating foreign currency balances was USD 1 = MNT 1,392 (31 December 2011: USD 1 = MNT 1,396). Employee benefits. Wages, salaries and other salary related expenses are recognized as an expense in the year in which the associated services are rendered by the Company’s employees. Short term accumulating compensated absences such as paid annual leave are recognized when services rendered by employees that increase their entitlement to future compensated absences and short term non-accumulating compensated absences such as sick leave are recognized when absences occur. As required by the law, companies in Mongolia make contributions to the government pension scheme Social Security and Health Insurance Fund. Such contributions are recognized as an expense in the profit or loss as incurred. The Company has no legal or constructive obligation to make pension or similar benefit payments beyond the payments to the statutory defined contribution scheme.

57


MANDAL GENERAL INSURANCE LLC

Notes to the Financial Statements – 31 December 2012

3. Summary of Significant Accounting Policies (Continued) Share based payments equity reserve and share-based compensation. The Parent company operates a number of equity-settled, share-based compensation plans, under which the Company receives services from its employees and third party (i.e. parties other than employees) as consideration for equity instruments (options) of the Parent or the Company. Refer to Note 18. The fair value of the employee services and services from the third party received in exchange for the grant of the options by the Parent is recognised as an expense over the vesting period with a corresponding credit to share based payment reserve under equity.The fair value of employee services received is measured by reference to the fair value of the options at grant date. The fair value of goods or services provided by the third party is measured directly by reference to value of goods or services provided at the date the entity obtains the goods or the counterparty renders service. If the identifiable consideration received appears to be less than the fair value of the equity instruments granted, the identifiable goods or services received are measured directly, while the unidentifiable goods or services received (or to be received) are measured as the difference between the fair value of the share-based payment and the fair value of any identifiable goods or services received (or to be received). The unidentifiable goods or services received are measured at the grant date. The total expense is recognised over the vesting period, which is the period over which all of the specified vesting conditions are to be satisfied. At the end of each reporting period, the entity revises its estimates of the number of options that are expected to vest based on the non-marketing vesting conditions. It recognises the impact of the revision to original estimates, if any, in the income statement, with a corresponding adjustment to share based payment reserve under equity. If the equity instruments granted to third party vest immediately, the counterparty is not required to complete a specified period of service before becoming unconditionally entitled to those equity instruments. In this case, on grant date the services received are recognized in full, with a corresponding increase in equity. Offsetting. Financial assets and liabilities are offset and the net amount reported in the statement of financial position only when there is a legally enforceable right to offset the recognized amounts and there is an intention to either settle on a net basis or to realise the asset and settle the liability simultaneously. Amendments of the financial statements after issue. The Company’s management and shareholders have the power to amend the financial statements after issue.

4. Critical Accounting Estimates and Judgments in Applying Accounting Policies The Company makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial year. Estimates and judgments are continually evaluated and are based on management’s experience and other factors including expectations of future events that are believed to be reasonable under the circumstances. Management of the Company also makes certain judgments apart from those involving estimations in the process of applying the accounting policies. Judgments that have the most significant effect on the amounts recognized in the financial statements and estimates that can cause a significant adjustment to the carrying amount of assets and liabilities within the next financial year include: Going concern. Management prepared these financial statements on a going concern basis. The Company made a loss of MNT 1,621,822 thousands during 2012 (loss of MNT 1,806,273 thousand during the period from 21 April to 31 December 2011). Though the Company has commenced generation of revenue from its operations from 2011 onwards, the Company had negative cash flows from operating activities in 2012 and might be dependent on financial support from its sole shareholder in the foreseeable future. In addition, the Company has not fully complied with regulatory reporting requirements during 2013 and 2012 (Note 26). These conditions indicate the existence of a material uncertainty which may cast significant doubt about the Company’s ability to continue as a going concern. Management assumed that the Company will continue as a going concern in the foreseeable future, and therefore these financial statements have been prepared on a going concern basis. In making this judgement management considered high capitalisation of the Company, current assets significantly exceeding current liabilities, availability of financing from its parent and expected growth in operations during 2013. Further, loss incurred in 2012 mostly relates to recognition of additional reserve for incurred but not reported losses (IBNR), which was estimated based on conservative assumptions (Note 15). The cancellation of insurance license by FRC due to regulatory non-compliance is considered by the management to be unlikely (Note 26). Estimates of loss provision (insurance reserves). Loss provision as of 31 December 2012 was calculated by a certified actuary based on historic information on loss ratios of the Mongolian insurance sector and the estimated loss ratios used in setting the Company’s premium rates, which are more conservative than average industry loss ratios. Accordingly, IBNR as of 31 December 2012 is determined for each line of business based on the Company’s earned premiums and an expected loss ratio (“ELR”) to project the ultimate losses to estimate the claim liability for IBNR on an ultimate undiscounted basis in accordance with the Expected Loss


Annual report 2012

method. The ultimate undiscounted IBNR amounts were then discounted to recognize the time value of money and provisions for adverse deviation. In addition, unexpired risk reseve (URR) was recognized based on results of liability adequacy test. Management believes that applied methodology, assumptions and inputs used in the calculation (including ELRs) are appropriate and that resulting level of insurance reserves as of 31 December 2012 is sufficient. Further information on loss ratios used, methodology of calculation, and assumptions involved in estimating insurance loss reserves including sensitivity analysis are disclosed in Note 15. The amounts of loss provision are disclosed in Note 14. Fronting reinsurance arrangements. When entering into certain reinsurance arrangements, the Company transfers significant portion of insured risks (90% or above) to the reinsurer. Under some of these arrangements the customers of the Company pay part of the insurance premium directly to the reinsurer and there are other arrangements that are characteristic to fronting arrangements. However, the existence of the reinsurance contracts where significant portion of insured risks are transferred does not relieve the Company from its obligation to pay claims to the policy holder under its insurance contract i.e. the Company does not have unconditional right to refuse the claim payment to the policy holder if the reinsurer has not paid the claim ceded. Due to the absence of protective clauses in the direct insurance contracts, management concluded that the Company still bears insurance risk regardless of the existence of fronting reinsurance arrangements, and that therefore both insurance contracts and related reinsurance contracts meet the definition of insurance contracts under IFRS. Therefore, during 2012 the Company recognized gross written premium and premium ceded with regard to related insurance and reinsurance contracts in the amounts of MNT 1,199,524 thousand and MNT 1,171,079 thousand, respectively. Were these reinsurance agreements considered to be fronting, the Company would have recognized income on net basis in the amount of MNT 28,445 thousand. When making this judgement management considered the terms and conditions of the insurance and reinsurance contracts, relevant regulations and legal operating environment in Mongolia, under which policy holder could initiate legal proceeding against an insurance company based on direct insurance policy, unless there is an explicit clause in the agreement that insurance company’s payment of claim is subject to the payment of claim by reinsurance company. This judgement does not have impact on the result for the year. Impairment losses on receivables. In determining whether an impairment loss should be recorded in the profit or loss the management makes judgments as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of assets before the decrease can be identified with an individual asset in that portfolio. This evidence may include observable data indicating that there has been an adverse change in the payment status of debtors or national or local economic conditions that correlate with defaults on assets in the group. As of 31 December 2012 the management has assessed that receivables are not impaired. Tax legislation. Mongolian tax currency and customs legislation is subject to varying interpretations. Refer to Note 26. Allocation of costs of the Parent’s employees. Certain employees of the parent company carry on work for the parent company and for a number of its subsidiaries in Mongolia, including the Company. Though they are actively involved in providing services to the Mongolian subsidiaries during 2011, these employees are paid by the parent, which makes no recharge to the subsidiaries. In addiiton, these employees were granted stock options on the shares of the Parent (Note 18). It is not possible to make a reasonable apportionment of their compensations (including stock options) in respect of each of the subsidiaries, including the Company. Accordingly, their compensations are not recognized in the Company’s financial statements, but in the consolidated financial statements of the parent company (MGG). Management believes that such accounting treatment is appropriate, given that services to the subsidiaries in Mongolia are provided in their capacity as employees of the parent company and that reasonable apportionment is not practicable due to lack of information for allocation of costs per entities. Further, in 2012 the involvement of these employees in providing services to Mongolian subsidiaries, particularly the Company, was very limited. Stock options issued to UMC. As disclosed in Note 18 the Company has recognised the cost of services provided by UMC Capital LLC, a local company, which was compensated by share options of the Parent in 2011 in the amount of MNT 997 million in the statement of comprehensive income for the period ended 31 December 2011. The compensation primarily relates to provision of services related to the Company’s incorporation during 2011. Part of the compensation amounting to approximately MNT 500 million for 2011 is estimated to relate to unidentified services in accordance with IFRS 2. In absence of specific written agreements the management has made significant judgement in respect of the period the unidentified services were provided and thus has recognized expenses for unidentified services in the amount of approximately MNT 500 million in 2011. The management has also made significant judgement in respect of the value of the options granted as described in Note 18. In management’s view, the value of services provided approximates fair value of the equity instruments awarded by the Parent on the date of signing relevant agreements (9 March 2011), as management has decided not to change previously agreed terms (including the number of options granted) regardless of increase in share price in the period between reaching an agreement with UMC and finalizing the formalized agreements.

59


MANDAL GENERAL INSURANCE LLC

Notes to the Financial Statements – 31 December 2012

4. Critical Accounting Estimates and Judgments in Applying Accounting Policies (Continued) In addition, management has estimated grant date fair value of Company’s shares call option, which represents UMC’s right to purchase 25% of the Company’s share capital in the future (Note 18). Management believes that fair value of this option is not material, particularly given that the option is granted for strategic reasons rather than services rendered to the Company, that the value of the Company’s net assets (representing exercise price) approximates the Company’s fair value and that exercise price changes each quarter in order to reflect net book value (i.e. net assets which approximates fair value of shares). Thus, management believes that no recognition of related expenses for share-based payments in respect of the described call option is necessary in these financial statements. Similarly, management has estimated the amount of expenses related to stock option bonus (Note 18) that should be accrued over the period until the Company has accumulated net profit. Management has estimated fair value of options on grant date based on available information (primarily Company’s budget for period from 2011 – 2015) and relevant assumptions, including estimated change of fair value of Parent’s shares over the vesting period, assumption that UMC will request issuance of options in the earliest period when such right can be exercised and that the options will have the same terms as options issued to UMC for provision of incorporation services during 2011 i.e. expiry period of 10 years. In estimated fair value of options on grant date, management considered that grant date is the date of issuance of options. Based on management’s estimate, the costs to be allocated for 2012 and 2011 are not material.

5. Adoption of New or Revised Standards and Interpretations The following new standards and interpretations became effective for the Company from 1 January 2012: “Disclosures—Transfers of Financial Assets” – Amendments to IFRS 7 (issued in October 2010 and effective for annual periods beginning on or after 1 July 2011). The amendment requires additional disclosures in respect of risk exposures arising from transferred financial assets. The amendment includes a requirement to disclose by class of asset the nature, carrying amount and a description of the risks and rewards of financial assets that have been transferred to another party, yet remain on the entity’s balance sheet. Disclosures are also required to enable a user to understand the amount of any associated liabilities, and the relationship between the financial assets and associated liabilities. Where financial assets have been derecognised, but the entity is still exposed to certain risks and rewards associated with the transferred asset, additional disclosure is required to enable the effects of those risks to be understood. This amendment did not result in any additional disclosure in these financial statements. Other revised standards and interpretations effective for the current period. The amendments to IFRS 1 “First-time adoption of IFRS”, relating to severe hyperinflation and eliminating references to fixed dates for certain exceptions and exemptions, did not have any impact on these consolidated financial statements. The amendment to IAS 12 “Income taxes”, which introduced a rebuttable presumption that an investment property carried at fair value is recovered entirely through sale, did not have a material impact on these financial statements.

6. New Accounting Pronouncements Certain new standards and interpretations have been issued that are mandatory for the annual periods beginning on or after 1 January 2013 or later, and which the Company has not early adopted IFRS 9, Financial Instruments: Classification and Measurement. IFRS 9, issued in November 2009, replaces those parts of IAS 39 relating to the classification and measurement of financial assets. IFRS 9 was further amended in October 2010 to address the classification and measurement of financial liabilities and in December 2011 to (i) change its effective date to annual periods beginning on or after 1 January 2015 and (ii) add transition disclosures. Key features of the standard are as follows: •

Financial assets are required to be classified into two measurement categories: those to be measured subsequently at fair value, and those to be measured subsequently at amortised cost. The decision is to be made at initial recognition. The classification depends on the entity’s business model for managing its financial instruments and the contractual cash flow characteristics of the instrument. An instrument is subsequently measured at amortised cost only if it is a debt instrument and both (i) the objective of the entity’s business model is to hold the asset to collect the contractual cash flows, and (ii) the asset’s contractual cash flows represent payments of principal and interest only (that is, it has only “basic loan features”). All other debt instruments are to be measured at fair value through profit or loss.


Annual report 2012

6. New Accounting Pronouncements (Continued) •

All equity instruments are to be measured subsequently at fair value. Equity instruments that are held for trading will be measured at fair value through profit or loss. For all other equity investments, an irrevocable election can be made at initial recognition, to recognise unrealised and realised fair value gains and losses through other comprehensive income rather than profit or loss. There is to be no recycling of fair value gains and losses to profit or loss. This election may be made on an instrument-byinstrument basis. Dividends are to be presented in profit or loss, as long as they represent a return on investment. Most of the requirements in IAS 39 for classification and measurement of financial liabilities were carried forward unchanged to IFRS 9. The key change is that an entity will be required to present the effects of changes in own credit risk of financial liabilities designated at fair value through profit or loss in other comprehensive income.

While adoption of IFRS 9 is mandatory from 1 January 2015, earlier adoption is permitted. The Company is considering the implications of the standard, the impact on the Company and the timing of its adoption by the Company. IFRS 10, Consolidated Financial Statements (issued in May 2011 and effective for annual periods beginning on or after 1 January 2013), replaces all of the guidance on control and consolidation in IAS 27 “Consolidated and separate financial statements” and SIC-12 “Consolidation - special purpose entities”. IFRS 10 changes the definition of control so that the same criteria are applied to all entities to determine control. This definition is supported by extensive application guidance. IFRS 11, Joint Arrangements, (issued in May 2011 and effective for annual periods beginning on or after 1 January 2013), replaces IAS 31 “Interests in Joint Ventures” and SIC-13 “Jointly Controlled Entities—NonMonetary Contributions by Ventures”. Changes in the definitions have reduced the number of types of joint arrangements to two: joint operations and joint ventures. The existing policy choice of proportionate consolidation for jointly controlled entities has been eliminated. Equity accounting is mandatory for participants in joint ventures. IFRS 12, Disclosure of Interest in Other Entities, (issued in May 2011 and effective for annual periods beginning on or after 1 January 2013), applies to entities that have an interest in a subsidiary, a joint arrangement, an associate or an unconsolidated structured entity. It replaces the disclosure requirements currently found in IAS 28 “Investments in associates”. IFRS 12 requires entities to disclose information that helps financial statement readers to evaluate the nature, risks and financial effects associated with the entity’s interests in subsidiaries, associates, joint arrangements and unconsolidated structured entities. To meet these objectives, the new standard requires disclosures in a number of areas, including significant judgments and assumptions made in determining whether an entity controls, jointly controls, or significantly influences its interests in other entities, extended disclosures on share of non-controlling interests in group activities and cash flows, summarised financial information of subsidiaries with material non-controlling interests, and detailed disclosures of interests in unconsolidated structured entities. IFRS 13, Fair value measurement, (issued in May 2011 and effective for annual periods beginning on or after 1 January 2013), aims to improve consistency and reduce complexity by providing a revised definition of fair value, and a single source of fair value measurement and disclosure requirements for use across IFRSs. IAS 27, Separate Financial Statements, (revised in May 2011 and effective for annual periods beginning on or after 1 January 2013), was changed and its objective is now to prescribe the accounting and disclosure requirements for investments in subsidiaries, joint ventures and associates when an entity prepares separate financial statements. The guidance on control and consolidated financial statements was replaced by IFRS 10, Consolidated Financial Statements. IAS 28, Investments in Associates and Joint Ventures, (revised in May 2011 and effective for annual periods beginning on or after 1 January 2013). The amendment of IAS 28 resulted from the Board’s project on joint ventures. When discussing that project, the Board decided to incorporate the accounting for joint ventures using the equity method into IAS 28 because this method is applicable to both joint ventures and associates. With this exception, other guidance remained unchanged. Amendments to IAS 1, Presentation of Financial Statements (issued June 2011, effective for annual periods beginning on or after 1 July 2012), changes the disclosure of items presented in other comprehensive income. The amendments require entities to separate items presented in other comprehensive income into two groups, based on whether or not they may be reclassified to profit or loss in the future. The suggested title used by IAS 1 has changed to ‘statement of profit or loss and other comprehensive income’. The Company expects the amended standard to change presentation of its financial statements, but have no impact on measurement of transactions and balances.

61


MANDAL GENERAL INSURANCE LLC

Notes to the Financial Statements – 31 December 2012

6. New Accounting Pronouncements (Continued) Amended IAS 19, Employee Benefits (issued in June 2011, effective for periods beginning on or after 1 January 2013), makes significant changes to the recognition and measurement of defined benefit pension expense and termination benefits, and to the disclosures for all employee benefits. The standard requires recognition of all changes in the net defined benefit liability (asset) when they occur, as follows: (i) service cost and net interest in profit or loss; and (ii) remeasurements in other comprehensive income. Disclosures—Offsetting Financial Assets and Financial Liabilities - Amendments to IFRS 7 (issued in December 2011 and effective for annual periods beginning on or after 1 January 2013). The amendment requires disclosures that will enable users of an entity’s financial statements to evaluate the effect or potential effect of netting arrangements, including rights of set-off. Offsetting Financial Assets and Financial Liabilities - Amendments to IAS 32 (issued in December 2011 and effective for annual periods beginning on or after 1 January 2014). The amendment added application guidance to IAS 32 to address inconsistencies identified in applying some of the offsetting criteria. This includes clarifying the meaning of ‘currently has a legally enforceable right of set-off’ and that some gross settlement systems may be considered equivalent to net settlement. Improvements to International Financial Reporting Standards (issued in May 2012 and effective for annual periods beginning 1 January 2013). The improvements consist of changes to five standards. IFRS 1 was amended to (i) clarify that an entity that resumes preparing its IFRS financial statements may either repeatedly apply IFRS 1 or apply all IFRSs retrospectively as if it had never stopped applying them, and (ii) to add an exemption from applying IAS 23 “Borrowing costs”, retrospectively by first-time adopters. IAS 1 was amended to clarify that explanatory notes are not required to support the third balance sheet presented at the beginning of the preceding period when it is provided because it was materially impacted by a retrospective restatement, changes in accounting policies or reclassifications for presentation purposes, while explanatory notes will be required when an entity voluntarily decides to provide additional comparative statements. IAS 16 was amended to clarify that servicing equipment that is used for more than one period is classified as property, plant and equipment rather than inventory. IAS 32 was amended to clarify that certain tax consequences of distributions to owners should be accounted for in the income statement as was always required by IAS 12. IAS 34 was amended to bring its requirements in line with IFRS 8. IAS 34 will require disclosure of a measure of total assets and liabilities for an operating segment only if such information is regularly provided to chief operating decision maker and there has been a material change in those measures since the last annual consolidated financial statements. The Company is currently assessing the impact of the improvements to standards on its financial statements. Transition Guidance Amendments to IFRS 10, IFRS 11 and IFRS 12 (issued in June 2012 and effective for annual periods beginning 1 January 2013). The amendments clarify the transition guidance in IFRS 1 “Consolidated Financial Statements”. Entities adopting IFRS 10 should assess control at the first day of the annual period in which IFRS 10 is adopted, and if the consolidation conclusion under IFRS 10 differs from IAS 27 and SIC 12, the immediately preceding comparative period (that is, year 2012 for a calendar year-end entity that adopts IFRS 10 in 2013) is restated, unless impracticable. The amendments also provide additional transition relief in IFRS 10, IFRS 11 “Joint Arrangements” and IFRS 12 “Disclosure of Interests in Other Entities”, by limiting the requirement to provide adjusted comparative information only for the immediately preceding comparative period. Further, the amendments will remove the requirement to present comparative information for disclosures related to unconsolidated structured entities for periods before IFRS 12 is first applied. The Company is currently assessing the impact of the amendment on its financial statements. Amendments to IFRS 1 “First-time adoption of International Financial Reporting Standards - Government Loans“ (issued in March 2012 and effective for annual periods beginning 1 January 2013). The amendments, dealing with loans received from governments at a below market rate of interest, give first-time adopters of IFRSs relief from full retrospective application of IFRSs when accounting for these loans on transition. This will give first-time adopters the same relief as existing preparers. Amendments to IFRS 10, IFRS 12 and IAS 27 - Investment entities (issued on 31 October 2012 and effective for annual periods beginning 1 January 2014). The amendment introduced a definition of an investment entity as an entity that (i) obtains funds from investors for the purpose of providing them with investment management services, (ii) commits to its investors that its business purpose is to invest funds solely for capital appreciation or investment income and (iii) measures and evaluates its investments on a fair value basis. An investment entity will be required to account for its subsidiaries at fair value through profit or loss, and to consolidate only those subsidiaries that provide services that are related to the entity’s investment activities. IFRS 12 was amended to introduce new disclosures, including any significant judgements made in determining whether an entity is an investment entity and information about financial or other support to an unconsolidated subsidiary, whether intended or already provided to the subsidiary.


Annual report 2012

Other revised standards and interpretations: IFRIC 20 “Stripping Costs in the Production Phase of a Surface Mine“, considers when and how to account for the benefits arising from the stripping activity in mining industry. Unless otherwise described above, the new standards and interpretations are not expected to affect significantly the Company’s financial statements.

7. Cash and Cash Equivalents In thousands of Mongolian Tugriks

Cash on hand Bank overdraft

31 Dec 2012

31 Dec 2011

1,974

646

(651)

-

Settlement accounts with banks

117,496

-

Demand deposits with banks

112,878

256,769

17,523

256,769

639,585

1,372,101

Term deposits with banks Total cash and cash equivalents

Cash and cash equivalents are not collateralised. All amounts are neither past due nor impaired. Term deposits with banks included in cash and cash equivalents have original maturities of less than three months and bear interest rate ranging from 8% to 13.6% p.a (2011: 6.6% p.a). The settlement account and the demand and term deposits are placed in commercial banks operating in Mongolia. The carrying amount of cash and cash equivalents approximates fair value. Settlement account with banks includes an amount of MNT 21,473 thousand (21,946 thousand in 2011) denominated in US Dollars. All other balances in cash and cash equivalents are denominated in Mongolian Tugrik. The maturity analysis of cash and cash equivalents are disclosed in Note 24. The credit quality of cash and cash equivalents balances may be summarised based on Standard and Poor’s ratings or equivalents of Moody’s and/or Fitch ratings. The credit quality at 31 December 2012 was as follows.

In thousands of Mongolian Tugriks 31 Dec 2012

31 Dec 2011

1,974

646

- B- o B+ rated

430,226

1,188,605

Unrated

207,385

182,850

639,585

1,372,101

Cash on hand

Total cash and cash equivalents

The unrated balance relates to one commercial bank in Mongolia, which has not been rated by any rating agency, refer to Note 8.

8. Deposits with Banks In thousands of Mongolian Tugriks

Term deposits with banks Total deposits with banks

31 Dec 2012

31 Dec 2011

5,523,827

4,669,817

5,523,827

4,669,817

63


MANDAL GENERAL INSURANCE LLC

Notes to the Financial Statements – 31 December 2012

8. Deposits with Banks (Continued) Deposits with banks are denominated in Mongolian Tugriks and are placed with 6 commercial banks (2011: 4 commercial banks) operating in Mongolia. Deposits with banks are neither past due nor impaired and are not collateralized. All deposits with banks bear fixed interest rates ranging from 13.8 % p.a. to 16.2 % p.a (from 11.0 % p.a. to 15.6 p.a % in 2011). As of 31 December 2012 the Company has no deposits due after 1 year (2011: MNT 1,580,485 thousand). The maturity analysis of deposits with banks is disclosed in Note 24. The carrying amount of short term deposits with banks approximates fair value due to their short term maturity. The carrying amount of long term deposits with banks as of 31 December 2011 approximates their fair value as they are placed in the bank close to the end of 2011 and there have not been significant changes in the interest rates as of 31 December 2011 compared to placement dates. The credit quality of deposits with banks may be summarised based on Standard and Poor’s ratings or equivalents of Moody’s and/or Fitch ratings. The credit quality at 31 December 2012 and 31 December 2011 was as follows.

In thousands of Mongolian Tugriks

- B- o B+ rated Unrated Total cash and cash equivalents

31 Dec 2012

31 Dec 2011

3,126,673

3,593,740

2,397,154

1,076,077

5,523,827

4,669,817

The unrated balance relates to three commercial banks in Mongolia (2011: one commercial bank), which have not been rated by any rating agency. Based on the reputation of these banks on the Mongolian market and other available information, management believes that counterparty risk is low and related amounts are fully recoverable.

9. Receivables In thousands of Mongolian Tugriks 31 Dec 2012

31 Dec 2011

Premium receivables

307,167

266,225

Other receivables from related party (Note 23)

25,447

44,644

Subrogation receivables

49,272

-

Other receivables

16,868

1,627

398,754

312,496

Total receivables

Receivables are not assigned any internal credit quality ratings by the Company and are interest free and not collateralized. None of the corporate clients are rated by international rating agencies. The receivables are neither impaired nor past due. The carrying amount of receivables approximates fair value due to their short term maturity. The Company assesses its insurance receivables and other receivables by credit quality by regular analysis of movements on respective balances. No movements within a reasonably long period of time might mean that the balance is impaired. On the other hand the Company reconciles this information to the payment schedule stipulated in the policy. For more details on managing credit risk, refer to Note 24. All receivables are denominated in Mongolian Tugrik. The maturity analysis of receivables is disclosed in Note 24. The information on related party balances is disclosed in Note 23.


Annual report 2012

10. Deferred Acquisition Costs Deferred acquisition costs analysis is presented below:

In thousands of Mongolian Tugriks 2012

Acquisition cost at 1 January 2012 Aquisition cost incurred during the year Aquisition cost amotized to statement of comprehensive income (Note 10) Acquisition cost at 31 December 2012

Agent commission

Reinsurance commission

Net acquisition cost

20,451

-

20,451

174,144

(9,152)

164,992

(64,089)

7,560

(56,529)

130,506

(1,592)

128,914

21 April 2011 – 31 December 2012 Agent commission

Reinsurance commission

Net acquisition cost

-

-

-

22,310

-

22,310

Aquisition cost amotized to statement of comprehensive income (Note 10)

(1,859)

-

(1,859)

Acquisition cost at 31 December 2012

20,451

-

20,451

Acquisition cost at 21 April 2011 Aquisition cost incurred during the year

Agent commission consists of commission paid to broker and agent on direct insurance contracts. Reinsurance commission consists of commission received from outward reinsurance.

11. Other Assets In thousands of Mongolian Tugriks 31 Dec 2012

31 Dec 2011

Inventories and office supplies

21,583

8,414

Prepayments

20,427

9,531

42,011

17,945

Total other assets

12. Property and equipment In thousands of Mongolian Tugriks Furniture Carrying amount at 21 April 2011

Computer

Vehicles

Total

-

-

-

-

Additions

37,366

40,880

133,308

211,554

Disposals

(4,727)

(6,147)

(165)

(11,039)

Depreciation charge (Note 21)

(1,831)

( 6,199)

( 6,396)

(14,426)

Cost at 31 December 2011

32,639

34,733

133,143

200,515

Accumulated depreciation at 31 December 2011

(1,831)

( 6,199)

( 6,396)

(14,426)

30,808

28,534

126,747

186,089

Additions

56,208

43,916

50,148

150,293

Depreciation charge (Note 21)

(9,422)

(20,824)

(14,587)

(44,833)

Cost at 31 December 2012

88,847

78,670

183,291

350,808

Accumulated depreciation at 31 December 2012

(11,253)

(27,023)

(20,983)

(59,259)

77,594

51,647

162,308

291,549

Carrying amount at 31 December 2011

Carrying amount at 31 December 2012

65


MANDAL GENERAL INSURANCE LLC

Notes to the Financial Statements – 31 December 2012

13. Provision for Unearned Premiums Movements in the provision for unearned premium are as follows:

In thousands of Mongolian Tugriks 2012 Gross Provision for unearned premiums as at 1 January Change in provision for unearned premiums Provision for unearned premiums as at 31 December

Reinsurer’s share

Net

419,104

(10,458)

408,646

1,007,599

(346,852)

660,747

1,426,703

(357,310)

1,069,393

From 21 April to 31 December 2011

Provision for unearned premiums as at 21 April 2011 Change in provision for unearned premiums Provision for unearned premiums as at 31 December 2011

Gross

Reinsurer’s share

Net

-

-

-

419,104

(10,458)

408,646

419,104

(10,458)

408,646

14. Loss Provision In thousands of Mongolian Tugriks 31 December 2012 Note

URR

RBNS

IBNR

Total Loss

Gross reserves

19

355,996

78,122

1,322,225

1,756,343

Reinsurers' share of reserves

19

Loss reserves net of reinsurers’ share 9

Subrogation receivables Loss reserves net of reinsurers' share and subrogation receivable

-

-

(584,465)

(584,465)

355,996

78,122

737,759

1,171,877

-

-

(49,272)

(49,272)

355,996

78,122

688,487

1,122,605

31 December 2011 Note

URR

RBNS

IBNR

Total Loss

19

-

-

68,496

68,496

-

-

-

-

-

-

68,496

68,496

Gross reserves Reinsurers' share of reserves Loss reserves net of reinsurers’ share

15. Evaluation of Insurance Liabilities As the Company is at start up stage, there is no historical loss information available. As a result, the Company has calculated insurance loss provision (including both RBNS and IBNR) based on expected loss ratios (representing ratio of incurred claims to earned premiums) per line of business, which were used in setting the Company’s premium rates and are more conservative than average loss ratios of Mongolian insurance sector i.e. expected loss method was used. The expected ultimate losses are calculated per each line of business as earned premium during the period multiplied by expected loss ratios.


Annual report 2012

The loss ratios used in the calculations are as following:

In thousands of Mongolian Tugriks 31 Dec 2012

31 Dec 2011

Accident

70%

70%

Property insurance

60%

60%

Motor insurance

55%

55%

Cargo insurance

60%

60%

Constraction insurance

60%

60%

Driver's liability

115%

70%

General liability insurance

60%

60%

Financial insurance

720%

-

Airplane insurance

60%

-

Based on the methodology used, IBNR is calculated as the difference between expected ultimate losses and reported claims. Total recognised insurance loss provisions represent discounted total unpaid claims increased by the amount of provision for adverse deviation. All liabilities were discounted to reflect the time value of money using an interest rate of 1% (2011: 3%) based on the Company’s investment portfolio at 31 December 2012 and the prevailing inflation. Claim liabilities were then discounted again at 0.5% (2.0% in 2011) to allow a margin for adverse deviations in the interest rate. Margins for claims development used for calculating provision for adverse deviation range from 10% to 15% (from 10% to 15% in 2011) depending on the line of business. If the above expected loss ratios were 5 percentage points higher/(lower) than those used by the Company, the Company’s net loss provision would increase/(decrease) by MNT 51,260 thousand (MNT 5,427 thousand in 2011). At present the Company is considering taking actions for collecting relevant historic information that would enable calculation and analysis of claims development factors and thus introduction of more sophisticated commonly used methods (e.g. chain ladder method or similar) for determining and evaluation of insurance liabilities in the following years. Liability adequacy test. The Management has performed liability adequacy test for all lines of business as at 31 December 2012 and has recognized unexpired risk reserve of MNT 355,996 thousands for driver’s liability and financial insurance (credit risk) lines where the insurance liabilities recognized were not sufficient for the settlement of estimated future claim liabilities. There was no unexpired risk reserve as of 31 December 2011.

16. Payables In thousands of Mongolian Tugriks 31 Dec 2012

31 Dec 2011

Reinsurance payable

43,717

-

Prepaid insurance premiums

6,848

6,747

Claims payable

2,493

-

53,058

6,747

83,768

112,712

16,517

35,082

100,285

147,794

Insurance payables

Total insurance payables Financial payables Payables to suppliers Accrued salary and bonus payables Total financial payables Non financial payables Social and health insurance payable Other tax payables Total non-financial payables Total payables as of year/period end

5,753

-

999

19,546

6,752

19,546

160,095

174,087

67


MANDAL GENERAL INSURANCE LLC

Notes to the Financial Statements – 31 December 2012

Liabilities arising on non-insurance related services represent operations under which the Company does not assume insurance risk. Carrying value of financial liabilities (including insurance payables) within payables approximates fair value at 31 December 2012 and 2011 due to short-term nature of these liabilities. The Company did not pledge its assets for payables. All payables as of 31 December 2012 and 2011 are denominated in Mongolian Tugrik, except for reinsurance payable of MNT 43,717 thousand which is denominated in USD. Maturity analysis of payables is disclosed in Note 24.

17. Share Capital The Company is a limited liability company. The total authorized share capital of the Company represents 25,000,000 ordinary shares with nominal value of MNT 1,000. The total issued share capital as of 31 December 2012 and 31 December 2011 consists of 6,243,016 ordinary shares with nominal value of MNT 1,000 per share. All issued ordinary shares are fully paid. Each ordinary share carries one vote. There were no movements of the share capital during 2012. The movement of the share capital during 2011 was as follows:

In thousands of Mongolian Tugriks, except for number of shares Number of Shares

Share Capital

On establishment date (21 April 2011)

2,000,000

2,000,000

Shares issued during the period

4,243,016

4,243,016

6,243,016

6,243,016

As of 31 December 2011

The sole shareholder and the ultimate controlling party of the Company is Mongolia Growth Group Ltd (MGG). Mongolia Growth Group Ltd is listed in Canadian stock exchange under YAK symbol. Based on the Investment Cooperation Agreement for the Establishment, Financing and Operation of Mandal Insurance signed between Mongolia Growth Group Ltd. and its Mongolian partner UMC Capital LLC (“UMC”), UMC has ability to appoint one member to the Company’s Board of Directors, while remaining two members are appointed by MGG. Thus, through this arrangement, UMC has ability to exercise significant influence over the Company’s operations. For options issued to UMC refer to Notes 4 and 18.

18. Share based payments The Company has recognised the following expenses related to equity settled share-based payments in 2012 and period from 21 April 2011 to 31 December 2011:

In thousands of Mongolian Tugriks

Employees’ share options UMC Capital LLC’s share options Share options to UMC consultant Cancelled (forfeited) employees’ share options Net share based payment expense

2012

From 21 April to 31 December 2011

371,103

428,907

-

997,282

40,192

39,349

(68,353)

-

342,942

1,465,538

Employees’ share options Under the share based plan of the Parent, the employees of the Company were granted share options of the Parent in 2011. Share options are granted to key employees and other employees of the Company as consideration for the service provided to the Company. The exercise price of the granted options is CAD 4.2, while market price of the shares on grant date, 25 April 2011, was CAD 4.04. Options vest in 4 annual tranches over four year period (i.e. 25% of options granted to each employee vest one year after grant date, the following 25% of options two years after grant date etc.), as vesting condition is continued employment in the Company or other fellow subsidiary of the Parent. Options are exercisable once vested and all of them


Annual report 2012

expire 5 years from the date of grant (i.e. on 25 April 2016). The Parent and the Company has no legal or constructive obligation to repurchase or settle the options in cash. No restrictions on trading shares with third parties are imposed on employees, once options are exercised. Movements in the number of outstanding share options to the Company’s employees granted by the Parent and their related weighted average exercise prices are as follows: Average exercise price per share in Canadian Dollar (CAD) On establishment date

Number of options

-

-

Granted

4,2

404,000

Forfeited

4,2

(77,000)

4.2

(50,000)

327,000

As of 31 December 2011 Forfeited As of 31 December 2012

277,000

The fair value of the share options granted in 2011, determined using the Black-Scholes valuation model, was CAD 2.83 per option. The significant inputs into the model were the share price of CAD 4.04 at the grant date, the exercise price of CAD 4.2, volatility of 90%, a dividend yield of nil%, expected option life of five years, and annual risk-free interest rate of 2.65% p.a. The volatility measured at the standard deviation of continuously compounded share returns is based on statistical analysis of daily share prices over the last year. Management used 100% probabilities of employees staying with the Company or fellow subsidiaries during vesting period. The fair value of each tranche of options to employees on the grant date is spread over the total vesting period using straight line method, which resulted in recognition of expenses of MNT 371,103 thousand for 2012 (428,907 thousand for the period from 21 April 2011 to 31 December 2011). The compensation expenses recognized in the previous periods in relation to options forfeited during the year is reversed from reserves for share based payment and it reduces the total expense for the year 2012 by the amount of MNT 68,353 thousands. In addition, certain employees of Mongolia Growth Group (MGG), who work for the Parent and and for a number of its Mongolian subsidiaries, including the Company, were awarded options on the Parent’s shares. Their total compensation in terms of salaries and share-based payments is recognized in the consolidated financial statements of the Parent. Management believes that such allocation is appropriate (refer to Note 4), particularly given that involvement of these employees in providing services to the Company in 2012 was further reduced. UMC Capital LLC’s share options Based on the Stock Option Agreement and Consulting Agreement, dated 9 March 2011, the Parent has issued 500,000 stock options on its shares to UMC (Note 17) as a compensation for services provided to MGG during 2011. Based on the Stock Option Agreement, the exercising of options was conditional upon setting up insurance company, which implies that options were granted primarily for incorporation services provided by UMC to MGG. The exercise price of the granted options is CAD 1.64, while market price of the shares on grant date, 9 March 2011, was CAD 1.78. Options cannot be exercised until 9 March 2014 and expire on 9 March 2021. The Parent and the Company has no legal or constructive obligation to repurchase or settle the options in cash. No restrictions on trading shares with third parties are imposed on UMC, once options are exercised. The fair value of the share options granted, determined using the Black-Scholes valuation model, was CAD 1.55 per option. The significant inputs into the model were the share price of CAD 1.78 at the grant date, the exercise price of CAD 1.64, volatility of 90%, a dividend yield of nil%, expected option life of ten years, and annual risk-free interest rate of 2.9% p.a. The volatility measured at the standard deviation of continuously compounded share returns is based on statistical analysis of daily share prices in 2011. The fair value of options on the grant date amounts to MNT 997,282 thousand. Given that the options were primarily given as compensation for consulting services provided by UMC during the Company’s incorporation (setting up company, registering it with authorities, obtaining insurance license, communication with regulators, recruiting management team and hiring employees etc.) and that there is no clear, documented evidence of obligation of UMC to provide services during vesting period or in further periods, the Company has recognized full amount of expenses related to these options in 2011 (Note 4).

69


MANDAL GENERAL INSURANCE LLC

Notes to the Financial Statements – 31 December 2012

18. Share based payments (Continued) Share options to UMC consultant In addition to options issued to UMC, the Parent has granted 30,000 options on its shares to an UMC consultant, who is obliged to provide consulting services to the Company during four year vesting period. The options were granted on 25 April 2011 and have the same terms as options granted to the Company’s employees. Accordingly, the fair value of options on grant date is the same as fair value of options granted to the Company’s employees. The fair value of each tranche of options to UMC consultant on the grant date is spread over the total vesting period using straight line method, which resulted in recognition of expenses of MNT 40,192 thousand (2011: MNT 39,349 thousand). Other options Apart from the options outlined above, based on the Investment Cooperation Agreement for the Establishment, Financing and Operation of Mandal Insurance, UMC is entitled to the following options: Company shares call option (which relates to Mandal’s shares), Change of control option and Stock option bonus. The nature of these options is outlined below. Company shares call option represents perpetual option to purchase 25% of the Company’s share capital (after share issue) at the book value of the preceding quarter. The book value is defined as the net value of the Company, calculated as total assets less intangible assets (patents, goodwill) and liabilities, divided by total number of shares outstanding. If the option is exercised, the Company will issue new shares and UMC would pay for these shares in cash. In case that nominal value of share is higher than exercise price (which will be the case in the first years of operations until the Company does not cover accumulated losses and becomes profitable), exercise price would be equal to nominal value of shares (i.e. UMC would pay more than value of net assets per share). Based on the agreement, this option is irrevocable, non-cancellable by termination of this or any other agreements between MGG and UMC. There is no particular performance condition stated in the agreement and UMC can exercise it at any time in whole or in part without any prior consent of MGG, and cannot be cancelled by MGG in any case (even if cooperation with UMC is terminated or this agreement is terminated). The Company does not have obligation to repurchase these options or shares or otherwise have any cash outflow. This option is received free of charge, as part of agreement on strategic cooperation (partnership) and enables UMC to make an investment in the amount of 25% of share capital at any time in the future, when it has available financial resources and thus become the shareholder of the Company. Management believes that fair value of this option is not material (Note 4). Change of control option gives UMC right to purchase all MMG’s shares in the Company at fair value (as determined by independent party), in case that 2 directors of MGG (with whom UMC established strategic partnership), cease to act as directors or executive directors of MGG, its assigns or its affiliates. This option represents a protective clause for UMC, which is treated as minority shareholder based on the abovementioned Investment Cooperation Agreement. Given that exercise price is fair value (market value) of shares, management believes that fair value of this option is unlikely to be material. The above mentioned agreement also specifies Stock option bonus, in the amount of 100% of audited Profit After Tax of the Company, which is payable to UMC in options of MGG. Once the Company becomes profitable, UMC has right to request issuance of options on MGG shares from MGG Board, which is expected to proceed with approval of issuance of options. Based on the terms of the agreement, the issued options will have vesting period of 3 years, which implies that UMC needs to remain strategic partner and continue managing the Company either directly or through appointment of key management team within 3 years after issuance of these options in order to be able to exercise them. Based on the agreement, the exercise price of these options is equal to the closing share price on the stock exchange at the time of issuance of options, which approximates market value (fair value) of shares at which any third party could purchase MGG shares. Though the exact terms of these options have not been yet decided, the terms are likely to be similar to the terms of consultant call options issued to UMC in 2011, which relate primarily to the Company’s incorporation and have 10 year expiry period. Management has estimated fair value of these options at expected grant date, based on the Company’s budget and other available information. Related costs in the amount of fair value of options need to be spread over period which is necessary for the Company to become profitable. Based on its estimate, management believes that costs to be allocated to year 2012 and the period from 21 April to 31 December 2011 are not material (Note 4).


Annual report 2012

71

19. Analysis of Premiums and Claims An analysis of premiums and claims by line of business for the year ended as of 31 December 2012 is provided in the following table:

In thousands of Mongolian Tugriks Accident insurance

Property insurance

Motor insurance

Cargo insurance

Construction insurance

Driver's liability insurance

General liability insurance

Financial insurance

Airplane insurance

Total

119,097

15,748

337,019

21,049

572,475

211,464

555,833

99,671

783,626

2,715,982

Gross premiums written Premiums ceded

-

-

(52,896)

-

(365,461)

-

(786,539)

(1,204,896)

Net premiums written

119,097

15,748

337,019

21,049

519,579

211,464

190,372

99,671

(2,913)

1,511,086

Change in provision for unearned premiums, gross (Note 13)

(82,268)

(7,232)

(249,569)

(3,011)

(332,641)

(115,822)

103,620

(60,462)

(260,214)

(1,007,599)

Change in reinsurer share in provision for unearned premiums, (Note 13)

(10,458)

-

-

-

6,847

-

89,887

-

260,576

346,852

26,371

8,516

87,450

18,038

193,785

95,642

383,879

39,209

(2,551)

850,339

(1,039)

-

(35,715)

-

-

(95,910)

(11,235)

(65,427)

-

(209,326)

-

-

-

-

-

-

-

-

-

-

(1,039)

-

(35,715)

-

-

(95,910)

(11,235)

(65,427)

-

(209,326)

Change in loss provision IBNR

(29,186)

(5,845)

(13,231)

(12,377)

(170,402)

(5,799)

(456,507)

(189,582)

(371,800)

(1,253,729)

Change in loss provision RBNS

(100)

-

(923)

-

-

(13,326)

-

(63,773)

-

(78,122)

-

-

-

-

-

(30,651)

-

(325,345)

-

(355,996)

(29,286)

(5,845)

(14,154)

(12,377)

(170,402)

(48,776)

(456,507)

(578,700)

(371,800)

(1,687,847)

8,302

-

-

-

31,257

-

187,057

-

357,849

584,465

(22,023)

(5,845)

(49,869)

(12,377)

(139,145)

(144,686)

(280,685)

(644,127)

(13,951)

(1,312,708)

Net premiums earned Gross claims paid Claims ceded Net claims paid

Change in loss provision URR Change in loss provisions, gross (Note 14) Change in reinsurer share in loss provision (Note 14) Net claims incurred

An analysis of premiums and claims by line of business for the period from 21 April to 31 December 2011 is provided in the following table:

In thousands of Mongolian Tugriks

Gross premiums written

Accident insurance

Property insurance

Motor insurance

Cargo insurance

Construction insurance

Driver's liability insurance

General liability insurance

Other insurance

Total

97

479

17,178

100

148,734

3,596

351,332

140

521,656

(13,210)

-

-

-

-

-

-

-

(13,210)

Net premiums written

(13,113)

479

17,178

100

148,734

3,596

351,332

140

508,446

Change in provision for unearned premiums, gross (Note 13)

(96)

(332)

(12,072)

(92)

(134,066)

(2,816)

(269,497)

(133)

(419,104)

10,458

-

-

-

-

-

-

-

10,458

(2,751)

147

5,106

8

14,668

780

81,835

7

99,800

Gross claims paid

-

-

(164)

-

-

(881)

-

-

(1,045)

Claims ceded

-

-

-

-

-

-

-

-

-

-

-

(164)

-

-

(881)

-

-

(1,045)

Change in loss provision, net of reinsurance (Note 14)

(1)

(100)

(2,094)

(6)

(9,958)

(787)

(55,550)

-

(68,496)

Net claims incurred

(1)

(100)

(2,258)

(6)

(9,958)

(1,668)

(55,550)

-

(69,541)

Premiums ceded

Change in reinsurer share in provision for unearned premiums, (Note 13) Net premiums earned

Net claims paid

Under accident insurance, the premiums ceded and respective change in reinsurers’ share in provision for unearned premium represent unproportional reinsurance contract commencing in 2011.


MANDAL GENERAL INSURANCE LLC

Notes to the Financial Statements – 31 December 2012

20. Interest Income In thousands of Mongolian Tugriks

Term deposits with banks Settlement accounts with banks Certificates of deposits Total interest income

2012

From 21 April to 31 December 2011

763,740

253,631

13,653

52,388

7,125

-

784,518

306,019

21. Administrative and Other Operating Expenses In thousands of Mongolian Tugriks 2012

From 21 April to 31 December 2011

Salary and bonus expenses

530,679

257,274

Advertising expenses

233,513

130,721

Professional service fee

129,337

111,776

Rental expense

187,881

35,982

Note

Premium receivable write-off Social security contributions Depreciation Amortization charge

12

83,410

-

61,605

24,072

44,833

14,426

1,451

95

Transport, fuel and repair expenses

37,032

15,274

Other

213,527

57,555

1,523,268

647,175

Total administrative and other operating expenses

22. Income Taxes Income tax expense comprises the following:

In thousands of Mongolian Tugriks 2012

From 21 April to 31 December 2011

Current income tax expenses

78,452

30,602

Income tax expenses

78,452

30,602

The Company provides for income taxes on the basis of income for financial reporting purposes, adjusted for items which are not assessable or deductible for income tax purposes. The income tax rate for profits of the Company is 10% for the first MNT 3 billion of taxable income, and 25% on the excess of taxable income over MNT 3 billion in accordance with Mongolian tax legislation.


Annual report 2012

22. Income Taxes (Continued) The effective income tax rate differs from the tax rate determined in accordance with applicable Mongolian tax legislation. Reconciliation between the expected and the actual taxation charge is provided below.

In thousands of Mongolian Tugriks

Loss before taxation Theoretical tax credit at the applicable statutory rate (10%) Effect of non-deductible expenses Unrecognised other potential deferred tax asset Unrecognised tax loss carry forward for the year/period Income tax expense as of year/period end

2012

From 21 April to 31 December 2011

1,543,370

1,775,671

(154,337)

(177,567)

47,746

(177,567)

18,371

(177,567)

166,672

59,136

78,452

30,602

Interest income on bank deposits is taxable at gross under Mongolian taxation law at 10% of the total interest income earned. Refer to Note 20 for the total interest income earned during the year/period. Differences between IFRS and statutory taxation regulations in Mongolia give rise to temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and their tax bases. The net temporary deductible difference as at 31 December 2012 was MNT 183,710 thousand comprising gross deductible temporary differences of MNT 375,079 thousand and gross taxable temporary differences of MNT 191,369 thousand. The net temporary deductible difference as at 31 December 2011 was MNT 109,454 thousand comprising gross deductible temporary differences of MNT 146,491 thousand and gross taxable temporary differences of MNT 37,037 thousand. The Company did not recognize deferred tax asset in these financial statements for the net deductible temporary difference, as the management assessed that there is no sufficient certainty with regard to recoverability of the related asset. The taxable losses are carried forward for next two years and are deductible up to 50% of the taxable income of that year in accordance with Mongolian legislation. The taxable loss available for carry forward for the year ended as of 31 December 2012 was MNT 2,148,625 thousand (2011: MNT 481,905 thousand). However, as the Company is at start-up stage, it cannot be known with sufficient certainty at present that the Company will have taxable profit in next two years and thus no deferred tax asset is recognized in these financial statements for taxable loss carry forward. The tax losses amounting MNT 481,905 thousand (2011: MNT 481,905 thousand) and MNT 1,666,720 thousand (2011: nil) expires in 2013 and 2014 respectively.

23. Related Party Transactions Parties are generally considered to be related if the parties are under common control or if one party has the ability to control the other party or can exercise significant influence or joint control over the other party in making financial and operational decisions. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form. Summary of significant balances with related parties as of 31 December 2012 and 2011 are presented below. The Company has no balances or transactions with the Parent, apart from the share capital (Note 17).

In thousands of Mongolian Tugriks Year

Note

Other receivables

UMC capital LLC, director related company

2012

9

5,447

Mandal Asset Management LLC, director related company

2012

9

20,000

Zulu LLC, company under common control

2011

9

44,644

These receivables are interest free, not collaterized and due immediately.

73


MANDAL GENERAL INSURANCE LLC

Notes to the Financial Statements – 31 December 2012

23. Related Party Transactions (Continued) Summary of significant transactions with related parties during 2012 are presented below:

In thousands of Mongolian Tugriks Zulu LLC, company under common control

Big Sky Capital LLC, company under common control

Creative Mind LLC, director related company

UMC Capital LLC, director related company

Payment made on behalf of

-

-

-

5,447

Gross premium written

-

47,322

-

-

-

-

22,500

-

157,994

13,040

-

-

Professional services fee Rental expense (Note 21)

Summary of significant transactions with related parties during the period from 21 April 2011 to 31 December 2012 are presented below:

In thousands of Mongolian Tugriks Zulu LLC, company under common control

Mr.Ganzorig Ulziibayar, the Company’s President

Big Sky Capital LLC, company under common control

UMC Holding LLC, director related company

UMC Capital LLC, director related company

44,644

-

-

-

-

Sales of property and equipment

-

-

12,659

-

-

Borrowing obtained and paid back

-

10,000

93,896

-

-

Cost of service provided under share based payment (Note 18)*

-

-

-

-

997,282

Payment of rental expense (Note 21)

-

-

-

35,982

-

Payment made on behalf of

Key management compensation is presented below:

In thousands of Mongolian Tugriks From 21 April to 31 December 2011

31 December 2012 Expense

Accrued liability

Expense

Accrued liability

Salaries

96,225

-

59,100

-

Short term bonuses

64,600

16,517

37,500

35,000

State pension and social security costs Cost of service provided by key employees under share based payment (Note 18) Total

17,691

-

6,501

-

180,862

-

249,212

-

359,387

16,517

352,313

35,000


Annual report 2012

24. Financial and Insurance Risk Management The risk management function within the Company is carried out in respect of financial risks (credit, market (currency and interest rate) and liquidity), insurance, operational and legal risks. The primary objectives of the risk management function are to establish risk limits, and then ensure that exposure to risks stays within these limits. The operational and legal risk management functions are intended to ensure proper functioning of internal policies and procedures to minimize operational and legal risks. The risk management function is currently carried out primarily by Chief Risk Officer. Credit risk The Company takes on exposure to credit risk which is the risk that a counterparty will be unable to pay amounts in full when due. The Company’s maximum exposure to credit risk is generally reflected in the carrying amounts of financial assets on the statement of financial position. The impact of possible netting of assets and liabilities to reduce potential credit exposure is not significant. The Company’s exposure to credit risk is managed through risk management policies and procedures with emphasis on the quality of the investment portfolio. All the Company’s investments consisted entirely of institutional deposits earning interest at an average of 15.4 percent p.a. (2011: 13.0 percent p.a). The funds invested are all held in reputable Mongolian banks and are in Mongolian Tugrik. The Company is in the early stages of development and is continually improving its policies regarding monitoring its credit risk. Amounts due from policy holders are short-term in nature and are not subject to material credit risk. Market risk The Company takes on limited exposure to market risks as explained below. The Company’s investment policy operates within the policies in place by management and its application is monitored by the Board of Directors. The investment strategy limits the investments to be held in bank deposits eliminating the risk of market fluctuations. The Company is not exposed to the uncertainty with the valuation of assets arising from changes in equity markets as the Company does not have any marketable securities such as stocks or bonds. Currency Risk Currency risk is the risk that the value of financial instruments will fluctuate due to changes in foreign currency exchange rates. The Company takes on exposure to the effects of fluctuations in the prevailing levels of exchange rates on its financial position and cash flows. As at the period end as well as throughout the entire period the Company had all of its significant balances in Mongolian Tugrik. As the Company was not operating in different currencies in the period the currency risk is minimal. Sensitivities of profit and loss to reasonably possible changes in exchange rates applied at the end of the reporting period relative to the functional currency of the Company (MNT), with all other variables held constant, is presented below.

In thousands of Mongolian Tugriks 2012

US Dollars

From 21 April to 31 December 2011

Currency rate increase by 5%

Currency rate decrease by 5%

Currency rate increase by 15%

Currency rate decrease by 15%

1,621

(1,621)

3,292

(3,292)

Liquidity Risk Liquidity risk is defined as the risk when the maturity of assets and liabilities does not match. Liquidity risk is managed by the Management of the Company. As at 31 December 2012 or 2011, the Company does not believe the current maturity profile of the Company lends itself to any material liquidity risk, taking into account the level of cash and deposits as at year end. The Company does not have material liabilities that can be called unexpectedly at the demand of a client. Claim payments are funded by current operating cash flow including investment income.

75


MANDAL GENERAL INSURANCE LLC

Notes to the Financial Statements – 31 December 2012

24. Financial and Insurance Risk Management (Continued) The table below shows the Company’s financial and insurance assets and liabilities at 31 December 2012 by their remaining contractual maturity except for loss provision (gross) and reinsurers’ share of loss provision which are presented based on expected maturity. The amounts disclosed in the table are the contractual undiscounted cash flows. Such undiscounted cash flows differ from the amounts included in the Statement of Financial Position, which are based on discounted cash flows. Foreign currency payments are translated using the official exchange rate at the balance sheet date.

In thousands of Mongolian Tugriks Up to 3 months

From 3 months to 6 months

from 6 months to 9 months

from 9 months to 1 year

More than 1 year

Total

Assets Cash and cash equivalents

651,214

-

-

-

-

651,214

1,249,966

816,328

1,927,239

2,034,022

-

6,027,555

Reinsurers’ share of loss provision

116,893

116,893

116,893

116,893

116,893

584,465

Receivables

117,225

168,577

112,952

-

-

398,754

2,135,298

1,101,798

2,157,084

2,150,915

116,893

7,661,988

Deposits with banks

Total financial and insurance assets at 31 December 2012 Liabilities Payables

(153,343)

-

-

-

-

(153,343)

Loss provision IBNR

(264,445)

(264,445)

(264,445)

(264,445)

(264,445)

(1,322,225)

Loss provision RBNS

(78,122)

-

-

-

-

(78,122)

Loss provision URR

(152,570)

(152,570)

(50,856)

-

-

(355,996)

(648,480)

(417,015)

(315,301)

(264,445)

(264,445)

(1,909,686)

Total financial and insurance liabilities at 31 December 2011 Net liquidity surplus/(gap)

1,486,818

684,783

1,841,783

1,886,470

(147,551)

5,752,302

Cumulative liquidity surplus

1,486,818

2,171,601

4,013,384

5,899,854

5,752,303

-

The table below shows the Company’s financial and insurance assets and liabilities at 31 December 2011 by their remaining contractual maturity except for loss provision (gross) which is presented based on expected maturity.

In thousands of Mongolian Tugriks Up to 3 months

From 3 months to 6 months

from 6 months to 9 months

from 9 months to 1 year

Cash and cash equivalents

1,374,793

Deposits with banks

1,055,000

-

-

-

-

1,374,793

-

2,250,000

-

1,950,000

5,255,000

137,006

87,795

87,795

-

-

312,596

2,566,799

87,795

2,337,795

-

1,950,000

6,942,389

(133,942)

(40,145)

-

-

-

(174,087)

(14,380)

(14,379)

(14,379)

(14,379)

(14,379)

(71,896)

(148,322)

(54,524)

(14,379)

(14,379)

(14,379)

(245,983) 6,696,406

More than 1 year

Total

Assets

Receivables Total financial and insurance assets at 31 December 2011 Liabilities Payables Loss provision Total financial and insurance liabilities at 31 December 2011 Net liquidity surplus/(gap)

2,418,477

33,271

2,323,416

(14,379)

1,935,621

Cumulative liquidity surplus

2,418,477

2,451,748

4,775,164

4,760,785

6,696,406


Annual report 2012

Interest Rate Risk The Company does not have formal policies and procedures in place for management of interest rate risks, as management considers this risk as insignificant to the Company’s business, given that all interest bearing assets (mostly short-term deposits with banks) are at fixed rates. The Company does not have interest bearing liabilities as of 31 December 2012 and 2011. Thus, management believes that Company’s exposure to this risk is insignificant and changes of interest rates would not have a material impact on the Company’s financial results. Insurance risk An insurance risk is a risk associated with any insurance contract concluded for a possibility of the occurrence of an insured event and uncertainty of the amount of loss incurred. The very nature of an insurance contract implies that such a risk is random and, therefore, unpredictable. Possible accumulation of large claims in such lines as property insurance, liability insurance and others is the major factor that could have a significant impact on the Company’s financial flows and performance indicators. Based on this, the Company chooses a risk management policy and reinsurance protection management policy, so as to minimize the impact of this factor. The above risk exposure is mitigated by diversification across a portfolio of insurance. All risks insured relate to Mongolian customers. Identification and responding to insurance operation risk is the responsibility of Chief Risk Officer. CRO has joined the Company in June 2010 and has annual objectives and annual plan agreed with the Company’s Chief Executive Officer. This includes risk management activities on insurance underwriting, claim processing, IT infrastructure, re-insurance activities, and overall risk management activities of the Company. The Company has approved policies on policy underwritings, claim processing, actuarial activity, reinsurance activities, and operation of Risk Management Committee. These policies define the procedures and approval limits for policy underwriting and claim activities for the Company. Risk Management Committee is responsible for analyzing tariffs and conditions of policies, loss ratios, reinsurance and profitability assessment, as well as making decisions on claims. The meetings of Risk Management Committee are held on a regular basis (usually weekly). The activities of this Commitee are overseen and approved by the Board of Directors, which is responsible for making final decisions on introduction of new insurance products, approving the Company’s policies and procedures and dealing with strategic or other significant issues facing the Company. All significant transactions exposing the Company to insurance risk are monitored by the Board of Directors. All insurance policies with risk above MNT 5 billion need to be approved by the Board of Directors. The Company has defined limits for signing insurance contracts in order to ensure identification and monitoring of significant exposures. All insurance contracts are signed by the Company’s CEO. Claim settlement Under an insurance agreement, the insured party must notify the insurance company of a loss incurred within a clearly defined time period, limited to three days, as stated in the Company’s most of the insurance contracts and/or policies. This relatively short time limit represents a common practice on the Mongolian insurance market. The exception is long-tailed business which primarily relates to liability insurance. Claims settlement processes are carried out in accordance with the Company’s claims policy. The Company has a special subdivision, which is responsible for claims settlement. This subdivision collects all necessary information about accidents (i.e. loss occurring events), performs registration of claims, evaluates possible exposure and proceeds with disbursement of claims within determined limits. Insurance claims are paid only upon provision to the Company of all necessary documents supporting occurrence of an insurance event. Claims settlement subdivision is also responsible for raising subrogation claims, preparation of reports on claims paid and claims reported, which are submitted to insurance managers. The Company has clearly defined limits related to claims approval and settlement process. When a loss is claimed, the Company notifies the relevant reinsurer on the loss claimed, if the insurance agreement was reinsured. Once the Company pays the claim, it sends the payment documents to reinsurers.

77


MANDAL GENERAL INSURANCE LLC

Notes to the Financial Statements – 31 December 2012

25. Management of Capital The Company’s objectives when managing capital are (i) to comply with capital requirements set by the Mongolian laws and the insurance regulator FRC, and (ii) to safeguard the Company’s ability to continue as a going concern. Insurance companies in Mongolia are subject to the following capital regulatory requirements prescribed by FRC: • • •

compliance with the requirements to the minimal share capital set by FRC Order No.333 of 23 November 2011 “Order on approving minimum share capital requirement of Insurance Company”; compliance with solvency ratio and solvency limit as set by FRC Order no. 211 of 28 October 2009 “Order on approving revised requirement on solvency ratio and limit calculations of general Insurance Company”; compliance with the requirements to the composition and structure of the assets set by FRC Order No. 170 dating 16 June 2010 “Order on approving revised regulation on the requirement of capital allocation and investment of general insurance company”.

Compliance with the above ratios is monitored by the Company on a quarterly basis with issuance of reports outlining their calculation reviewed and signed by the Chief Executive Officier and submitted to FRC. As at 31 December 2012 the Company has complied with all aforementioned capital requirements. As at 31 December 2011 the Company complied with all aforementioned capital requirements except solvency limit specified under FRC Order No. 211 of 28 October 2009, which was revised during 2012. The amount of capital that the Company managed as of 31 December 2012 was MNT 4,623,401 thousand (2011: MNT 5,902,281 thousand). The Company’s share capital amount to MNT 6,243,016 thousand and was above regulatory minimum of MNT 2,000,000 thousand in accordance with the minimum set by FRC (2011: MNT 1,000,000 thousand).

26. Contingencies and Commitments Non-Compliance with reporting requirement. Under the Insurance Law of Mongolia the Company is required to submit their audited financial statements to FRC by 10 February of the year following the financial year end. Under this law, the Company is also required to publish their audited summary financial statements in the newspaper within the first quarter after the financial year end. The Company was not able to comply with both of above requirements for the financial years ended 31 December 2012 and 2011. As per Mongolian regulations, FRC has the right to take any corrective actions when an insurance company is not complying with the law, including imposing a fine or even cancelling the insurance license. The management believes that the Company is operating on going concern basis and that no action will be taken by FRC that would materially impact the financial position of the Company or its ability to continue the operations. Management believes that cancelling insurance license due to the non-compliance with reporting requirements of the law is highly unlikely, as management informed the regulator about this issue on regular basis. Refer to Note 4. Legal proceedings. From time to time and in the normal course of business, claims against the Company may be received. On the basis of own estimates and internal professional advice, management is of the opinion that no material losses will be incurred and accordingly no provision has been made in these financial statements. Tax legislation. Mongolian tax, currency and customs legislation is subject to varying interpretations, and changes, which can occur frequently. Management’s interpretation of such legislation as applied to the transactions and activity of the Company may be challenged by tax authorities. Mongolian tax authorities may be taking a more assertive position in their interpretation of the legislation and assessments, and it is possible that transactions and activities that have not been challenged in the past may be challenged by tax authorities. As a result, significant additional taxes, penalties and interest may be assessed. Fiscal periods remain open to review by the authorities in respect of taxes for five calendar years preceding the year of review. Under certain circumstances reviews may cover longer periods. Mongolian tax legislation does not provide definitive guidance in certain areas, specifically in areas such as VAT, corporate income tax, personal income tax and other areas. From time to time, the Company adopts interpretations of such uncertain areas that reduce the overall tax rate of the Company. As noted above, such tax positions may come under heightened scrutiny as a result of recent developments in administrative and court practices. The impact of any challenge by the tax authorities cannot be reliably estimated; however, it may be significant to the financial position and/or the overall operations of the entity.


Annual report 2012

The Company’s management believes that its interpretation of the relevant legislation is appropriate and the Company’s tax positions will be sustained. The management believes that tax risks related to areas are remote at present. The management performs regular re-assessment of tax risk and its position may change in the future as a result of the change in conditions that cannot be anticipated with sufficient certainty at present. Operating lease commitments. The Company has no long-term non-cancellable operating leases, but annual operating leases, which can be cancelled under relatively short notice. Thus, management believes that the amount of the future minimum lease payments under non-cancellable operating leases is not material.

27. Fair Value of Financial Instruments Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation, and is best evidenced by an active quoted market price. Apart from long-term bank deposits, all of the Company’s financial assets and liabilities are of short term nature and thus their carrying amounts approximate fair value. Management believes that carrying amounts of long-term deposits as of 31 December 2011 approximates their fair value, as they were placed close to year end and the changes in interest rates after their origination until 31 December 2011 were not significant. All financial assets as at 31 December 2012 and 2011 are classified as Loans and receivables and all financial assets and financial liabilities of the Company are carried at amorised cost.

28. Events After the End of Reporting Period Management is not aware of any events that occurred after the end of reporting year until XX April 2013, which would have impact on these financial statements.

79


Head Office Mandal Office, Seoul street 7/1 Sukhbaatar district, 2nd khoroo, P.O.Box-2772 Ulaanbaatar 15160, люongolia Phone: (976) 7010 7007 Fax: (976) 7011 7017 E-mail: info@mandal.mn Web: www.mandal.mn


Mandal Daatgal - Annual report 2012 [eng]  

Mandal Daatgal - Annual report 2012 [eng]

Mandal Daatgal - Annual report 2012 [eng]  

Mandal Daatgal - Annual report 2012 [eng]

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