Elmo - Annual Report 2010 by 26th frame

Co. Reg. No. C3500

CONTENTS Directors’ report Independent auditor’s report Profit and loss account Technical account – general business Non-technical account

Balance sheet

4-5 6 7 8 9

Statement of comprehensive income

Statement of changes in equity

Statement of cash flows

Notes to the financial statements

12-44

DIRECTORS’ REPORT The directors present their report and audited financial statements for the year ended 31 December 2010.

but we also completed the upgrade of our IT system to an Oracle Database.

PRINCIPAL ACTIVITIES The principal activities of the company are that of an insurance company licensed in terms of Section 7 of the Insurance Business Act, 1998 by the Malta Financial Services Authority to write general business in Malta.

Other infrastructural projects are also well on the way to completion, one of which is the total refurbishment of our Craig Street office and which is situated behind our head office. In addition, plans are well underway to refurbish our Abate Rigord Street office, where works should start in the latter part of 2011. During the year we also upgraded our Paola branch, where we tripled our floor space and we recently opened a new branch in St. Paul’s Bay, which now brings our branch structure up to 8 branches.

REVIEW OF THE BUSINESS During the year under review the company registered a profit before tax of €3,082,212 compared to €3,369,940 in 2009. This was a solid performance in the light of the continuing impact of the global recession, and reflects continued focus on our core strengths of, ■ underwriting for sustainable profit ■ fair claim settlements ■ the control of expenditure ■ a reinsurance strategy that balances risk and reward, as well as ■ a robust investment strategy. We take great care in our reinsurance structure, and with whom we place our reinsurances. It is of importance to all of our stakeholders. In this respect we partner with, ■ reinsurers who have acceptable security ratings to both ourselves and our regulator ■ reinsurers who can provide technical support ■ a reinsurance broker that has technical ability and a global reach ■ reinsurers and reinsurance brokers that seek long-term relationships. In 2010, our net investment income amounted to €1.75m compared to €1.65m in 2009. We have now recovered a substantial percentage of the fair value investment losses incurred in 2008, during the height of the financial crisis. The main reason for the reduction in Elmo’s overall profitability (before tax) amounting to €287,728 is the result of a €282,660 increase in our combined acquisition costs and administration expenses. KEY DEVELOPMENTS IN 2010 2010 was a significant year in the life of the company. Not only did we pursue the aims of our mission statement, “Elmo Insurance will differentiate itself through offering a quality and personalised service to its customers, pricing stability based on market and risk knowledge and robust statistics, and professional relationships with its reinsurance broker and lead reinsurers”,

The company is committed to investing in its staff, providing assistance and incentives to encourage them to pursue academic studies in insurance, IT and accounting. It is encouraging to note that a very high percentage of our staff have taken up these opportunities. Additional resources have also been dedicated to strengthening our IT support and accounting departments. The insurance industry is currently in the process of preparing for the regulatory transformation imposed on it, by the introduction of Solvency II. A considerable amount of time and resources have been dedicated in completing the QIS 5 exercise and in taking major steps to bring our corporate governance in line with the EU Directive - Solvency II. We are well prepared for the change which is set to come into force as at 1 January 2013. Our associate company, JLTIMM Ltd., an insurance management company servicing the captive insurance industry, has secured over the last 12 months two insurance licences from the MFSA on behalf of its clients and is currently in the closing stages of securing a third licence. Prospects for this company are encouraging. CONTINUED DELIVERY The challenges for 2011 include: ■ the further enhancement of our IT system; ■ growing the business profitably in the light of the continued global recession, and the competition of both the Maltese and Global insurance markets; ■ meeting the needs of a changing distribution system. Despite this, the business is in good shape and we look forward to the future with confidence. We expect to deliver continued premium growth and sustainable profitable performance. RESULTS AND DIVIDEND The profit and loss account is set out on pages 7 and 8. During the year under review the company distributed a net dividend

of €370,000 in June 2010 and a further €1,059,240 in December. In the same month, Elmo’s share capital was increased by €529,240, from €3,494,060 to €4,023,300. DIRECTORS The directors of the company who held office during the year were: William Harding – Chairman David Bartoli – Managing Director Alan Bartoli John Cooper Roger Bellamy Godfrey Leone Ganado STATEMENT OF DIRECTORS’ RESPONSIBILITIES FOR THE FINANCIAL STATEMENTS The directors are required by the Insurance Business Act, 1998 and the Companies Act, 1995 to prepare financial statements which give a true and fair view of the state of affairs of the company as at the end of each financial period and of the profit or loss for that period. In preparing the financial statements, the directors are responsible for: ■ ensuring that the financial statements have been drawn up in accordance with International Financial Reporting Standards as adopted by the EU; ■ selecting and applying appropriate accounting policies; ■ making accounting estimates that are reasonable in the circumstances; ■ ensuring that the financial statements are prepared on the going concern basis unless it is inappropriate to presume that the company will continue in business as a going concern.

controls over, and the security of, the website. Access to information published on the company’s website is available in other countries and jurisdictions, where legislation governing the preparation and dissemination of financial statements may differ from requirements or practice in Malta. AUDITORS The auditors, PricewaterhouseCoopers, have indicated their willingness to continue in office and a resolution for their reappointment will be proposed at the Annual General Meeting. By order of the Board

William Harding Chairman

David Bartoli Managing Director

“Elmo” Abate Rigord Street Ta’ Xbiex Malta 16 June 2011

The directors are also responsible for designing, implementing and maintaining internal controls relevant to the preparation and the fair presentation of the financial statements that are free from material misstatement, whether due to fraud or error, and that comply with the Insurance Business Act, 1998 and the Companies Act, 1995. They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The financial statements of Elmo Insurance Limited for the year ended 31 December 2010 are included in the Annual Report 2010, which is published in hard-copy printed form and may be made available on the company’s website. The directors are responsible for the maintenance and integrity of the Annual Report on the website in view of their responsibility for the

INDEPENDENT AUDITOR’S REPORT To the Shareholders of Elmo Insurance Limited REPORT ON THE FINANCIAL STATEMENTS We have audited the financial statements of Elmo Insurance Limited on pages 7 to 44, which comprise the balance sheet as at 31 December 2010, the profit and loss account, the statements of comprehensive income, changes in equity and cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information. Directors’ Responsibility for the Financial Statements As explained more comprehensively in the Statement of directors’ responsibilities for the financial statements on page 5, the directors are responsible for the preparation of financial statements that give a true and fair view in accordance with International Financial Reporting Standards (IFRSs) as adopted by the EU and the requirements of the Maltese Companies Act, 1995 and Insurance Business Act, 1998, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation of financial statements that give a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion In our opinion the financial statements ■ give a true and fair view of the balance sheet of the company as at 31 December 2010, and of its financial performance and its cash flows for the year then ended in accordance with IFRSs as adopted by the EU; and ■ have been properly prepared in accordance with the requirements of the Maltese Companies Act, 1995 and Insurance Business Act, 1998. REPORT ON OTHER LEGAL AND REGULATORY REQUIREMENTS We also have responsibilities under the Maltese Companies Act, 1995 to report to you if, in our opinion: ■ The information given in the directors’ report is not consistent with the financial statements. ■ Adequate accounting records have not been kept, or that returns adequate for our audit have not been received from branches not visited by us. ■ The financial statements are not in agreement with the accounting records and returns. ■ We have not received all the information and explanations we require for our audit. ■ Certain disclosures of directors’ remuneration specified by law are not made in the financial statements, giving the required particulars in our report. We have nothing to report to you in respect of these responsibilities.

167, Merchants Street Valletta Malta David Valenzia Partner 16 June 2011

PROFIT AND LOSS ACCOUNT

TECHNICAL ACCOUNT – GENERAL BUSINESS

Year ended 31 December

2010 Notes € Earned premiums, net of reinsurance Gross premiums written 4 13,300,687 Outward reinsurance premiums (4,100,575) ____________

2009 €

13,278,591 (4,092,749) ____________

Net premiums written

9,200,112 ____________

9,185,842 ____________

Change in the gross provision for unearned premiums 15 Change in the provision for unearned premiums, reinsurers’ share 15

(26,800) (10,155) ____________ (36,955) ____________

70 (41,845) ____________ (41,775) ____________

Earned premiums, net of reinsurance 9,163,157 Allocated investment return transferred from the non-technical account (page 8) 6 1,102,643 Other technical income 304,484 ____________ Total technical income

10,570,284 ____________

Claims incurred, net of reinsurance Claims paid - gross amount 7,044,638 - reinsurers’ share (918,859) ____________

6,125,779 ____________

9,144,067 1,139,969 213,887 ____________ 10,497,923 ____________

7,765,402 (1,480,447) ____________ 6,284,955 ____________

Change in the provision for claims - gross amount 15 (20,585) - reinsurers’ share 15 ____________ (184,664)

(557,226) 19,927 ____________

(205,249) ____________

(537,299) ____________

Claims incurred, net of reinsurance 5,920,530 Net operating expenses 5 2,155,454 ____________ Total technical charges

5,747,656

8,075,984 ____________

1,813,942 ____________ 7,561,598 ____________

2,494,300

2,936,325

____________ ____________ Balance on the technical account for general business (page 8)

PROFIT AND LOSS ACCOUNT NON-TECHNICAL ACCOUNT

Year ended 31 December

2010 Notes â&#x201A;Ź Balance on the technical account for general business (page 7) 2,494,300

2009 â&#x201A;Ź 2,936,325

Administration expenses 5 Investment income 6 Investment expenses and charges 6 Allocated investment return transferred to the general business technical account (page 7) 6

(57,370) 1,810,928 (63,003)

(78,745) 1,732,080 (79,751)

(1,102,643) ____________

(1,139,969) ____________

Profit before tax Tax expense 9

3,082,212 (765,960) ____________

3,369,940 (899,067) ____________

____________ ____________ Profit for the year The notes on pages 12 to 44 are an integral part of these financial statements.

2,316,252

2,470,873

BALANCE SHEET As at 31 December

2010 Notes € ASSETS Intangible assets - computer software 11 205,932 Tangible assets: - land and buildings 12 3,426,236 - plant and equipment 12 151,657 Investments: - investment in associated undertaking 13 24,308 - other investments 14 17,672,022 Deferred tax asset 20 112,462 Reinsurers’ share of technical provisions 15 3,390,992 Deferred acquisition costs 16 760,146 Debtors: - arising out of direct insurance operations 17 3,650,714 - other debtors 17 68,456 Prepayments and accrued income 17 147,763 Current taxation 375,625 Cash at bank and in hand 24 ____________ 153,862

2009 € 132,274 3,337,384 116,686 26,213 16,163,914 164,571 3,216,483 769,392 3,898,010 78,991 155,719 10,212 164,680 ____________

____________ ____________ Total assets 30,140,175 EQUITY AND LIABILITIES Capital and reserves Called up share capital 18 4,023,300 Revaluation reserve 19 1,255,926 Profit and loss account 5,199,179 ____________

28,234,529

3,494,060 1,230,696 4,312,167 ____________

Total equity 10,478,405 ____________ LIABILITIES Technical provisions 15 16,580,057 Provisions for other risks: deferred taxation 20 451,327 Creditors: - interest-bearing borrowings 21 431,799 - creditors arising out of direct insurance operations 22 1,150,278 - other creditors 22 - - accruals and deferred income 22 ____________ 1,048,309

9,036,923 ____________

Total liabilities 19,661,770 ____________ Total equity and liabilities 30,140,175

19,197,606 ____________

16,573,842 390,776 277,163 920,708 16,480 1,018,637 ____________

____________ ____________ 28,234,529

The notes on pages 12 to 44 are an integral part of these financial statements. The financial statements on pages 7 to 44 were authorised for issue by the Board on 16 June 2011 and were signed on its behalf by:

William Harding Chairman

David Bartoli Managing Director

STATEMENT OF COMPREHENSIVE INCOME Year ended 31 December

Profit for the year – total comprehensive income

2010 €

2009 €

2,316,252

2,470,873

____________ ____________ STATEMENT OF CHANGES IN EQUITY Profit Share Revaluation and loss capital reserve account Notes € € € Balance at 1 January 2009 3,494,060 1,230,696 2,681,294 Comprehensive income Profit for the year ____________ - - 2,470,873 ____________ ____________

2,470,873 ____________

Transactions with owners Dividends - ordinary shares 10 ____________ - - (840,000) ____________ ____________

(840,000) ____________

Total € 7,406,050

____________ ____________ ____________ ____________

Balance at 31 December 2009 3,494,060 1,230,696 4,312,167

Balance at 1 January 2010 3,494,060 1,230,696 4,312,167 Comprehensive income Profit for the year ____________ - - 2,316,252 ____________ ____________ Other comprehensive income Land and buildings - revaluation surplus, net of deferred taxation 19 ____________ - 25,230 - ____________ ____________ Total comprehensive income ____________ - 25,230 2,316,252 ____________ ____________ Transactions with owners Increase in share capital 18 529,240 - - Dividends ordinary shares 10 - - (1,429,240) ____________ ____________ ____________ Total transactions with owners ____________ 529,240 - (1,429,240) ____________ ____________ Balance at 31 December 2010 4,023,300 1,255,926 5,199,179

9,036,923 9,036,923

2,316,252 ____________

25,230 ____________ 2,341,482 ____________

529,240 (1,429,240) ____________ (900,000) ____________

____________ ____________ ____________ ____________

The notes on pages 12 to 44 are an integral part of these financial statements.

10,478,405

STATEMENT OF CASH FLOWS Year ended 31 December

2010 Notes € Operating activities Cash generated from operations 23 1,806,853 Dividends received 6 259,240 Interest received 409,718 Tax paid (1,040,193) ____________ Net cash generated from operating activities

1,435,618 ____________

2009 € 1,291,649 214,109 461,563 (1,259,184) ____________ 708,137 ____________

Investing activities Purchase of intangible assets 11 (163,473) Purchase of plant and equipment 12 (173,364) Increase in investment in associate 13 (563) Purchase of investments – fair value through profit or loss 14 (3,619,999) Disposal of investments – fair value through profit or loss 14 3,205,567 Disposal of plant and equipment 12 - Net movement in investments loans and receivables 14 50,760 ____________

(145,896) (94,449) (2,829,186) 2,880,266 500 248,692 ____________

(701,072) ____________

59,927 ____________

Financing activities Dividends paid 10 (1,429,240) Issue of share capital 18 529,240 ____________

(840,000) ____________-

Net cash (used in)/generated from investing activities

Net cash used in financing activities (900,000) ____________ Decrease in cash and cash equivalents (165,454)

(840,000) ____________

____________ ____________ (71,936)

Movement in cash and cash equivalents At beginning of year (112,483) Net cash outflow (165,454) ____________

(40,547) (71,936) ____________

(277,937)

(112,483)

____________ ____________ At end of year

The notes on pages 12 to 44 are an integral part of these financial statements.

NOTES TO THE FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies adopted in the preparation of these financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.

1.1. Basis of preparation These financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the EU, the Insurance Business Act, 1998 and the Companies Act, 1995. The financial statements are prepared under the historical cost convention as modified by the fair valuation of financial assets at fair value through profit or loss and the revaluation of land and buildings. The preparation of financial statements in conformity with IFRSs as adopted by the EU requires the use of certain accounting estimates. It also requires directors to exercise their judgement in the process of applying the company’s accounting policies (see Note 2 – Critical accounting estimates and judgements). The balance sheet is organised in increasing order of liquidity, with additional disclosures on the current or non-current nature of the company’s assets and liabilities provided within the notes to the financial statements. Standards, interpretations and amendments to published standards effective in 2010 In 2010 the company adopted new standards, amendments and interpretations to existing standards that are mandatory for the company’s accounting period beginning on 1 January 2010. The adoption of these revisions to the requirements of IFRSs as adopted by the EU did not result in substantial changes to the company’s accounting policies. Standards, interpretations and amendments to published standards that are not yet effective Certain new standards, amendments and interpretations to existing standards have been published by the date of authorisation for issue of these financial statements, but are mandatory for the company’s accounting periods beginning after 1 January 2010. The company has not early adopted these revisions to the requirements of IFRSs as adopted by the EU and the company’s directors are of the opinion that there are no other requirements that will have a possible significant impact on the company’s financial statements in the period of initial application. IFRS 9, Financial instruments, addresses the classification and measurement of financial assets, and replaces the multiple classification and measurement models in IAS 39 with a single model that has only two classification categories: amortised cost and fair value. Classification under IFRS 9 is driven by the entity’s business model for managing the financial assets and the contractual characteristics of the financial assets. Subject to adoption by the EU, IFRS 9 is effective for financial periods beginning on, or after, 1 January 2013.

1.2. Foreign currency translation (a) Functional and presentation currency Items included in the financial statements are measured using the currency of the primary economic environment in which the entity operates (“the functional currency”). The financial statements are presented in euro (€), which is the Company’s functional and presentation currency.

(b) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement within ‘administrative expenses’.

1.3. Revenue recognition Revenue comprises the fair value for services and is recognised as follows: (a) Rendering of services Premium recognition is described in accounting policy 1.15 dealing with insurance contracts. (b) Interest income Interest income from financial assets not classified as fair value through profit or loss is recognised on a time proportionate basis using the effective interest method. When a receivable is impaired, the company reduces the carrying amount to its recoverable amount, being the estimated future cash flow discounted at the original effective interest rate of the instrument and continues unwinding the discount as interest income. (c) Dividend income Dividend income is recognised when the right to receive payment is established. (d) Other net fair value gains or losses from financial assets at fair value through profit or loss Other gains or losses arising from changes in the fair value of the ‘Financial assets at fair value through profit or loss’ category are presented in the profit and loss account within ‘Net fair value gains or losses on financial assets at fair value through profit or loss’ in the period in which they arise.

1.4. Investment return Investment return includes dividend income, other net fair value movements on financial assets at fair value through profit or loss (including interest income from financial assets, classified as fair value through profit and loss), interest income from financial assets not classified as fair value through profit or loss and is net of investment expenses, charges and interest. The investment return is allocated between the technical and non-technical profit and loss accounts on a basis which takes into account that technical provisions are fully backed by investments.

1.5. Property, plant and equipment Tangible assets comprising land and buildings, office furniture and equipment and motor vehicles are initially recorded at cost. Property is subsequently shown at market value, based on valuations by external independent valuers, less subsequent depreciation. Valuations are carried out on a regular basis such that the carrying amount of property does not differ materially from that which would be determined using fair values at the reporting date. All other plant and equipment are subsequently stated at historical cost less depreciation. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the company and the cost of the item can be measured reliably. All other repairs and maintenance costs are charged to the profit and loss account during the financial period in which they are incurred. Increases in the carrying amount arising on revaluation are credited to the revaluation reserve in shareholders’ equity. Decreases that offset previous increases of the same asset are charged against the revaluation reserve; all other decreases are charged to the income statement.

NOTES TO THE FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 1.5. Property, plant and equipment (continued) Depreciation is calculated on the straight line method to write off the cost of the assets, other than land, to their residual values over their estimated useful life as follows. Buildings Improvement to buildings Office furniture and equipment Motor vehicles

% 2 10 20 20

The assets residual values and useful lives are reviewed and adjusted as appropriate at each reporting date. Gains and losses on disposals are determined by comparing proceeds with carrying amount and are included in the profit and loss account. Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount.

1.6. Intangible assets – computer software Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortised using the straight-line method over their estimated useful lives of 4 years. Costs associated with developing or maintaining computer software programmes are recognised as an expense as incurred.

1.7. Investment in associated undertakings Associated undertakings are all entities over which the company has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associated undertakings are accounted for by the equity method of accounting and are initially recognised at cost. Equity accounting involves recognising in the profit and loss account, the company’s share of the associate’s profit or loss for the year and the share of post-acquisition movements in reserves is recognised in reserves. The cumulative post-acquisition movements are adjusted against the cost of the investment. The company’s investment in associated undertaking is carried in the balance sheet at an amount that reflects its share of the net assets of the associate and includes goodwill (net of any accumulated impairment loss) on acquisition. Equity accounting is discontinued when the carrying amount of an investment in an associated undertaking reaches zero, unless the company has incurred obligations or guaranteed obligations in respect of the associated undertaking. On disposal of an investment, the difference between the net disposal proceeds and the carrying amount is charged or credited to the profit and loss account.

1.8. Financial assets The company classifies its financial assets in the following categories: financial assets at fair value through profit or loss and loans and receivables. The classification depends on the purpose for which the financial assets were acquired. The directors determine the appropriate classification of the financial assets at the time of purchase and re-evaluate such designation at every reporting date.

(a) Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss are part of a group of investments that is managed on a portfolio basis and whose performance is evaluated and reported internally on a fair value basis to the company’s key management personnel in accordance with a documented investment strategy. (b) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than those that the company intends to sell in the short term or that it has designated as fair value through profit or loss. They include, inter alia, debtors, deposits held with credit or financial institutions and cash and cash equivalents. All purchases and sales of investments are recognised on the trade date, which is the date that the company commits to purchase and sell the asset. All investments are initially recognised at fair value plus, in the case of all financial assets not carried at fair value through profit or loss, transaction costs that are directly attributable to their acquisition. Investments are derecognised when the rights to receive cash flows from the investments have expired or where they have been transferred and the company has also transferred substantially all risks and rewards of ownership. Financial assets at fair value through profit or loss are subsequently re-measured at fair value. Loans and receivables are carried at amortised cost using the effective interest method, less any provision for impairment. Realised and unrealised gains and losses arising from changes in fair value of the ‘financial assets at fair value through profit or loss’ category are included in the profit and loss account in the period in which they arise. The fair value of quoted investments is based on quoted market prices at the reporting date. If the market for an investment is not active, the company establishes fair value by using valuation techniques.

1.9. Impairment of assets (a) Impairment of financial assets carried at amortised cost The company assesses at each reporting date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that have occurred after the initial recognition of the asset (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. Objective evidence that a financial asset or group of assets is impaired includes observable data that comes to the attention of the company about the following events: (i) significant financial difficulty of the issuer or debtor; (ii) a breach of contract, such as default or delinquency in payments; (iii) it becoming probable that the issuer or debtor will enter bankruptcy or other financial reorganisation; (iv) observable data indicating that there is a measurable decrease in the estimated future cash flow from a group of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the group. The company first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant. If the company determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment.

NOTES TO THE FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 1.9. Impairment of assets (continued) (a) Impairment of financial assets carried at amortised cost (continued) If there is objective evidence that an impairment loss has been incurred on loans and receivables carried at amortised cost, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the financial asset’s original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the profit and loss account. If in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as improved credit rating), the previously recognised impairment loss is reversed by adjusting the allowance account. The amount of the reversal is recognised in the profit and loss account. (b) Impairment of other non-financial assets Assets that are subject to amortisation or depreciation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units).

1.10. Cash and cash equivalents For the purposes of the statement of cash flows, cash and cash equivalents comprise cash in hand and deposits held at call with banks which are held for operational purposes, net of bank overdrafts.

1.11. Share capital Shares are classified as equity when there is no obligation to transfer cash or other assets.

1.12. Dividends Dividends on ordinary shares are recognised in equity in the period in which they are declared.

1.13. Current and deferred tax The tax expense for the period comprises current and deferred tax. Tax is recognised in the profit and loss account, except to the extent that it relates to items recognised directly in equity. In this case, the tax is also recognised in equity. Deferred tax is recognised using the liability method for all temporary differences arising between the tax bases of assets and liabilities and their carrying values for financial reporting purposes. However, if the deferred income tax arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss, it is not accounted for. Deferred tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the end of the reporting period and are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled. Deferred tax assets are recognised only to the extent that future taxable profit will be available against which the temporary differences can be utilised.

1.14. Borrowings Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost. Interest costs are charged against income without restriction. No borrowing costs have been capitalised.

1.15. Insurance contracts - classification The company issues contracts that transfer significant insurance risk and that are classified as insurance contracts. As a general guideline, the company defines as significant insurance risk the possibility of having to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder. Insurance contracts – General business The results for direct business are determined on an annual basis whereby the incurred cost of claims, commissions and related expenses are charged against the earned proportion of premiums, net of reinsurance as follows: (i) Premiums written relate to business incepted during the year together with any differences between the booked premiums for prior years and those previously accrued, less cancellations. (ii) Unearned premiums represent the proportion of premiums written in the year that relate to unexpired terms of policies in force at the balance sheet date, calculated on a time apportionment basis. (iii) Commissions and other acquisition costs that vary with and are related to securing new contracts and renewing existing contracts are deferred over the period in which the related premiums are earned. These are capitalised and are shown as deferred acquisition costs (“DAC”) in the balance sheet. DAC is amortised over the term of the policies as the premium is earned. All other costs are recognised as expenses when incurred. (iv) Claims incurred comprise claims and related expenses paid in the year and changes in the provision for outstanding claims, including provisions for claims incurred but not reported (“IBNR”) and related expenses, together with any other adjustments to claims from previous years. Where applicable, deductions are made for salvage and other recoveries. (v) Provision is made at the year-end for the estimated cost of claims incurred but not settled at the reporting date, including the cost of claims incurred but not yet reported to the company. The estimated cost of claims includes expenses to be incurred in settling claims and a deduction for the expected value of salvage and other recoveries. The company takes all reasonable steps to ensure that it has appropriate information regarding its claims exposures. However, given the uncertainty in establishing claims provisions, it is likely that the final outcome will prove to be different from the original liability established. Liabilities for unpaid claims are estimated using the input of assessments for individual cases reported to the company and statistical analysis for the claims incurred but not reported, and to estimate the expected ultimate cost of more complex claims that may be affected by external factors (such as court decisions). The company does not discount its liabilities for unpaid claims. (vi) Provision in the form of an unexpired risk provision is made for any deficiencies arising when unearned premiums, net of associated acquisition costs, are insufficient to meet expected claims and expenses after taking into account future investment return on the investments supporting the unearned premiums provision and unexpired risks provision. The expected claims are calculated having regard to events that have occurred prior to the reporting date. (vii) The above method of provisioning satisfies the minimum liability adequacy that is required by IFRS 4. Reinsurance contracts held 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.

NOTES TO THE FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 1.15. Insurance contracts - classification (continued) Reinsurance contracts held (continued) 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 (classified within debtors), as well as longer term receivables (classified within reinsurersâ&#x20AC;&#x2122; share of technical provisions) 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 and are recognised as an expense when due. The company assesses its reinsurance assets for impairment on a regular 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 profit and loss account. 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 also calculated following the same method used for these financial assets. These processes are described in accounting policy 1.9. Receivables and payables related to insurance contracts Receivables and payables are recognised when due. These include amounts due to and from agents, brokers and insurance contract holders. If there is objective evidence that an insurance receivable is impaired, the company reduces the carrying amount of the insurance receivable accordingly and recognises that impairment loss in the profit and loss account. The company gathers the objective evidence that an insurance receivable 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. These processes are described in accounting policy 1.9.

2. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS IN APPLYING ACCOUNTING POLICIES Estimates and judgements are continually evaluated and based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. In the opinion of the directors, the accounting estimates and judgements made in the course of preparing these financial statements are not difficult, subjective or complex to a degree which would warrant their description as critical in terms of the requirements of IAS 1 (revised), other than the estimate of the ultimate liability arising from claims made under insurance contracts. There are several sources of uncertainty that need to be considered in the estimate of liabilities that the company will ultimately pay for insurance claims. In particular, insurance risks including exposure to liability can span over more than one accounting year, and this increases the uncertainty surrounding the estimate for final settlement. The company applies conventional statistical models in order to determine the ultimate liability of claims as further described in Note 3.1. The directors believe that the liability arising from claims under insurance contracts is adequately reserved as at the financial year end. Further detail is provided in Note 15 to these financial statements.

3. MANAGEMENT OF INSURANCE AND FINANCIAL RISK The company issues contracts that transfer insurance risk. The company is also exposed to financial risk. This section summarises these risks and the way the company manages them.

3.1. Insurance risk The risk under any one insurance contract is the possibility that the insured event occurs and the uncertainty of the amount of the resulting claim. By the very nature of an insurance contract, this risk is random and therefore unpredictable. The terms and conditions of the contracts set out the bases for the determination of the companyâ&#x20AC;&#x2122;s liability should the insured event occur. The risks underwritten include accident, motor (including third party liability), marine and transport, fire and other damage to property, engineering, and liability. Details of gross premiums written and claims incurred analysed by class are provided in the segmental analysis (Note 4). For a portfolio of insurance contracts where the theory of probability is applied to pricing and provisioning, the principal risk that the company faces under its insurance contracts is that the actual claims and benefit payments exceed the carrying amount of the insurance liabilities. This could occur because the frequency or severity of claims are greater than estimated. Insurance events are random and the actual number and amount will vary from year to year from the estimate established using statistical techniques. Experience shows that the larger the portfolio of similar insurance contracts, the smaller variability about the expected outcome will be. In addition, a more diversified portfolio is less likely to be affected across the board by a change in any subset of the portfolio. The company has developed its insurance underwriting strategy to diversify the type of insurance risks accepted and within each category of business to achieve a sufficiently large population of risks to reduce the variability of the expected outcome. Factors that aggravate insurance risks include the lack of risk diversification in terms of type and amount of risk, geographical location and type of industry covered. (a) Frequency and severity of claims The frequency and severity of claims can be affected by several factors including increasing levels of court awards and the risks of a single event that can affect a number of individual risks insured by the company, such as flood or an earthquake. The company manages these risks through its underwriting strategy, adequate reinsurance arrangements and proactive claims handling. Underwriting risk The directors manage exposure to insurance risk through an Underwriting Committee (U.C.) that considers aggregation of risk, and establishes risk retention levels. The underwriting strategy attempts to ensure that the risks underwritten are well diversified in terms of type and amount of risk and industry. Disciplined underwriting, encompassing risk assessment, risk management, pricing and exposure control is critical to the companyâ&#x20AC;&#x2122;s success. The goal is for underwriters to be in a position to: - Understand and assess each risk, - Make appropriate decisions within their area of competence and authority limits, - Differentiate between risks, - Apply suitable terms and conditions in order to manage the portfolio, - Control exposure, - Improve the predictability of the loss experience and make appropriate use of the companyâ&#x20AC;&#x2122;s technical capacity.

NOTES TO THE FINANCIAL STATEMENTS 3. MANAGEMENT OF INSURANCE AND FINANCIAL RISK (CONTINUED) 3.1. Insurance risk (continued) (a) Frequency and severity of claims (continued) Each of the company’s underwriters has a specific license that sets clear parameters for the business that they can underwrite, based on the competence of the individual underwriter. The U.C. looks at company underwriting issues, reviewing and agreeing underwriting direction and setting policy and directives where appropriate, and limits on the overall retention of risk that the company carries. The company’s management of the underwriting and claims risks restricts underwriting of specific high risk classes of business to underwriters with appropriate technical competence and includes reviewing the performance and management of selected individual insurance portfolios throughout the company. Pricing is generally based upon historical claims frequencies and claims severity averages, adjusted for inflation and trended forward. While claims remain the company’s principal cost, allowance is also made in the pricing procedures for acquisition expenses, administration expenses, investment income, the cost of reinsurance, and for a profit loading that adequately covers the cost of the capital exposed to risk. The company has the right not to renew individual policies or to reprice on renewal, it can impose deductibles and it has the right to reject the payment of a fraudulent claim. Reinsurance arrangements are in place as further described below. Reinsurance risk The company reinsures a portion of the risks underwritten to control exposure to losses, to reduce volatility, and to protect capital. The type of reinsurance cover, and the level of retention, are based on the company’s internal risk management assessment, which takes into account the risk being covered and the sums assured. The reinsurance strategy and programme are set and agreed by the Reinsurance Committee on an annual basis. The reinsurance arrangements include a mix of proportional, facultative and non-proportional cover, which limit the liability of the company to any one individual claim or event. Monthly reviews of aggregates are carried out to ensure that adequate reinsurance is in place. Periodical meetings are held with the company’s reinsurance brokers, the purpose of which is to systematically agree the renewal process of the company’s reinsurance requirements, and to ensure a formalised means of communication between Elmo and its reinsurance brokers. Good ad hoc contact with reinsurance brokers is maintained during the year when dealing with risks that are not catered for by standard reinsurance treaties. Further, reinsurance arrangements are in place with RSA to protect Elmo from adverse development of outstanding claims that the company assumed from RSA when the portfolio transfer agreement between RSA and Elmo was executed on 1 May 2004. The company monitors the financial condition of reinsurers on an ongoing basis, and reviews its reinsurance arrangements regularly to ensure that its counterparty exposure to individual reinsurance groups is within the parameters set by the U.C., and the Malta Financial Services Authority. The company does not place reinsurance with reinsurers having a credit rating lower than ‘A-‘. Concentration of insurance risk All risks underwritten by the company are based in Malta. The distribution of premium by insurance business category is summarised in Note 4 to the financial statements. The directors consider that the insurance portfolio is not unduly concentrated, also taking into account the nature and extent of reisurance protection acquired by the company.

Claims handling Risks surrounding known claims are mitigated through the company’s inhouse teams of skilled claims technicians who apply their experience and knowledge to the circumstances of individual claims. These teams are responsible for investigating and adjusting claims, together with specialist independent loss adjustors that might be engaged depending on exigencies. Claim estimates are reviewed periodically and adjusted on the basis of information that becomes available specific to the claim as well as changes in external factors such as judicial decisions and legislation. The company generally pursues early settlement of claims to reduce its exposure to unpredictable developments. Sources of uncertainty in the estimation of future claim payments Claims on contracts are accounted for on a claims-occurrence basis. The company is liable for all insured events that occurred during the term of the contract, even if the loss is discovered after the end of the contract term. As a result, the estimation of claims incurred but not reported (‘IBNR’) is generally subject to a greater degree of uncertainty than the estimation of the cost of settling claims already notified to the company. Certain classes of business can take several years to develop, in particular claims involving casualty, and are therefore subject to a greater degree of uncertainty than other classes of business which are typically settled in a shorter period of time. The estimated cost of claims includes direct expenses to be incurred in settling claims, net of the expected subrogation value and recoveries. The company takes all reasonable steps to ensure that it has appropriate information regarding its claims exposures. However, given the uncertainty in establishing claims provisions, it is possible that the final outcome will prove to be different from the original liability established. The liability for these contracts comprises a provision for IBNR and a provision for reported claims not yet paid at the balance sheet date (see Note 15). In calculating the estimated cost of unpaid claims, the company uses a combination of estimation techniques, based partly on known information and partly on statistical analyses of a historical experience. Reserves are analysed by line of business. Case reserves are established on each individual claim and are adjusted as new information becomes known during the course of handling the claim. Lines of business for which claims data (e.g. paid claims and case reserves) emerge over a long period of time are referred to as long tail lines of business. Lines of business for which claims data emerge more quickly are referred to as short tail lines of business. Risks underwritten by the company are typically short tail, although certain lines of business may take longer to develop, including, for example, personal accident and employers’ liability. The company’s claims managers regularly review reserves for both current and prior accident years using the most recent claims data. These reserve reviews incorporate a variety of judgements, and involve extensive analysis. The ultimate cost of outstanding claims, including claims incurred but not reported, is subsequently estimated through statistical analyses of historical claims trends, which are projected forward giving greater weighting to recent years. Additional qualitative judgement is applied to assess the extent to which past trends may not apply in the future. Note 15 presents the development of the estimate of ultimate claim cost for claims notified in a given year. This gives an indication of the accuracy of the company’s estimation techniques for claims payable.

3.2. Financial risk The company is exposed to financial risk through its financial assets, financial liabilities, and insurance and reinsurance assets and liabilities. The key financial risk is that the proceeds from its financial assets are not sufficient to fund the obligations arising from its insurance risk. The most important components of this financial risk are the interest rate risk, equity price risk, currency risk, credit risk and liquidity risk. These risks arise from open positions in interest rate, currency and equity products, all of which are exposed to general and specific market movements. The risk management policies employed by the company to manage these risks are discussed below.

NOTES TO THE FINANCIAL STATEMENTS 3. MANAGEMENT OF INSURANCE AND FINANCIAL RISK (CONTINUED) 3.2. Financial risk (continued) Market risk (a) Interest rate risk In general, the company is exposed to risk associated with the effects of fluctuations in the prevailing levels of market interest rates. Assets issued at variable rates expose the company to cash flow interest rate risk. Assets issued at fixed rates expose the company to fair value interest rate risk. The total assets and liabilities subject to interest rate risk are as follows:

2010 € ____________

2009 € ____________

Assets at floating interest rates Assets at fixed interest rates

937,005 8,725,097 ____________ 9,662,102

2,043,935 8,214,470 ____________ 10,258,405

Liabilities at floating interest rates

431,799

277,163

____________ ____________ ____________ ____________ Interest rate risk is principally managed through the investment in debt securities having a wide range of maturity dates. Moreover, investment parameters exist to limit exposure to any one particular issuer and any one particular security. Note 14 incorporates maturity information with respect to the company’s assets. The exposure to interest rate risk in respect of borrowings is not considered to be significant. Insurance liabilities are not directly sensitive to the level of market interest rates, as they are not discounted and contractually non-interest bearing. The impact of interest rates on insurance liabilities (e.g. in the case of damages awarded by the courts) is considered within the company’s reserving policy and is mitigated by interest accruing on investments. Up to the balance sheet date the company did not have any hedging policy with respect to interest rate risk as exposure to such risks was not deemed to be significant by the directors. i) Sensitivity Analysis - interest rate risk The sensitivity analysis for interest rate risk illustrates how changes in the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates at the reporting date. At 31 December 2010, if interest rates at that date would have been 100 basis points (2009: 25 basis points) lower with all other variables held constant, pre-tax profit for the year would have been €517,670 (2009: €131,327) higher. An increase of 100 basis points (2009: 25 basis points), with all other variables held constant, would have resulted in pre-tax profits being €469,078 (2009: €128,371) lower. (b) Price risk The company’s financial assets are also susceptible to the risk of changes in value due to changes in the prices of equities in respect of investments held and classified on the balance sheet as fair value through profit or loss. The directors manage this risk of price volatility by entering into a diverse range of investments including equities and collective investment schemes. The company has an active Investment Committee that has established a set of investment guidelines that is also approved by the Board of Directors. These guidelines provide parameters for investment management, including contracts with external portfolio managers. The directors review market value fluctuations arising on the company’s investments on a regular basis. Investment parameters and diversification procedures also consider solvency restrictions imposed by the relevant Insurance Regulations.

The total assets subject to equity price risk are as follows:

2010 € ____________

2009 € ____________

Assets subject to equity price risk

8,111,952

6,003,984

____________ ____________ i) Sensitivity analysis – equity price risk The sensitivity for equity price risk illustrates how changes in the fair value of equity securities will fluctuate because of changes in market prices, whether those changes are caused by factors specific to the individual equity issuer, or factors affecting all similar equity traded in the market. The sensitivity for equity price risk is based on global equity returns, assuming that currency exposures are hedged. Given the investment strategy of the company a 10% (2009: 10%) positive or negative movement in equity prices is considered to be an appropriate benchmark for sensitivity purposes. An increase and a decrease of 10% (2009: 10%) in equity prices, with all other variables held constant, would result in an impact on the pre-tax profit for the year of €811,195 (2009: €600,398). (c) Currency risk Currency risk arises from the possibility that fluctuations in foreign exchange rates will impact on the amounts that are paid to settle liabilities and on the amounts that are realised from the company’s assets. Most of the company’s liabilities are in local currency and are therefore not subject to currency risk. The company’s exposure to foreign exchange risk arises primarily from investments that are denominated in currencies other than the euro. The company’s Investment Committee establishes allowable thresholds with regards to the company’s exposure to foreign exchange risk. Currency exposure is also regulated by the Regulations underlying the Maltese Insurance Business Act, 1998. i) Sensitivity analysis – currency risk As at 31 December 2010, the company’s exposure to foreign currency investments, represented 30% of the company’s total investments (2009: 26%). The strengthening or weakening of the functional currency by 10% (2009: 10%) against the other currencies with all other variables held constant, would result in an impact on pre-tax profit for the year of €540,182 (2009: €421,761). (d) Credit risk Credit risk is the risk that a counterparty will be unable to pay amounts in full when due. Key areas where the company is exposed to credit risk are: ■ Investments and cash and cash equivalents; ■ Reinsurers’ share of insurance liabilities; ■ Amounts due from reinsurers in respect of claims already paid; ■ Amounts due from policy holders and insurance intermediaries. The company places limits on the level of credit risk undertaken from the main categories of financial instruments. These limits also take due consideration of the solvency restrictions imposed by the relevant Regulations. The investment strategy of the company considers the credit standing of the counterparty and control structures are in place to assess and monitor these risk thresholds. The company structures the levels of credit risk it accepts by limiting as far as possible its exposure to a single counterparty or groups of counterparty. Limits on the level of credit risk are approved by the directors, and the credit terms allowed depend on the distribution channel through which business is secured. Frequent meetings are held, attended by directors, in order to monitor the overall credit situation, and to take remedial measures as appropriate. Debtors are stated net of a provision for impairment (see Note 17). The directors consider that the company is not exposed to material concentration of credit risk in respect of trade debtors due to the large number of customers comprising the company’s debtor base.

NOTES TO THE FINANCIAL STATEMENTS 3. MANAGEMENT OF INSURANCE AND FINANCIAL RISK (CONTINUED) 3.2. Financial risk (continued) (d) Credit risk (continued) Reinsurance is used to manage insurance risk. This does not, however, discharge the company’s liability as primary insurer. If a reinsurer fails to pay a claim for any reason, the company remains liable for the payment to the policyholder. The creditworthiness of reinsurers is monitored on an annual basis by reviewing their financial strength prior to finalisation of any contract. The company’s policy is to only contract reinsurers with a minimum rating of A-. The company is also exposed to credit risk for its cash at bank and investments. The company’s cash is placed with quality financial institutions. Assets bearing credit risk at the balance sheet date are analysed as follows: As at 31 December 2010

AAA A to A- BBB Unrated Total to AA to BB € ____________ € ____________ € ____________ € ____________ € ____________

Debt securities at fair value 2,708,753 ____________ 6,054,651 ____________ 657,886 ____________ - ____________ 9,421,290 through profit or loss ____________ Loans and receivables Deposits with banks or credit institutions - - 58,844 79,936 138,780 Insurance and other receivables 61,197 57,813 5,755 3,719,198 3,843,963 53,057 ____________ - ____________ 37,899 ____________ 62,905 ____________ 153,861 Cash and cash equivalents ____________ 114,254 ____________ 57,813 ____________ 102,498 ____________ 3,862,039 ____________ 4,136,604 ____________ Reinsurers’ share of technical 541,970 ____________ 1,400,168 ____________ - ____________ - ____________ 1,942,138 provisions (see note above) ____________ 3,364,977 7,512,632 760,384 3,862,039 15,500,032 Total assets bearing credit risk

____________ ____________ ____________ ____________ ____________ As at 31 December 2009

AAA A to A- BBB Unrated Total to AA to BB € ____________ € ____________ € ____________ € ____________ € ____________

Debt securities at fair value 3,365,757 ____________ 6,420,678 ____________ 183,951 ____________ - ____________ 9,970,386 through profit or loss ____________ Loans and receivables Deposits with banks or credit institutions - 57,949 - 131,591 189,540 Insurance and other receivables 61,010 77,991 2,063 3,977,611 4,118,675 46,646 ____________ 7,769 ____________ - ____________ 110,265 ____________ 164,680 Cash and cash equivalents ____________ 107,656 ____________ 143,709 ____________ 2,063 ____________ 4,219,467 ____________ 4,472,895 ____________ Reinsurers’ share of technical 434,318 ____________ 1,323,155 ____________ - ____________ - ____________ 1,757,473 provisions (see note above) ____________ Total assets bearing credit risk 3,907,731 7,887,542 186,014 4,219,467 16,200,754

____________ ____________ ____________ ____________ ____________

As at 31 December 2010 and 2009 the company had significant exposure with the Government of Malta through investments in debt securities and/or treasury bills. These were equivalent to 17% in 2010 (2009: 17%) of the company’s total assets. (e) Liquidity risk The company’s exposure to liquidity risk arises from the eventuality that the frequency or severity of claims are greater than estimated. Liquidity risk is the risk that cash may not be available to pay obligations when due at a reasonable cost. The directors do not consider this risk to be significant given the nature of the company’s financial assets and liabilities. The company’s financial assets are considered to be readily realisable as they consist of local and foreign securities listed on recognised stock markets. Moreover, the company ensures that a reasonable level of funds is available at any point in time for unexpected large claims and the company may also resort to overdraft facilities which provide a short-term means of finance. The table below analyses the company’s financial liabilities into relevant maturity groupings based on the remaining period at the reporting date to the contractual maturity date. The amounts disclosed in the table are the expected timing cash flows arising from the company’s liabilities. As at 31 December 2010

Contracted undiscounted cash outflows

Between Between Less than one and two and Over one year two years five years five years Total € € € € € ____________ ____________ ____________ ____________ ____________ Bank overdraft Insurance and other payables

431,799 - - - 431,799 2,198,587 ____________ - ____________ - ____________ - ____________ 2,198,587 ____________ 2,630,386 - - - 2,630,386 Expected undiscounted cash outflows

____________ ____________ ____________ ____________ ____________

Between Between Less than one and two and Over one year two years five years five years Total € € € € € ____________ ____________ ____________ ____________ ____________ Technical provisions - Claims outstanding 4,510,270 1,466,803 3,022,158 1,542,237 10,541,468

____________ ____________ ____________ ____________ ____________

As at 31 December 2009

Contracted undiscounted cash outflows

277,163 - - - 277,163 1,955,825 ____________ - ____________ - ____________ - ____________ 1,955,825 ____________ 2,232,988 - - - 2,232,988

____________ ____________ ____________ ____________ ____________

NOTES TO THE FINANCIAL STATEMENTS 3. MANAGEMENT OF INSURANCE AND FINANCIAL RISK (CONTINUED) 3.2. Financial risk (continued) (e) Liquidity risk (continued)

Expected undiscounted cash outflows

Between Between Less than one and two and Over one year two years five years five years Total € € € € € ____________ ____________ ____________ ____________ ____________

____________ ____________ ____________ ____________ ____________

Technical provisions - Claims outstanding 4,173,548 1,349,623 3,547,125 1,491,757 10,562,053

3.3. Capital risk management The company’s objectives when managing capital are:

■ to comply with the insurance capital requirements required by the Maltese insurance regulator (“MFSA”);

■ to safeguard the company’s ability to continue as a going concern so that it can continue to provide returns for shareholders and benefits for other stakeholders; and,

■ to provide an adequate return to shareholders by pricing insurance contracts commensurately with the level of risk. In order to maintain or adjust the capital structure, the company may issue new shares or capitalise contributions received from its shareholders. The company is required to hold regulatory capital for its general insurance business in compliance with the rules issued by the Malta Financial Services Authority (MFSA). The minimum capital requirement must be maintained at all times throughout the year. The company monitors its capital level on a regular basis, by ensuring that sufficient assets are maintained to match insurance liabilities and to provide solvency cover. Any transactions that may potentially affect the company’s solvency position are immediately reported to the directors and shareholders for resolution prior to notifying the MFSA. As at 31 December 2010, the company’s net admissible assets in this regard amounted to €10,478,405 (2009: €9,036,923). The company was compliant with its regulatory capital requirements throughout the financial period. The current year amounts are, in general, estimates that are updated once calculations prepared for regulatory submissions are final.

3.4. Fair value estimate The fair value of publicly traded investments is based on quoted market prices at the balance sheet date. At 31 December 2010 and 31 December 2009, the carrying amount of the Company’s other financial assets and liabilities approximated their fair values. The following table presents the Company’s assets that are measured at fair value at 31 December 2010, by level of the following fair value measurement hierarchy:

■ Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1).

■ Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (level 2).

■ Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (level 3).

2010 2009 Level 1 Level 1 € ____________ € ____________ Assets Fair value through profit or loss - Equity securities, other variable yield securities and units in unit trusts – listed 8,111,952 6,003,988 - Debt securities ____________ 9,421,290 ____________ 9,970,386

____________ ____________

Total assets 17,533,242 The company’s investments are quoted in active markets and accordingly are classified as level 1.

15,974,374

4. SEGMENTAL ANALYSIS General business Gross premiums written and gross premiums earned by class of business Gross premiums written Gross premiums earned 2010 2009 2010 2009 € € € € ____________ ____________ ____________ ____________ Direct insurance Motor (third party liability) 1,811,052 1,775,933 1,803,306 1,821,724 Motor (other classes) 5,685,527 5,818,354 5,681,973 5,759,590 Fire and other damage to property 3,393,948 3,404,303 3,422,265 3,453,537 Other classes 2,410,160 2,280,001 2,366,343 2,243,810 ____________ ____________ ____________ ____________ 13,300,687 13,278,591 13,273,887 13,278,661

____________ ____________ ____________ ____________ Gross claims incurred, gross operating expenses and reinsurance balance by class of business

Gross claims incurred Gross operating expenses Reinsurance balance 2010 2009 2010 2009 2010 2009 € ____________ € ____________ € ____________ € ____________ € ____________ € ____________

Direct insurance Motor (third party liability) 1,272,828 1,219,789 485,466 441,575 109,763 16,932 Motor (other classes) 4,055,715 3,572,676 1,536,530 1,397,477 323,174 338,927 Fire and other damage to property 1,034,896 1,638,964 820,119 772,945 1,024,649 614,771 Other classes 660,614 776,747 624,672 550,754 238,288 354,635 ____________ ____________ ____________ ____________ ____________ ____________ 7,024,053 7,208,176 3,466,787 3,162,751 1,695,874 1,325,265

____________ ____________ ____________ ____________ ____________ ____________

Gross premiums written emanate from contracts concluded in or from Malta. The reinsurance balance represents a charge or credit to the technical account arising from the aggregate of all items relating to reinsurance outwards.

NOTES TO THE FINANCIAL STATEMENTS 5. NET OPERATING EXPENSES 2010 2009 ____________ € ____________ € Acquisition costs 2,819,139 2,695,717 Change in deferred acquisition costs, net of reinsurance 13,134 (7,812) Administrative expenses 691,883 553,591 Reinsurance commissions and profit participation (1,311,332) ____________ (1,348,809) ____________

____________ ____________

2,212,824 1,892,687 Allocated to: Technical profit and loss account 2,155,454 1,813,942 Non-technical account 57,370 78,745 ____________ ____________ 2,212,824 1,892,687

____________ ____________

Total commissions for direct business accounted for in the financial year amounted to €799,372 (2009: €752,676). Further detail on expenses by nature is provided in Note 7 to the financial statements.

6. INVESTMENT RETURN 2010 2009 ____________ € ____________ € Dividends received from investments at fair value through profit or loss 259,240 214,109 Interest receivable from other loans and receivables 1,448 13,803 Net gains from financial investments at fair value through profit or loss 1,552,708 1,542,238 Share of losses of associated undertaking (21,090) (38,070) Gain from dilution of investments 18,622 ____________ ____________ 1,810,928 ____________ 1,732,080 ____________ Investment expenses and charges Investment expenses and charges 63,003 ____________ 79,751 ____________ 63,003 ____________ 79,751 ____________

____________ ____________ Total investment return

1,747,925

1,652,329

Allocated as follows: Technical profit and loss account 1,102,643 1,139,969 Non-technical account 645,282 512,360 ____________ ____________ 1,747,925 1,652,329

____________ ____________

7. EXPENSES BY NATURE 2010 2009 ____________ € ____________ € Staff costs (Note 8) 1,946,243 1,890,200 Directors’ remuneration (Note 8) 8,160 8,153 Amortisation of intangible assets (Note 11) 89,815 49,081 Depreciation of property, plant and equipment (Note 12) 96,250 95,323 Professional indemnity insurance 68,686 38,280 Increase in debtors impairment provision (Note 17) 42,951 29,970 Legal and professional fees 140,725 130,893 Advertising 167,132 137,976 Other expenses 993,385 ____________ 969,961 ____________ Total administrative expenses 3,553,347 3,349,837

____________ ____________

Allocated to: Technical profit and loss account 3,495,977 3,271,092 Non-technical account 57,370 78,745 ____________ ____________ 3,553,347 3,349,837

____________ ____________

F ees charged by the auditor for services rendered during the financial period ended 31 December 2010 and 2009 amounted to: 2010 2009 ____________ € ____________ € Annual statutory audit 27,300 24,600 Other assurance services 2,350 3,850 Tax advisory and compliance services 820 1,557 Other 130 ____________ 620 ____________ 30,600 30,627

____________ ____________ 8. STAFF COSTS

2010 2009 ____________ € ____________ € Salaries 1,843,614 1,796,496 Social security costs 110,789 101,857 ____________ ____________ 1,954,403 1,898,353

____________ ____________

The average number of persons employed during the year was: ____________ 2010 ____________ 2009 Managerial 12 12 Technical 62 62 Administrative 8 8 ____________ ____________

____________ ____________

Staff costs amounting to €4,308 were recharged to related undertakings. In 2009 staff costs amounting to €173 were recharged by related undertakings (see note 26).

NOTES TO THE FINANCIAL STATEMENTS 9. TAX EXPENSE 2010 2009 ____________ € ____________ € Current tax expense 674,779 813,491 Under provision in prior years - (1,812) Deferred tax charge (Note 20) 91,181 87,388 ____________ ____________ Tax expense 765,960 899,067 The tax on the company’s profit before tax differs from the theoretical amount that would arise using the basic tax rate as follows:-

____________ ____________

2010 2009 ____________ € ____________ € Profit before tax ____________ 3,084,701 ____________ 3,369,940 Tax on profit at 35% 1,079,645 1,179,479 Adjusted for tax effect of: Income subject to reduced rates of tax (51,776) (44,000) Expenses not deductible for tax purposes 13,084 15,040 Gains not subject to tax (137,723) (81,330) Movement in deferred tax not recognised (see below) (137,263) (201,683) Other differences (7) 31,561 ____________ ____________

____________ ____________

Tax expense 765,960 899,067 As at 31 December 2009, the company had temporary differences arising on unrealised fair value losses from financial assets at fair value through profit and loss of €588,272. Deferred income tax assets are recognised for losses carry-forwards to the extent that the realisation of the related tax benefit through future taxable gains is probable. In 2009, the company did not recognise deferred income tax assets of €137,263 in respect of capital losses amounting to €392,181.

10. DIVIDENDS The directors declared a net interim dividend of €1,429,240 during 2010 equivalent to 95 cents per share. The directors do not propose the payment of a final dividend in respect of 2010. The net dividend declared in respect of 2009 was €840,000 (56 cents per share).

11. INTANGIBLE ASSETS Computer software € ____________ At 1 January 2009 Cost 171,499 Accumulated amortisation (136,040) ____________

____________

Net book amount 35,459 Year ended 31 December 2009 Opening net book amount 35,459 Additions 145,896 Amortisation charge ____________ (49,081)

____________

Closing net book amount 132,274 At 31 December 2009 Cost 317,395 Accumulated amortisation (185,121) ____________

____________

Net book amount 132,274 Year ended 31 December 2010 Opening net book amount 132,274 Additions 163,473 Amortisation charge ____________ (89,815)

____________

Closing net book amount 205,932 At 31 December 2010 Cost 480,868 Accumulated amortisation (274,936) ____________

____________ Net book amount Amortisation of €89,815 (2009: €49,081) is included in net operating expenses in the technical account.

205,932

NOTES TO THE FINANCIAL STATEMENTS 12. TANGIBLE ASSETS Office Land and furniture & Motor buildings equipment vehicles Total € € € € ____________ ____________ ____________ ____________ At 1 January 2009 Cost or valuation 3,422,381 508,682 133,170 4,064,233 Accumulated depreciation (121,778) (390,266) (97,245) (609,289) ____________ ____________ ____________ ____________

____________ ____________ ____________ ____________

Net book amount 3,300,603 118,416 35,925 3,454,944 Year ended 31 December 2009 Opening net book amount 3,300,603 118,416 35,925 3,454,944 Additions 61,673 14,510 18,266 94,449 Disposals - - (18,635) (18,635) Depreciation charge (24,892) (48,280) (22,151) (95,323) Depreciation released on disposal - - 18,635 18,635 ____________ ____________ ____________ ____________

____________ ____________ ____________ ____________

Closing net book amount 3,337,384 84,646 32,040 3,454,070 At 31 December 2009 Cost or valuation 3,484,054 523,192 132,801 4,140,047 Accumulated depreciation (146,670) (438,546) (100,761) (685,977) ____________ ____________ ____________ ____________

____________ ____________ ____________ ____________

Net book amount 3,337,384 84,646 32,040 3,454,070 Year ended 31 December 2010 Opening net book amount 3,337,384 84,646 32,040 3,454,070 Additions 70,614 102,750 - 173,364 Surplus on revaluation (Note 19) 46,709 - - 46,709 Depreciation charge (28,471) ____________ (55,412) ____________ (12,367) ____________ (96,250) ____________

____________ ____________ ____________ ____________

Closing net book amount 3,426,236 131,984 19,673 3,577,893 At 31 December 2010 Cost or valuation 3,601,377 625,942 132,801 4,360,120 Accumulated depreciation (175,141) ____________ (493,958) ____________ (113,128) ____________ (782,227) ____________

____________ ____________ ____________ ____________

Net book amount 3,426,236 131,984 19,673 3,577,893 The company’s land and buildings were revalued on 31 December 2010 by independent professional architects on the basis of an open market valuation. The surplus arising on revaluation, net of deferred taxation, was credited to the revaluation reserve in 2010.

13. INVESTMENT IN ASSOCIATED UNDERTAKING 2010 2009 ____________ € ____________ € Year ended 31 December At beginning of year 26,213 64,284 Additions 563 Share of results of associate (21,090) (38,071) Gain on dilution of investment ____________ 18,622 ____________

____________ ____________

At end of year 24,308 26,213 At 31 December Cost 74,250 73,687 Share of results (49,942) (47,474) ____________ ____________

____________ ____________ Closing cost and net book amount The associated undertaking is shown below:

24,308

26,213

Associated undertaking Registered Class of Percentage of Office shares held shares held 2010 2009 JLT Insurance Management Malta Alfred Craig Street, Ordinary 33% 49% Limited Ta’ Xbiex Shares The following financial information available to the company relates to the investment that is classified as an associate as at the balance sheet date. Assets Liabilities Loss € ____________ € ____________ € ____________

____________ ____________ ____________

2010 128,548 (47,349) (46,916) 2009 63,590 ____________ (10,475) ____________ (77,693) ____________

14. INVESTMENTS The investments are summarised by measurement category in the table below: 2010 2009 ____________ € ____________ € Fair value through profit or loss 17,533,242 15,974,374 Loans and receivables ____________ 138,780 ____________ 189,540

____________ ____________

17,672,022

16,163,914

NOTES TO THE FINANCIAL STATEMENTS 14. INVESTMENTS (CONTINUED) (a) Investments at fair value through profit or loss 2010 2009 ____________ € ____________ € Equity securities, other variable yield securities and units in unit trusts - listed 8,111,952 6,003,988 Debt securities 9,421,290 9,970,386 ____________ ____________

____________ ____________

Total investments at fair value through profit or loss 17,533,242 15,974,374 Maturity of fixed income debt securities: Within one year 754,372 1,038,497 Between 1 and 2 years 1,588,174 1,196,932 Between 2 and 5 years 4,170,676 3,099,854 Over 5 years 2,908,068 4,635,103 ____________ ____________ 9,421,290 9,970,386 All other securities classified as fair value through profit or loss are non-current in nature.

____________ ____________ The movements in investments classified as fair value through profit or loss are summarised as follows:

2010 2009 ____________ € ____________ € Year ended 31 December At beginning of year 15,974,374 14,930,976 Additions 3,619,999 2,829,186 Disposals (sale and redemptions) (3,110,658) (3,165,500) Net fair value gains ____________ 1,049,527 ____________ 1,379,712

____________ ____________

At end of year 17,533,242 15,974,374 As at 31 December Cost 17,516,230 17,006,917 Accumulated net fair value gains/(losses) 17,012 ____________ (1,032,543) ____________ Net book amount 17,533,242 15,974,374

____________ ____________

(b) Loans and receivables 2010 2009 ____________ € ____________ €

____________ ____________

Deposits with banks or credit institutions 138,780 189,540 Maturity of deposits with banks or credit institutions: 2010 2009 ____________ € ____________ € Within 3 months 138,780 135,964 Within 6 months - 53,576 ____________ ____________ 138,780 189,540 The above deposits earn interest as follows: 2010 2009 ____________ € ____________ €

____________ ____________ ____________ ____________ At fixed rates

138,780

189,540

15. INSURANCE LIABILITIES AND REINSURANCE ASSETS 2010 2009 ____________ € ____________ € Gross technical provisions Claims reported and loss adjustment expenses 9,963,498 9,988,994 Claims incurred but not reported 577,970 573,059 Provision for unearned premiums ____________ 6,038,589 ____________ 6,011,789

____________ ____________

16,580,057 16,573,842 Reinsurers’ share of technical provisions Claims reported and loss adjustment expenses 1,850,602 1,667,118 Claims incurred but not reported 91,535 90,355 Provision for unearned premiums 1,448,855 1,459,010 ____________ ____________ 3,390,992 3,216,483 Net technical provisions Claims reported and loss adjustment expenses 8,112,896 8,321,876 Claims incurred but not reported 486,435 482,704 Provision for unearned premiums 4,589,734 4,552,779 ____________ ____________

____________ ____________ ____________ ____________ 13,189,065

13,357,359

NOTES TO THE FINANCIAL STATEMENTS 15. INSURANCE LIABILITIES AND REINSURANCE ASSETS (CONTINUED) Technical provisions are considered to be substantially current in nature. The gross claims reported are net of expected recoveries from salvage and subrogation. The amounts for salvage and subrogation at the end of 2010 and 2009 are not material. Technical provisions are established to cover the expected ultimate liability for claims and loss adjustment expenses in respect of all claims that have occurred at the balance sheet date. The provisions established cover reported claims and associated loss adjustment expenses, as well as claims incurred but not yet reported to the company, and are based on undiscounted estimates of future claim payments. Outstanding claims provisions for reported claims are based primarily on individual case estimates by reference to known facts at the date of estimation. The ultimate cost of outstanding claims, including incurred but not reported claims, is estimated through statistical analysis of historical claims trends as further described in note 3.1 to these financial statements. The main assumption underlying this analysis is that past claims development experience can be used to project future claims development, and hence ultimate claims costs. Additional qualitative judgement is applied to assess the extent to which past trends may not apply in the future. Based on this process, no key variable has been identified for which a change could have a material impact on the profit or loss for the year. The development of insurance liabilities provides a measure of the companyâ&#x20AC;&#x2122;s ability to estimate the ultimate value of claims. The top half of the table below illustrates how the companyâ&#x20AC;&#x2122;s estimate of total claims incurred for each accident year has changed at successive year-ends. The bottom half of the table reconciles the cumulative claims to the amount appearing in the balance sheet. The accident-year basis is considered to be the most appropriate for the business written by the company. The development of insurance liabilities is presented for accident years to date during which the company has been operating as insurance principal. The development of the liabilities assumed by the company on 1 May 2004 on transfer of the insurance portfolio formerly underwritten by Royal & Sun Alliance plc is presented separately. As described in Note 3.1, the adverse development of claims reserves acquired by way of this portfolio transfer is protected through a reinsurance arrangement with RSA.

1 May 2004 to Pre 1 May 31 December 2004 2004 2005 2006 2007 2008 € € € € € € ____________ ____________ ____________ ____________ ____________ ____________ 2010 € ____________

2009 € ____________

Liability recognised in the balance sheet

Current estimates of cumulative claims Cumulative payments to date

- at end of accident year - one year later - two years later - three years later - four years later - five years later - six years later 3,336,134

4,016,942 3,778,515 3,640,529 3,455,629 3,400,832 3,365,652 3,336,134 4,899,052

6,354,353 5,934,930 4,982,967 4,936,520 4,917,314 4,899,052

5,322,511

6,760,611 6,575,277 5,756,854 5,547,184 5,322,511

6,468,003

5,033,011

6,526,922

7,105,804

7,102,909 5,856,088 6,652,598 7,105,804 7,245,191 5,550,170 6,526,922 6,623,046 5,033,011 6,468,003

Total

44,472,969

____________€

93,965

444,333

520,952

806,251

510,338

1,309,160

3,693,708

8,599,331

____________ ____________ ____________ ____________ ____________ ____________ ____________ ____________ ____________

1,220,624

(4,560,908) ____________ (3,242,169) ____________ (4,454,719) ____________ (4,801,559) ____________ (5,661,752) ____________ (4,522,673) ____________ (5,217,762) ____________ (3,412,096) ____________ (35,873,638) ____________

5,781,532

5,901,655 5,958,612 5,752,459 5,636,865 5,609,298 5,896,475 5,781,532

Estimate of the ultimate claims costs:

The development table is presented net of reinsurance. Development trends extracted in gross terms were found to be similar.

15. INSURANCE LIABILITIES AND REINSURANCE ASSETS (CONTINUED)

NOTES TO THE FINANCIAL STATEMENTS

NOTES TO THE FINANCIAL STATEMENTS 15. INSURANCE LIABILITIES AND REINSURANCE ASSETS (CONTINUED) Movements in insurance liabilities and reinsurance assets (a) Claims and loss adjustment expenses (including IBNR) Year ended 2010 Gross Reinsurance Net ____________ € ____________ € ____________ € Total at beginning of year ____________ 10,562,053 ____________ (1,757,473) ____________ 8,804,580 Claims settled during the year (7,044,638) 918,859 (6,125,779) Increase/(decrease) in liabilities - arising from current year claims 8,315,985 (1,210,181) 7,105,804 - arising from prior year claims ____________ (1,291,932) ____________ 106,658 ____________ (1,185,274) Total at year end 10,541,468 (1,942,137) 8,599,331 Year ended 2009 Gross Reinsurance Net ____________ € ____________ € ____________ €

____________ ____________ ____________

Total at beginning of year ____________ 11,119,279 ____________ (1,777,400) ____________ 9,341,879 Claims settled during the year (7,765,402) 1,480,447 (6,284,955) Increase/(decrease) in liabilities - arising from current year claims 7,779,172 (1,126,574) 6,652,598 - arising from prior year claims ____________ (570,996) ____________ (333,946) ____________ (904,942) Total at year end 10,562,053 (1,757,473) 8,804,580 Variations occur when compared to prior year claims estimates due to a combination of factors including claims being settled for different amounts than estimated, and changes made to reserve estimates as more information becomes available. Favourable movements are indicative of a prudent reserving methodology in prior years.

____________ ____________ ____________

(b) Provision for unearned premiums The movements for the year are summarised as follows: Year ended 2010 Gross Reinsurance Net ____________ € ____________ € ____________ € At beginning of year 6,011,789 (1,459,010) 4,552,779 Net charge to profit and loss 26,800 ____________ 10,155 ____________ 36,955 ____________ At end of year 6,038,589 (1,448,855) 4,589,734 Year ended 2009 Gross Reinsurance Net ____________ € ____________ € ____________ €

____________ ____________ ____________

At beginning of year 6,011,859 (1,500,855) 4,511,004 Net (credit)/charge to profit and loss (70) ____________ 41,845 ____________ 41,775 ____________ At end of year 6,011,789 (1,459,010) 4,552,779

____________ ____________ ____________ 16. DEFERRED ACQUISITION COSTS

2010 2009 ____________ € ____________ € Year ended 31 December At beginning of year 769,392 727,503 Net (credit)/charge to profit and loss (9,246) 41,889 ____________ ____________ At end of year 760,146 769,392

____________ ____________ Deferred acquisition costs are all classified as current assets.

17. DEBTORS AND PREPAYMENTS AND ACCRUED INCOME 2010 2009 ____________ € ____________ € Debtors Debtors arising out of direct insurance operations - due from policyholders 2,708,096 2,892,453 - due from intermediaries 942,618 1,005,557 Amount due from related parties (Note 26) 64,990 67,729 Other debtors 3,466 11,262 ____________ ____________ 3,719,170 3,977,001 Prepayments and accrued income Accrued interest 124,793 141,674 Prepayments 22,970 14,045 ____________ ____________

____________ ____________

147,763

155,719

NOTES TO THE FINANCIAL STATEMENTS 17. DEBTORS AND PREPAYMENTS AND ACCRUED INCOME (CONTINUED) Amounts due from related parties are unsecured, interest free and repayable on demand. Debtors are presented net of an allowance for impairment of €343,734 (2009: €300,783). As at 31 December 2010, debtors amounting to €2,463,117 (2009: €2,709,769) were fully performing, whereas debtors amounting to €1,187,597 (2009: €1,188,241) were past due but not impaired. These dues related to a number of independent parties for whom there is no recent history of significant default. The ageing analysis of the trade receivables which were past due but not impaired at year end is as follows: 2010 2009 ____________ € ____________ € Within credit terms 509,407 570,060 Not more than 3 months overdue 339,163 326,178 More than 3 months overdue 339,027 292,003 ____________ ____________ 1,187,597 1,188,241

____________ ____________

18. SHARE CAPITAL

2010 2009 ____________ € ____________ € Authorised 2,000,000 (2009: 745,000) ordinary “A” shares of €1 (2009: €2.329373) each 2,000,000 1,735,383 2,000,000 (2009: 745,000) ordinary “B” shares of €1 (2009: €2.329373) each 2,000,000 1,735,383 23,300 (2009: 10,000) ordinary “C” shares of €1 (2009: €2.329373) each ____________ 23,300 ____________ 23,294

____________ ____________

4,023,300 3,494,060 Issued and fully paid 2,000,000 (2009: 745,000) ordinary “A” shares of €1 (2009: €2.329373) each 2,000,000 1,735,383 2,000,000 (2009: 745,000) ordinary “B” shares of €1 (2009: €2.329373) each 2,000,000 1,735,383 23,300 (2009: 10,000) ordinary “C” shares of €1 (2009: €2.329373) each ____________ 23,300 ____________ 23,294 4,023,300 3,494,060 By virtue of a resolution dated 23 November 2010, the shareholders resolved to increase, amend and substitute the authorised and issued share capital of the company from €3,494,060 divided into 745,000 ordinary ‘A’ shares, 745,000 ordinary ‘B’ shares and 10,000 ordinary ‘C’ shares of €2.329373 each, to €4,023,300 divided into 2,000,000 ordinary ‘A’ shares, 2,000,000 ordinary ‘B’ shares and 23,300 ordinary ‘C’ shares of €1 each.

____________ ____________

“A”, “B” and “C” ordinary shares rank pari passu in all respects except for the appointment of directors. The holders of ordinary “A” and ordinary “B” shares have the right to appoint one director for every ten percent of the share capital held by reference to the nominal value of shares. The holders of ordinary “C” shares have the right to appoint one director.

19. REVALUATION RESERVE 2010 2009 ____________ € ____________ € At 1 January 1,230,696 1,230,696 Surplus on revaluation of property, net of deferred taxation ____________ 25,230 ____________ At 31 December 1,255,926 1,230,696

____________ ____________

The balance at 31 December is made up as follows: 2010 2009 ____________ € ____________ €

____________ ____________ Revaluation reserve arising on land and buildings This reserve is not a distributable reserve.

1,255,926

1,230,696

20. DEFERRED TAXATION 2010 2009 ____________ € ____________ € Balance at 1 January 226,205 138,817 Movements during the year: Profit and loss account (Note 9) 91,181 87,388 Revaluation reserve 21,479 ____________ ____________- Balance at 31 December - net 338,865 226,205 Deferred taxation is calculated on temporary differences under the liability method using a principal tax rate of 35% (2009: 35%) except for temporary differences on investment property that are calculated under the liability method using a principal tax rate of 12% of the carrying amount.

____________ ____________

The year end balance comprises: 2010 2009 ____________ € ____________ € Temporary differences attributable to depreciation of fixed assets (3,569) (1,292) Temporary differences attributable to fair value adjustments - investments 39,072 (68,632) Temporary differences attributable to revaluation of land and buildings 412,255 390,776 Temporary differences attributable to capital losses - (787) Temporary differences attributable to provision for impairment of doubtful debtors (108,893) (93,860) ____________ ____________ Balance at 31 December – net 338,865 226,205

____________ ____________

NOTES TO THE FINANCIAL STATEMENTS 20. DEFERRED TAXATION (CONTINUED) eferred income tax assets and liabilities are offset when there is a legally enforceable right to set off a current asset against a D current tax liability. The following amounts determined after appropriate offsetting are shown in the balance sheet: 2010 2009 ____________ € ____________ € Deferred tax asset (112,462) (164,571) Deferred tax liability ____________ 451,327 ____________ 390,776

____________ ____________ The above temporary differences are considered to be substantially non-current in nature.

338,865

226,205

21. INTEREST-BEARING BORROWINGS 2010 2009 ____________ € ____________ €

____________ ____________ Bank overdraft (Note 24)

431,799

277,163

The bank overdraft is secured by a hypothec on the company’s property.

22. CREDITORS 2010 2009 ____________ € ____________ € Other creditors Creditors arising out of direct insurance operations 1,150,278 920,708 Amounts due to related parties (Note 26) ____________ - ____________ 16,480 1,150,278 937,188 Accruals and deferred income Accrued expenses 452,597 426,814 Deferred income 595,712 591,823 ____________ ____________

____________ ____________ ____________ ____________ The above creditors are considered to be current in nature.

1,048,309

1,018,637

23. CASH GENERATED FROM OPERATIONS econciliation of profit before tax to cash generated from operations: R 2010 2009 ____________ € ____________ € Profit before tax 3,082,212 3,369,940 Adjustments for: Investment income (Note 6) (1,810,928) (1,732,080) Amortisation (Note 11) 89,815 49,081 Depreciation (Note 12) 96,250 95,323 Profit on disposal of fixed assets (Note 12) - (500) Impairment of debtors (Note 17) 42,951 29,970 Movements in: Technical provisions (net) (168,294) (495,524) Debtors and prepayments, including DAC 232,085 (157,934) Creditors and accruals ____________ 242,762 ____________ 133,373 Cash generated from operations 1,806,853 1,291,649

____________ ____________ 24. CASH AND CASH EQUIVALENTS For the purpose of the statement of cash flows, the year end cash and cash equivalents comprise the following:

2010 2009 ____________ € ____________ € Cash at bank and in hand 153,862 164,680 Bank overdraft (431,799) (277,163) ____________ ____________ (277,937) (112,483) Interest bearing: - at floating rates (329,766) (132,037)

____________ ____________ ____________ ____________ 25. COMMITMENTS Capital commitments Commitments for capital expenditure not provided for in these financial statements are as follows:

2010 2009 ____________ € ____________ € Authorised and contracted - computer hardware and software 60,693 136,879

____________ ____________

NOTES TO THE FINANCIAL STATEMENTS 26. RELATED PARTY TRANSACTIONS Due to common ultimate shareholders, the directors consider the Cassar and Cooper Group and the C & H Bartoli Group to be related parties (including related entities and close family of shareholders). Trading transactions with related parties during the year were as follows: 2010 2009 ____________ € ____________ € (a) Entities with significant influence over the entity (including related entities and close family of shareholders) Gross premium receivable, net of claims paid 29,231 59,447 Reimbursement of expenses for back-office support 6,004 173 Rent payable 35,124 34,525 Commission payable 181,691 181,691 (b) Other related parties Fees payable 83,256 73,124 Year end balances arising from the above transactions: 2010 2009 ____________ € ____________ € Entities with significant influence over the entity (including related entities and close family of shareholders) Amounts due by 64,990 67,729 Amounts due to - 16,480 The above balances are unsecured, interest free and repayable on demand.

____________ ____________ ____________ ____________

____________ ____________ 27. STATUTORY INFORMATION Elmo Insurance Limited is a limited liability company and is incorporated in Malta.

Branches: Birkirkara • Bormla • Paola • Qormi • Rabat • St. Paul’s Bay • Valletta • Zebbug