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Financial condition report 2017Gard Marine & Energy Limited 1

FINANCIALCONDITION REPORT

κ Gard Marine & Energy Limited κ|

20 February 2017 2017


Table of ContentsEXECUTIVE SUMMARY ............................................................................................................................... 3

A BUSINESS AND PERFORMANCE ............................................................................................................. 6

A 1 Business ............................................................................................................................................ 6

A 2 Underwriting performance .................................................................................................................11

A 3 Investment performance ....................................................................................................................14

A 4 Performance of other activities ..........................................................................................................15

A 5 Any other material information ...........................................................................................................15

B SYSTEM OF GOVERNANCE ....................................................................................................................16

B 1 General information on the system of governance .............................................................................16

B 2 Fit and proper requirements...............................................................................................................19

B 3 Risk management system including the own risk and solvency assessment.......................................19

B 4 Internal control system ......................................................................................................................24

B 5 Implementation of internal audit function ............................................................................................25

B 6 Implementation of actuarial function...................................................................................................27

B 7 Outsourcing .......................................................................................................................................28

B 8 Any other information ........................................................................................................................29

C RISK PROFILE .........................................................................................................................................30

C 1 Material risks .....................................................................................................................................31

C 2 Other risks .........................................................................................................................................32

C 3 Risk mitigation ...................................................................................................................................33

C 4 Risk concentration .............................................................................................................................33

C 5 Prudent person principle ....................................................................................................................33

C 6 Risk sensitivity ...................................................................................................................................35

C 6 Any other information regarding the risk profile ..................................................................................35

D VALUATION FOR ECONOMIC BALANCE SHEET PURPOSES ...............................................................36

D 1 Valuation of assets ............................................................................................................................38

D 2 Valuation of technical provisions ........................................................................................................39

D 3 Alternative methods for valuations .....................................................................................................42

D 4 Any other material information ...........................................................................................................42

E CAPITAL MANAGEMENT .........................................................................................................................43

E 1 Eligible capital ...................................................................................................................................43

E 2 Capital requirements .........................................................................................................................44

E 3 Internal model ...................................................................................................................................45

E 4 Compliance with MMS/BSCR ............................................................................................................45

E 5 Any other information ........................................................................................................................45

E SIGNIFICANT EVENTS .............................................................................................................................45

Appendix 1 Abbreviations Gard companies ...................................................................................................46

Appendix 2 Other abbreviations ....................................................................................................................47


EXECUTIVE SUMMARY

This report covers Gard Marine & Energy Limited's("Gard M&E") business and performance, system ofgovernance, risk profile, valuation for EconomicBalance Sheet (EBS) purposes and capitalmanagement. The ultimate administrative body thathas the responsibility for all of these matters is theBoard of Directors, with the help of variousgovernance and control functions that are put in placeto monitor and manage the business.

In the tables values are stated in USD million. Valuesbelow USD 500 thousand are displayed as "0". Emptycell means that there is no value to state. Roundingdifferences +/– one unit can occur.

Key figures

USD million, as of 20.02 2017 2016

Assets 499 522Technical provisions 212 236Other liabilities 74 86Total statutory economic capital and surplus 213 200

Eligible capitalTier 1 capital 209 184Tier 2 capital 4 6Tier 3 capitalEligible capital 213 190

Required CapitalBSCR 89 106Minimum Margin of Solvency 23 25

Bermuda Solvency Capital Requirement RatioEligible capital to meet BSCR Ratio 240 % 189 %Eligible capital to meet Minimum Margin of Solvency Ratio 934 % 764 %

Gard fulfils the minimum and solvency capitalrequirements (hereafter referred to as MinimumMargin of Solvency or MMS) and BermudaSolvency Capital Requirement Ratio or BSCRstipulated by the supervisory authorities as of thereporting date of 20 February 2017.

The principles used to determine the solvency ratioare explained in this document. Chapter Ddescribes the valuation principles used to determineeligible capital, and Chapter E those used todetermine the BSCR.


A. Business and performanceThe section discusses the group structure and alllegal entitites inclued in the group, and states theunderwriting and investment performance of GardM&E.

Gard is a marine and energy insurance group whichis active in Protection and Indemnity (P&I) andMarine and Energy (M&E) business. Gard operatesin global markets, offering insurance solutions tocorporate customers, often through insurancebrokers. Its global presence and activities allows thecompany to achieve an efficient risk diversification.

The financial year ending 20 February 2017delivered an acceptable result for Gard M&E Ltd.Gross written premium was reduced to USD 203million, a decrease of USD 63 million (23.8 percent) from last year. This was primarily due to acontinued softening market and lower demand insome segments. A softer market has resulted infalling rate levels with a corresponding decrease inexpected profitability, an increasing share ofbusiness not being renewed and lower newacquisition ratio. The number of claims within theretention have been fewer than expected.

Investment returns are normally an importantcontribution to the net results and Gard M&E seeksto add returns through a diversified investmentportfolio. The return of the financial year ending 20February 2017 exceeded expectations. The equitymarket in particular had a strong developmentduring the year, and was the main contributor to thereturn. Details on business and performance can befound in section A.

B. System of GovernanceThe section discusses the Gard Group's system ofgovernance which Gard M&E is a part of.

Gard has an effective system of governance, whichprovides for sound and prudent management.

An assessment of the risk management systemconcluded that the system is adequate consideringthe size and complexity of the operations.

A board committee for risk was established during2016.

The individual elements of the System ofGovernance at Gard can be found in section B.

C. Risk ProfileIn context of its business operations Gard M&Eenters into a broad variety of risks, where the mainrisks are underwriting risk and market risk. Gard isalso exposed to counterparty default risk,operational risk, liquidity risk, business risk,compliance risk and reputational risk. We describehow we deal with these risks in section C.

Gard M&E's risk profile has changed somewhatover the last 12 months to 20 February 2017. TheBSCR for premium risk was reduced by 19 per cent,due to reduction in both rates and volume. BSCRfor reserve risk decreased by 7 per cent, due to thereduction in premium rates and volume as well as areduction in net loss and loss expense provisions.

Equity investment risk has increased from USD 15million to USD 19 million last year mainly driven byan increase in balances receivable on sale ofinvestments. For the other market risks the changesfrom last year are not material. The material risksthat Gard is facing are believed to be captured inthe risk landscape.

D. Valuation for Solvency PurposesThis section specifies and describes the valuation ofassets and liabilities for Economic Balance Sheet(EBS) purposes, the differences between thebases, methods and main assumptions used for thevaluation of assets for EBS purposes and thoseused in statutory financial statements.

The fair value of assets is mainly measured on amark-to-market basis, determined by reference topublished price quotations in active markets. Forunquoted financial assets, the fair value has beenestimated using a valuation technique based onassumptions that are supported by observablemarket prices (mark-to-model).

The technical provisions under BSCR is determinedas the sum of best estimate present value ofliabilities and a risk margin. For BSCR purposes therisk margin calculation and discounting effectscalculation for the technical provisions have beenprepared based on risk-free spot rates distributedby the Bermuda Monetary Authority (BMA).Valuation methods are elaborated in section D.


E. Capital ManagementThe section describes the capital management ofthe Gard group, and the capital requirement andeligible capital of Gard M&E.

Gard group aims to hold sufficient capital andliquidity as well as constrain its risk taking to ensurethat the group can continue to operate following anextreme loss event with the same risk tolerance forinsurance risk. The probability that Gard groupwould have to raise additional capital from itsmutual Members by way of unbudgetedsupplementary calls should be low.

Gard group aims to manage its capital such that allits regulated entities meet local regulatory capitalrequirements at all times. This was the casethroughout the financial year up to 20 February2017.

Gard M&E has a simple capital structure consistingof Tier 1 capital through equity capital, which is fullypaid in and available, Tier 2 capital consisting ofexcess of encumbered assets less capitalrequirement applicable to the encumbered assets,and no Tier 3 capital. 98 per cent of all availablecapital is assigned to the highest quality level(Tier 1). Capital management is described in sectionE.

Declaration

"We the undersigned attest that, to the best of ourknowledge and belief, this financial condition reportfairly represents the financial condition of theCompany in all material respects as at 20 February2017."

Rolf Thore Roppestad

Chief Executive Officer

Steinar Bye

Chief Financial Officer

Date 31 August 2017


A BUSINESS AND PERFORMANCEA 1 Business

The section discusses the group structure and all legal entitites inclued in the group.

A 1.1 Group structureThe parent company of the Gard group (‘Gard’ or‘the group’) is Gard P. & I. (Bermuda) Ltd. (GardBermuda). Gard Bermuda is a mutual insuranceassociation registered and domiciled in Bermuda.As a mutual association, Gard Bermuda is ownedby its members, who are shipowners, charterersand operators in the marine industries.

Gard Bermuda and its subsidiaries comprise of fivedirect insurance entities, two captive reinsurancecompanies, one insurance management company,eight insurance intermediary companies, onerepresentative office and a property company. Theinsurance entities have branches in differentjurisdictions.

Corporate structure

All entities are ultimately owned 100 per cent byGard Bermuda with the exception ofAssuranceforeningen Gard – gjensidig – (GardNorway), in which Gard Bermuda controls thevoting rights. Gard Marine & Energy Insurance(Europe) AS (Gard M&E Europe) and Gard M&E–Escritorio de Representacão no Brasil Ltda. areowned 100 per cent by Gard Marine & Energy

Limited (Gard M&E), and the subsidiaries of GardAS are owned 100 per cent by Gard AS.

The insurance intermediary companies, LingardLimited (Lingard) and Gard AS, provideintermediary and related insurance services to theinsurance entities. All of the main corporatefunctions of the insurance entities are carried out bytheir own employees. Lingard Limited is the


Manager for all of the Bermuda domiciled insurancecompanies and Gard AS is the agent for GardNorway and Gard M&E Europe, as well as theNorwegian branches of Gard Bermuda and GardM&E. Certain operational functions are delegatedfrom Lingard Limited to Gard AS.

A 1.2 Legal entitiesA 1.2.1 Gard groupThe Gard group is under group supervision by theNorwegian Financial Supervisory Authority(Finanstilsynet).

A 1.2.2 Gard BermudaGard Bermuda is the parent company in the Gardgroup. The company is a mutual insuranceassociation domiciled in Bermuda and registered bythe Bermuda Monetary Authority as as a Class 2company. The manager of Gard Bermuda isLingard Limited.

Gard Bermuda provides Protection & Indemnity(P&I) and related insurance products to itsMembers, who are shipowners, operators andcharterers with ships entered in the association. Asa mutual insurance association, the company isowned by its Members. There are no externalcapital owners.

Gard Bermuda carries out its direct insurancebusiness through branches in Norway andSingapore. The general agents of the branches areGard AS in Norway and Gard (Singapore) Pte. Ltd.in Singapore.

The Members of Gard Bermuda are also Membersof Gard Norway and vice versa.1 However, all of theMembers of the two associations exercisemembership rights through the parent company inaccordance with the group structure. Gard Bermudahas been given the right to exercise membershiprights on behalf of the entire membership in GardNorway. Thus, Gard Norway is treated as asubsidiary of Gard Bermuda in the same way as theother wholly owned subsidiaries, such as GardM&E, Gard Re, Lingard, and Gard AS.

Gard Bermuda and Gard Norway are members ofthe International Group of P&I Clubs and both areparties to the International Group of P&I Clubs’Pooling Agreement. The Pooling Agreement is thecontractual basis for the sharing of claims among

1 See Article 2.6 of the Bye-Laws of Gard P&I Bermuda andArticle 4.7 of the Statutes of Gard P&I Norway. Gard P&IBermuda and Gard P&I Norway have entered into mutual

the P&I Clubs and the collective purchase of marketreinsurance. The two associations are recorded as“Paired Associations” in the Pooling Agreement,with Gard Bermuda as the principal.

Gard Bermuda is regulated by the BMA.

A 1.2.3 Gard NorwayGard Norway is the Norwegian P&I Club founded inArendal, Norway, in 1907. The company isregistered and domiciled in Norway and is licensedby the Norwegian Ministry of Finance. The headoffice of Gard Norway is in Arendal, Norway. GardAS acts as an intermediary for Gard Norway.

Gard Norway provides P&I and related insuranceproducts to its Members, who are ship-owners,operators and charterers with ships entered in theclub. As a mutual insurance association, thecompany is owned by its Members. There are noexternal capital owners.

Based on the group’s governance structure, GardBermuda has the power to govern and control thebusiness activities of Gard Norway. This includesthe power to appoint the members of its board ofdirectors. Based on internationally acceptedaccounting standards, this creates the legal basisrequired for consolidation of the two companies’accounts.2

Gard Norway is primarily used as a vehicle forwriting direct P&I business in certain countrieswhere an EU/EEA based insurer is required orpreferred to comply with local regulations.

Gard Bermuda and Gard Norway are recorded as“Paired Associations” under the International Groupof P&I Clubs’ Pooling Agreement.

Gard Norway is regulated by the Norwegian FSA.

A 1.2.4 Gard M&EGard M&E is a joint stock company and a whollyowned subsidiary of Gard Bermuda. The companyis domiciled in Bermuda as a Class 3B company.The manager of Gard M&E is Lingard Limited.

Gard M&E offers marine and energy insuranceproducts on a commercial basis to shipowners andoperators, and operators within the international oiland gas industry. Gard M&E carries out its directinsurance business through branches.

reinsurance agreements whereby the two associations reinsureeach other.2 Reference is made to the International Accounting Standard 27Consolidated and Separate Financial Statements (IAS 27).


Gard Marine & Energy Limited – Escritório deRepresentação no Brasil Ltda. (Gard Brazil) is asubsidiary of Gard M&E and is registered anddomiciled in Brazil. Gard Brazil is authorised tocarry out insurance agency activities in Brazil onbehalf of Gard M&E.

Gard M&E is regulated by the BMA.

A 1.2.5 Gard M&E EuropeGard Marine & Energy Insurance (Europe) AS(Gard M&E Europe) is a wholly owned subsidiary ofGard M&E and is registered and domiciled inArendal, Norway and licensed by the NorwegianMinistry of Finance to carry out marine and energybusiness.3

Gard M&E Europe is used as a vehicle for writingbusiness in certain countries where an EU/EEAbased insurer is required or preferred to complywith local regulations. Gard AS acts as intermediaryfor Gard M&E Europe.

Gard M&E Europe is regulated by the NorwegianFSA.

A 1.2.6 Gard ReGard Reinsurance Co Ltd (Gard Re) is a joint stockcompany and is a wholly owned subsidiary of GardBermuda. The company is domiciled in Bermudaand is registered by the BMA as a class 3Acompany . The manager of Gard Re is LingardLimited.

Reinsurance agreements have been entered intobetween Gard Re, as the reinsurer, and GardBermuda and Gard M&E as the reassured, coveringa certain proportion of these two direct insurers’retained risks. A stop loss reinsurance agreementhas also been entered into between Gard Re andGard Norway.

Gard Re is regulated by the BMA.

A 1.2.7 Hydra (Gard cell)Hydra Insurance Company Ltd is a segregatedaccounts company. It is permitted to create‘segregated accounts’ or ‘cells’ in order tosegregate the assets and liabilities attributable to aparticular segregated account from thoseattributable to other segregated accounts and fromthe company’s general account.

Hydra Insurance Company Ltd was established bythe parties to the International Group of P&I Clubs’

3 Classes 6, 8, 9, 12 and 13 in the Norwegian regulations of 18September 1995 on insurance classes.

Pooling Agreement as a captive insurance companyfor the purpose of reinsuring certain layers of riskretained by the parties to the Pooling Agreement.Each party to the Pooling Agreement owns asegregated account in Hydra and is responsible forits own account, or cell, within the company. TheHydra Gard cell is wholly owned by Gard Bermuda.

Hydra Gard Cell is regulated by the BMA.

A 1.2.8 SafeguardSafeguard Guarantee Company Ltd. (Safeguard) isa joint stock company domiciled in Bermuda and isa wholly owned subsidiary of Gard Bermuda. Thecompany is domiciled in Bermuda and is registeredby the Bermuda Monetary Authority as a Class 3Acompany.The company is managed by LingardLimited.

Safeguard is a special purpose vehicle whose solepurpose is to offer the financial security requiredunder the International Convention on Civil Liabilityfor Bunker Oil Pollution Damage, 2001 to mobileoffshore units and other ’specialist craft’ insuredoutside of the reinsurance structure established bythe International Group of P&I Clubs. Due tochanges in the group’s reinsurance arrangements,Safeguard ceased to write new business with effectfrom 20 February 2015, however, the range ofinsurance products which can be offered bySafeguard can be extended to include special risksincurred under other liability regimes which mayenter into force in the future.

Safeguard is regulated by the BMA.

A 1.2.9 Lingard LimitedLingard is a joint stock company domiciled inBermuda. It is a wholly owned subsidiary of GardBermuda and is registered as an InsuranceManager by the Bermuda Monetary Authority.

Lingard has entered into management agreementswith Gard Bermuda, Gard Re, Safeguard and GardM&E whereby it has been delegated theresponsibility of administering the day-to-daybusiness and corporate functions of these Bermudadomiciled companies. Certain insuranceintermediary functions, such as, inter alia,underwriting and claims handling, are sub-delegated under an agency agreement with GardAS as insurance intermediary.

Lingard is regulated by the BMA.


A 1.2.10 Gard ASGard AS is a Norwegian joint stock companydomiciled in Arendal, Norway, and a wholly ownedsubsidiary of Gard Bermuda. Gard AS is registeredwith the Norwegian Financial Supervisory Authorityas an insurance agent.

Gard AS has entered into separate agencyagreements with Gard Norway, Gard M&E Europeand Lingard pursuant to which Gard AS acts asagent and intermediary with regard to the portfoliosof direct business of Gard Bermuda, Gard Norway,Gard M&E and Gard M&E Europe. The agencyagreements give Gard AS, inter alia, the power toconclude contracts of insurance on behalf of thecompanies and to handle claims which fall withinthe scope of each company’s insurance cover.

Gard AS has also established a service network ofwholly owned subsidiaries in;

i. Finland – Oy Gard (Baltic) Abii. United Kingdom/England – Gard (UK)

Limitediii. United States – Gard (North America) Inc.iv. Hong Kong – Gard (HK) Limitedv. Greece – Gard (Greece) Ltdvi. Japan - Gard (Japan) K.K.vii. Singapore - Gard (Singapore) Pte. Ltd.

These subsidiaries are the Members’ and clients’local contact points and perform, inter alia,insurance intermediary services in their respectivelocal markets on behalf of Gard AS’ principals.

Gard AS is regulated by the Norwegian FSA.

A 1.2.11 Details of supervisory authorities and external auditors

Name Function EntityNorwegian Financial Supervisory Authority(Finanstilsynet)Revierstredet 30151 OsloNorway

Phone: +47 22 93 98 00Main contact: Geir David Johannesen

Regulator Gard groupGard NorwayGard M&E EuropeGard AS

Bermuda Monetary AuthorityBMA House43 Victoria StreetHamiltonBermuda

Phone: +441 295 5278

Regulator Gard BermudaGard M&EGard REHydra Gard Insurance Company Ltd.SafeguardLingard

PricewaterhouseCoopers ASKystveien 144841 ArendalNorway

Phone: +47 95 26 00 00

External auditor Gard groupGard NorwayGard M&E EuropeGard AS

PricewaterhouseCoopers Ltd.Dorchester House7 Church Street WestHamilton HM 11Bermuda

Phone: +441 295 2000

External auditor Gard BermudaGard M&EGard ReHydraSafeguardLingard


A 1.3 Material lines of business andgeographical areasGard is a marine and energy insurance group whichis active in two lines of insurance business:∂ Protection and Indemnity (P&I) which is liability

insurance for owners, charterers and operatorsof ships and mobile offshore units.

∂ Marine and Energy which within Marine includesproducts such as Hull & Machinery and Loss ofHire to ship-owners as well as Builder’s Riskinsurance to shipyards. Energy includesproducts such as property and casualtyinsurance for operators and contractors in theupstream oil and gas industry with a focus onoffshore operations.

The core purpose of the association is to help Gard'smembers and clients in the marine industries tomanage risk and its consequences. The two maincomponents of the value proposition of Gard arestrong financial security and excellent service. This iscombined with effective and efficient claim handling,strong risk selection and good pricing skills.Gard operates in global markets, offering insurancesolutions to corporate customers, often throughinsurance brokers. Most markets where Gardoperates are fragmented and highly competitive.The main competitors besides the other P&I clubs,are the Lloyd’s insurance market, large globalinsurance and reinsurance companies, and nationaland local insurance companies.

Gard group is one of the world’s leading marine andenergy insurers. 21 per cent of all ocean-goingvessels above 1,000 GT and 45 per cent on gross

tonnage basis have one or more covers from Gard.It also insures about 25 per cent of all MobileOffshore Units (MOUs). Gard Bermuda and GardNorway are members of the International Group ofP&I Clubs (IG), which covers close to 90 per cent ofthe world’s ocean-going tonnage. The P&I clubsshare claims above a certain level and collectivelypurchase reinsurance programmes. Gard is thelargest club in the International Group and insuresapproximately 17 per cent of the tonnage and 15per cent of the premium in the International Group.Gard has a market share of 4 per cent in the globalmarine market and is a medium–sized capacityprovider in energy.

A 1.4 Significant events in reportingperiodGard has established three new branches over thereporting period; Gard M&E Hong Kong branch,Gard Norway UK branch and Gard M&E Europe UKbranch.

The Gard M&E Hong Kong branch was establishedin 2016. Gard M&E Hong Kong branch writesMarine business which has been designated to thebranch from 20.02.2017. The financial statementsof the Gard M&E Hong Kong are reported and filedto the Hong Kong authorities.

The branch seeks to manage the insurance risk itfaces through its underwriting strategy, adequatereinsurance arrangements and proactive claimshandling. The branch is participating in the externalreinsurance arrangements that are in place for GardM&E.


A 2 Underwriting performanceThe financial year ending 20 February 2017delivered an acceptable result for Gard M&Econsolidated.

The total result is USD 14 million with a combinedratio net (CRN) of 113 per cent against a total resultof USD 8 million with a CRN of 90 per cent lastyear.

Gross earned premium was USD 236 million, adecrease of USD 54 million (18.7 per cent) from lastyear. Gross written premium was reduced to USD203 million, a decrease of USD 63 million (23.8 percent) from last year. This was primarily due to acontinued softening market and lower demand insome segments. A softer market has resulted infalling rate levels with a corresponding decrease inexpected profitability, an increasing share ofbusiness not being renewed and lower newacquisition ratio. Net earned premium was USD 105million against USD 128 million last year.

Gross incurred claims during the period amountedto USD 216 million against USD 199 million lastyear. Claims incurred for own account was USD 95million against last year claims of USD 92 million.The number of frequency claims and large claimswithin the retention have been fewer than expected.Some claims from previous accident years havedeveloped negatively, but there are also run-offgains contributing to lower claims incurred. TheEnergy area has faced two large claims this yeargiving a combined ratio above plan.

Operating expenses (sum of acquisition costs andother insurance related expenses) have decreasedfrom last year due to decrease in business volume.

The technical result is a loss of USD 13 million anda CRN of 113 per cent. Last year there was a profitof USD 14 million on the technical accounts with acombined ratio net of 90 per cent.

The non-technical result is a positive USD 28million. Last year the non-technical result wasnegative with USD 4 million.

The total equity is USD 216 million against totalequity of USD 202 million at the end of last year.

MarineGross written premium is USD 154 million, adecrease of USD 45 million (22.5 per cent) from lastyear.

Gross earned premium is USD 177 million, adecrease of USD 30 million (14.4 per cent) from lastyear. The decrease in gross earned premium is lessthan the decrease in gross written premium due topremium reserves from last year earned in thecurrent year.

The Marine area produced a good technical resultdue to a reduction in number of frequency claimsand large claims within the retention. Some claimsfrom previous accident years have developednegatively, but there are also run-off gainscontributing to a lower claims incurred.

EnergyGross written premium is USD 49 million, adecrease of USD 19 million (28.0 per cent) from lastyear. Gross earned premium is USD 59 million, adecrease of USD 24 million (29.2 per cent) from lastyear.

Claims incurred for own account is USD 48 millionagainst USD 23 million last year. The Energy areahas faced two large claims this year and hence theincrease in claims incurred for own account.

The Energy area produced a poor result due to thereduction in premium and the high claim cost.


Underwriting performance by line of business,

20.02.2017USD million Marine Energy TotalTechnical resultGross written premium 154 49 203Gross earned premium 177 59 236Ceded reinsurance -94 -36 -131Earned premium for own account 82 23 105Other insurance related income 0 0 0Claims incurred, grossIncurred this year 53 40 93Incurred previous years 41 82 123Total claims incurred, gross 94 122 216Reinsurers' share of gross incurred claims -47 -75 -121Claims incurred for own account 48 47 95Insurance related expenses for own account 13 6 19Other insurance related expenses 4 1 4Technical result 18 -31 -13

20.02.2016USD million Marine Energy TotalTechnical resultGross written premium 198 68 267Gross earned premium 206 84 290Ceded reinsurance -113 -49 -162Earned premium for own account 94 34 128Other insurance related income 0 0 0Claims incurred, grossIncurred this year 93 16 109Incurred previous years 54 36 90Total claims incurred, gross 147 52 199Reinsurers' share of gross incurred claims -79 -29 -108Claims incurred for own account 68 23 92Insurance related expenses for own account 14 7 21Other insurance related expenses -1 3 2Technical result 12 1 13


Gross written premium by geographical area isshown in the table below.

Gross written premium by geographical area, based on location of member/client

USD million 20.02.2017 20.02.2016

EEA 108 133Norway 36 51Other areas 60 83Total gross written premium 203 267


A 3 Investment performanceThe return on the investment portfolio and othernon-technical items was a positive USD 28 millioncompared to a negative USD 2 million last year.The financial markets showed strong development,particularly compared with the year up to 20February 2016.

Gard seeks to add returns through a diversifiedinvestment portfolio. In the current environment, weexpect to be compensated above risk free rate,given our investment risk profile. The return of theyear of 8.2 per cent exceeds this expectation, butthis also have to be seen in relation to the weakreturn of the previous year.

Income generated from equities (dividends) andfrom bonds (interest payments) has remained onthe same level in both periods.This year’s expenses related to investment activitiesare in line with expectations.

Total gain from equities, excluding non-equityrelated investment funds, was USD 35 million thisyear, which is a significant change from last year’sloss in equities of USD 10 million. However, Gardexperienced a loss of USD 16 million on the equityoverlay program for the financial year up to 20February 2017.

There were no changes to the portfolio’s strategicasset allocation between periods.

Investment performance by asset class, Gard M&E

20.02.2017USD million

Equities andinvestment

funds BondsFinancial

derivatives

Otherfinancial

investments TotalIncome 2 3 1 -0 6

Expenses -1 -1

Realised gain & loss 17 -2 -17 1 -1

Change in unrealised gain & loss 15 1 7 0 23

Total 28

20.02.2016USD million

Equities andinvestment

funds BondsFinancial

derivatives

Otherfinancial

investments TotalIncome 2 4 1 -0 7

Expenses 1 1

Realised gain & loss 9 -2 10 11 28

Change in unrealised gain & loss -21 -3 -14 0 -38

Total -2


A 4 Performance of other activitiesOther comprehensive income/(loss) consists ofexchange differences on subsidiaries whenconverting from reporting currency to USD in the

consolidation process or changes in pensionvaluation, with only minor effect for the current andprevious year

A 5 Any other material informationThere is no other material information to be disclosed.


B SYSTEM OF GOVERNANCEThe section discusses the Gard Group's system of governance which Gard M&E is a part of.

B 1 General information on the system of governance

B 1.1 Governance structureGovernance PrinciplesGard Bermuda is the parent company in the Gardgroup. Each subsidiary is a legal entity organisedunder the law of its country of incorporation andsubject to its domestic laws and regulations. Theboard of directors of each individual subsidiarygives due consideration to applicable laws and theconstitutional documents of the relevant company.To the extent appropriate and consistent with suchlaws and regulations, the board of the individualsubsidiary shall comply with directions from theBoard of Directors of Gard Bermuda as the ultimateshareholder of the relevant subsidiary.

Composition of Boards and CommitteesThe Members of Gard Bermuda and Gard Norwayare the owners of the Gard group. For this reason,the composition of the governing corporate bodiesof the various legal entities of the group should tothe extent possible and practical, mirror thecomposition of the membership of the twoassociations with regard to, inter alia, the categoriesof tonnage entered and geographical spread.Participation in sub-committees established by theBoard of the parent company is widely distributed.

Roles and responsibilities for governing bodiesThe General Meeting of Gard Bermuda is thehighest authority in the group. It has no direct riskgovernance function.

The Board of Directors (BoD) of Gard Bermuda isultimately responsible for the management of thegroup. It sets the overall strategy and is involved inall significant decisions, including the establishmentof general principles for the administration of thecompany’s funds. It determines the risk appetiteand Comfort Zone at group level through the groupRisk Policy as well as the Investment Guidelines.The Board shall be informed of any breach ofminimum capital requirements. It has delegatedauthority in respect of overseeing the day-to-daymanagement to the Executive Committee.

The Executive Committee is given the task toimplement strategies and decisions determined bythe Board and to make the operational decisionsthat are required for this purpose within the overallstrategy, risk appetite and Comfort Zoneestablished by the Board of Directors. It makesrecommendations on the risk appetite and ComfortZone. The Executive Committee approve the risktolerance and overall limits for material riskexposures and determines how much risk each ofthe subsidiaries are allowed to take. It monitorscompliance with the overall risk appetite andInvestment Guidelines, and shall makerecommendations to the Board in accordance withthe contingency procedures. The ExecutiveCommittee shall be informed about any significantweaknesses in the Risk Management Systemand/or the Internal Risk Capital Model.

The Audit Committee is responsible for overseeingthe integrity of the financial reporting, compliancemonitoring, performance of the external and internalauditors, internal control and treatment of complaintprocedures. Reports from the Internal Audit functionshall be addressed to the Audit Committee.

The Risk Committee shall have oversight of thegroup’s risks with particular focus on reviewing thegroup’s risk strategy, risk appetite, risk tolerance,risk profile and assessing the effectiveness of therisk management framework. The Risk Committeeshall also consider the risks’ impact on both thefinancial and non-financial goals of the group.

The Remuneration Committee’s role is to establishtransparent procedures for reviewing anddetermining the remuneration of the Directors andthe Chief Executive Officer and to makerecommendations thereon to the ExecutiveCommittee and the Board as the case may be. TheRemuneration Committee shall also review Gard’sremuneration policy in general, including operationof any employee incentive scheme from time totime. The Remuneration Committee shall ensurethat the compensation structure is in line with the


group risk appetite statement approved by theBoard.

The board of directors of the subsidiary insurancecompanies (i.e., Gard Re, Safeguard, Gard M&E,Gard M&E Europe and Gard Norway) is responsiblefor considering and approving the financial plan andnew business for underwriting, and ensurecompliance with local regulations. They review andendorse the Group risk appetite statement and thelimits approved by Board and the ExecutiveCommittee. The risk management function, thecompliance function and the internal audit functionreport to the board of directors in matters relating torisk management and compliance.

The President holds the office of Chief ExecutiveOfficer (CEO) of Gard Bermuda, Gard M&E, GardAS and Gard Norway and is an ex officio member ofthe Executive Committee. The CEO is responsiblefor implementing the Risk Management System andfor ensuring that risk taking is aligned with the riskappetite. Soft limits for material risks are approvedby the CEO. The CEO shall monitor that all risksare appropriately managed and shall inform theExecutive Committee and the Board of Directors ofany breaches in accordance with the contingencyprocedures.

The Senior Vice Presidents (SVP) in the GroupLeadership Team (GLT) lead the risk takingoperations. They report to the CEO.

The Risk and Capital Committee is an advisoryforum to the CEO on matters relating to risk andcapital management. It comprises the CEO, Headof risk management, Chief Financial Officer (CFO),Chief Investment Officer (CIO), Chief UnderwritingOfficer (CUO), Chief Legal Counsel and others.Relevant reports to the Executive Committee, RiskCommittee, Audit Committee and/or board ofdirectors, shall be reviewed by the Risk and CapitalCommittee before submission.

The following figure illustrates the roles andresponsibilities of the governing bodies, keydecision makers, and the second and third line ofdefence functions. The figure also illustrates howthe risk management function is integrated into thedecision-making process of Gard. For moreinformation regarding the Three Lines of Defencemodel and how the risk management function isintegrated into the organisational structure of Gardsee chapter B 3.3.

Illustration of governance structure

All key functions are equipped with properresources and skills. The reporting lines to oneanother and to the Board have been clearly defined.

B 1.2 Material changes to the system ofgovernance over the reporting periodGard established a Risk Committee in August2016. The Risk Committee assists the boards andthe Executive Committee in fulfilling theirresponsibilities with regard to the oversight of riskswithin the parent company and its subsidiaries, withparticular focus on reviewing the group’s overall riskstrategy, risk appetite, risk tolerance, risk profile andassessing the effectiveness of the risk managementframework.

B 1.3 Remuneration policyThe remuneration enables Gard group to attractand retain superior talent and to provide competitiveterms to motivate people towards their highestperformance. It is in line with the group’s businessstrategies, objectives and long-term interests. Theremuneration shall encourage prudent riskmanagement, ensuring that no employee isencouraged to take risk exceeding the risk appetiteas defined in the Group Risk Policy approved by theBoard of Directors of Gard Bermuda.


The remuneration of all employees, includingmembers of a governing or supervisory body of acompany within the group is appropriate with regardto the individual’s function and responsibilities andthe nature, scope and complexity of the relevantbusiness activities. It commensurates with industrystandards and proportional to their respectiveduties.

The compensation structure is based on thephilosophy that success of Gard is the result of thejoint efforts of the whole organization. The collectivebonus scheme reflects this as it applies toemployees of the group regardless of position andworking place. It underpins the value of teamworkand collective performance across the individualdepartments and offices.

The remuneration governance structure is clear,transparent and effective.

GovernanceThe remuneration of Directors and members ofsupervisory bodies of a legal entity of the group isdetermined by the General Meeting of the relevantlegal entity. The remuneration of the CEO of a legalentity is determined by the Board of Directors of thatlegal entity. The remuneration of staff below theCEO level is determined by the CEO or those beingdelegated authority by the CEO to determine suchmatters.

The members of the remuneration committee areindependent and should not be employees of theGard group. They must have sufficient knowledgeand experience in risk analysis to independentlyassess the group’s remuneration policy and thecompensation programs’ fitness.

Remuneration structureThe remuneration that employees receive for theirprofessional activities with the group shall bestipulated in their individual contracts ofemployment. It consists of a salary, supplementedby a collective bonus scheme, pension plan andother benefits.

Remuneration for each role in the Gard group shallbe reasonable and fair.

The majority of Gard’s s staff is employed by GardAS in Norway. Their terms of employment with

respect to remuneration is governed to a certainextent by the collective wage agreement, madebetween the finance sector union, Finansforbundet,and the Norwegian Financial Services Association(Finans Norge), which the Gard group has agreedto abide by.

The variable component of the remuneration shallbe small relative to the overall compensation for allemployees. The maximum bonus achievable foremployees shall be in accordance with applicableregulatory requirements. The bonus shall becalculated using several key performanceindicators. It shall not encourage any employee totake on risk outside of the risk appetite.

Gard shall conduct annual reviews with eachindividual employee to determine a remunerationpackage for each employee that is commensuratewith that employee’s contribution to the group.

Pension schemeMost Gard employees in Gard have a definedcontribution pension plan. A contribution plan is aretirement plan in which a certain amount orpercentage of salary is set aside each year by theassociation for the benefit of each of its employees.

The Group Leadership Team and certain keypersonal have a pension scheme that gives themright to retire at 60 years of age and covers incomeincluded and above 12 times G. G is a base rateused as the basis for calculation benefits. G isadjusted annually and is approved each year by theNorwegian parliament. This pension scheme issecured by an agreement with Norsk TillitsmannPensjon/Nordic Trustee. The obligation is securedthrough a pledge deposit on a bank account ownedby Gard AS.

B 1.4 Assessment of the adequacy of thesystem of governanceThe system of governance is assessed as adequateconsidering the size, nature and complexity of theGard group’s operations, and sufficient to ensurethat all the risks the entities in the group areexposed to are appropriately dealt with and that theapplicable requirements in respect of thegovernance system are being met.


B 2 Fit and proper requirementsThe regulations in Bermuda, Norway and othercountries require insurance companies to ensurethat the members of the governing corporate bodiescollectively possess the right professionalqualifications, knowledge and experience. This isknown as the ‘fit and proper’ requirement.

All persons who effectively run the group’sbusiness, including the members of the Board ofDirectors, the Executive Committee, GLT, and keyfunctions, hereunder, the Actuarial function, RiskManagement function, Compliance function, andInternal Audit function, must at all times be fit andproper for the role. ‘Fit’ implies that theirprofessional qualifications, knowledge and

experience must be adequate to enable sound andprudent management and ‘proper’ requires theperson to be of good repute and integrity.

As a standard procedure, each year before theAnnual General Meeting, the Election Committeereviews the current composition of the group’svarious boards and committees to ensure that theyeach meet the overall “fit and proper” criteria.Members of Gard’s boards and committees, andcandidates to be nominated for election to boardsand committees, are required to complete aquestionnaire and curriculum vitae prepared by theElection Committee.

B 3 Risk management system including the own risk andsolvency assessment

B 3.1 StrategyThe purpose of the risk management system is toensure that material risks are managed inaccordance with our corporate objectives and riskcarrying capacity.

Gard’s risk strategy establishes, through the riskappetite statement, the level of risk that Garddeems to be acceptable as part of its “business asusual”-activities.

The risk appetite of Gard is to hold sufficient capitaland liquidity as well as constraining its risk-taking toensure that it can continue to operate following anextreme loss event with the same risk tolerance forinsurance risk. The risk-taking must be aligned toGard’s risk carrying capacity.

Gard aims to fulfil the following key objectives:

• Have a high probability of meeting its insuranceliabilities and providing its services;

• Preserve the continuity of its offering after anextreme loss event; and

• Have the flexibility and competence to helpmembers and clients manage new risks andpursue attractive business opportunities as andwhen they arise.

The risk profile of Gard is managed to providemembers and customers with high security that

Gard can meet its liabilities, protect the capitalbase, and minimize long-term premium cost for themembers.

The risk strategy is reviewed annually as part of thefinancial plan process.

The following principles define Gard’s approach torisk management:

• Controlled risk taking: We have anunambiguous definition of our risk appetite. Weonly accept risks in line with our risk appetite,which we understand and are able to manage.

• Clear accountability: Authority is delegatedand responsibilities are clearly defined. Individualsare accountable for the risks they take on. Thereis no reward for taking risks which are outside ourrisk appetite.

• Responsiveness: Efficient information flow andeffective decision making procedures enablesufficient risk monitoring and prompt remediation ifand when the risk profile deteriorates.

• Independent control: Our Risk Managementfunction, Compliance function and Internal Auditfunction provide independent advice, challengethe business functions, and monitor theeffectiveness of the Risk Management System.


• Risk culture: We are open and transparentabout losses and failures. We take correctiveaction and learn from mistakes.

B 3.2 Key elements of Gard’s riskmanagement systemThe risk management system consists of thefollowing components:

Risk appetite and limitsOur overall risk appetite and Comfort Zone (targetrange for capitalization) are defined in accordancewith Gard’s risk carrying capacity and corporateobjectives. This cascades into limits by risk typeand legal entities. This forms the basis for all riskmanagement, monitoring and reporting.

Risk policiesThese are policies describing the processes andprocedures for managing all material riskexposures. The purpose of the policies is to ensureconsistent and adequate risk and capitalmanagement.

Risk management cycleRisks are identified, assessed, managed, monitoredand reported according to the following principles:• Identify – Material risks are defined and

described in the risk landscape (see chapterC).

• Assess – Material risks and emerging risks areassessed regularly and at least annually. TheOwn Risk and Solvency Assessment processis the main process for assessing the overallrisk and solvency position at group, legal entitylevel and branches.

• Manage – Risk is managed proactively, on anindividual and aggregated level, in line with therisk appetite and risk tolerance

• Monitor – There is regular monitoring of therisk exposures and whether they are alignedwith the risk appetite. The purpose of themonitoring is to ensure that adequate remedialactions can be taken swiftly if necessary.

• Report – There is regular reporting of riskexposures from the 2nd line to the CEO and theboard of directors of the legal entities, as wellas to the Executive Committee, the AuditCommittee, the Risk Committee and the Boardof Directors of Gard Bermuda.

Internal Risk Capital ModelAn internal risk capital model is used to calculateeconomic capital of the group and all insuranceentities. For more information see section B 3.5.

Contingency proceduresThere are contingency procedures in place thatdescribe how to respond to a breach in risktolerance or limits, ensuring that appropriate andproportionate remedial actions are taken.

DisclosureThere are procedures in place to ensure thatinformation about risk and capital that is disclosedto regulators, rating agencies and other externalstakeholders, is appropriate, accurate, timely andcomplete.

B 3.3 Implementation and integration ofthe risk management systemRisk governance is based on the three lines ofdefence model, with clearly defined roles andresponsibilities. Risk management is carried out inthe business functions (1st line), risk oversight isprimarily carried out by the Risk management,Compliance and Actuarial functions (2nd line), andindependent assurance is provided by Internal Audit(3rd line).

1st line of defence functions: Accountable forimplementing, embedding and using the RiskManagement System, hereunder:

• Establishing and delivering the business planwithin the risk appetite and managing the riskexposure.

• Identifying and evaluating all material riskswithin their area of responsibility.

• Monitoring and analysing changes in the riskexposure on a regular basis and assessingthese against the risk appetite.

2nd line of defence functions: Operateefficiently and effectively and be independent fromthe 1st line of defence. The 2nd line of defencefunctions shall be responsible for their respectivetasks across the group, including all subsidiariesand associated companies. They have directaccess to the CEO and report regularly to the RiskCommittee, the Audit Committee and Board ofDirectors. They also have direct access to theExecutive Committee and the Board of Directors inmatters relating to the Risk Management System.The Risk Management and Compliance functions


are responsible for developing and maintaining theRisk Management System for the 1st line to use inits day-to-day business and for providing anindependent and forward looking view of the riskprofile to the Board and the Executive Committee,hereunder:

Support the 1st line of defence in assessingmaterial risks.Provide value-adding challenge and support tohelp ensure that risk has been adequatelyconsidered in all significant business decisions.Provide assurance to the Executive Committeeand Board of Directors that the Risk

Management System is being operatedeffectively by the 1st line. Make remedialrecommendations in respect of limit breachesand improvements to the Risk ManagementSystem.

3rd line of defence function: Responsible forproviding wholly independent assurance to theAudit Committee, the Executive Committee, theRisk Committee and the Board of Directors on theadequacy and effectiveness of the RiskManagement System. The internal audit function isappointed by, and reports to the Audit Committee.

The three lines of defence-model is illustrated in the figure below.

3 lines of defence


The figure below illustrates how the risk management function is integrated into the organisational structure ofGard.

Integration of risk management function

Risk management and internal control systems andreporting procedures are managed by Gard AS onbehalf of Gard group and its subsidiaries andassociated companies and implementedconsistently across the group.

B 3.4 Own Risk and Solvency Assessment(ORSA)The ORSA process comprises the totality ofprocesses that Gard utilises to identify, assess,monitor, manage and report risks in the short andlong term, as well as determining capitalrequirements.

The ORSA report is prepared annually by the RiskManagement function under the CFO on aconsistent basis for all areas and on behalf of allinsurance companies, branches and managementcompanies in Gard group. The risk profile, capitaland solvency situation and outlook over the

4 Board of Directors in Gard Bermuda has delegated theauthority to approve the ORSA report to the ExecutiveCommittee.

planning period is reviewed throughout the year foreach legal entity by key executive members.

The ORSA report is produced at the end of thefinancial planning process but before the financialplan has been adopted by the ExecutiveCommittee. The financial plan is used for projectingthe future development of the risk profile and futurecapital and solvency requirements and the findingsfrom the ORSA process is used in the financialplanning process and any decisions on groupcontributions, capital contributions within the groupand deferred call reductions.

The ORSA report is approved by the ExecutiveCommittee4 and the Boards of Directors of all legalentities and distributed to the Norwegian FSA, theBermuda Monetary Authority (BMA) and otherrelevant authorities after the internal approvalprocess is finalised.


B 3.5 Determination of Gard’s ownsolvency needsGard uses the Solvency II standard formula forcalculating regulatory capital requirements for thegroup and its Norwegian regulated insuranceentities. Regulatory capital requirements for theBermuda insurance entities is calculated accordingto the BSCR framework. To determine theeconomic capital needs given Gard’s risk profile,Gard uses an internal risk capital model. Theeconomic capital calculated in the internal riskcapital model is a better representation of the actualcapital requirement of the group and its legalentities than any known factor-based model.

The first internal risk capital model in Gard wasdeveloped in 2004 and has since been refined tomeet business needs and regulatory requirements.All insurance undertakings in Gard are included inthe internal risk capital model. Economic capital isused for all internal purposes, such ascapitalisation, hereunder assessment of capitalagainst risk appetite and Comfort Zone, financialplanning, reinsurance and investment planning.

The model provides our best estimate of risk, andensures that we have a consistent understanding ofour risk exposures and solvency requirementsacross all legal entities. Results from the RiskCapital Model are communicated quarterly to theExecutive Committee/Board of Directors, the RiskCommittee, Group Leadership Team and other keydecision makers.

The economic capital expresses the potential lossover a one-year time horizon with a confidence levelof 99.5 per cent. This is consistent with industrypractice and Solvency II.

Gard’s capital management activities are closelyintegrated with the risk management system asdescribed in chapter B 3.2.

Gard has made use of the option provided for in thethird subparagraph of Article 246(4) of Directive2009/138/EC and undertaken the own risk andsolvency assessment at the level of the group andat the level of any subsidiary in the group at thesame time, and produced a document covering allthe assessments.

B 3.6 Material intra-group outsourcingarrangementsSee section A 1.2.9 Lingard and A 1.2.10 Gard ASfor management and agency agreements within theGard group.


B 4 Internal control system

B 4.1 Elements of internal control systemGard’s internal control system is built on the threelines of defence model as described in section B3.2, where preventive and detective controls shallbe carried out in the business functions (1st line),risk oversight, detective controls and monitoringshall be carried out by, respectively, the riskmanagement, actuary, compliance and qualitymanagement functions (2nd line), and independentassurance concerning the adequacy andeffectiveness of the internal control system shall beprovided by internal audit (3rd line).

The internal controls shall contribute to theprevention of financial losses or other adverseoutcomes such as loss of reputation through timelyand proactive control of relevant risks. Effectiveprevention averts or mitigates risks before any lossoccurs. The internal control system shall alsocontribute to the detection at an early stage ofirregular business conduct, deviations from agreedstandards for process execution or data errorswhich have caused or may cause losses/adverseoutcomes. Early detection enables timely andeffective actions to avoid any recurrence and also toimplement preventive measures for similar risks.

When Gard designs and implements internalcontrols, the following key principles apply:

Internal controls shall be embedded in thebusiness to continually improve the quality ofour operations and foster a positive risk culture.

Both preventive and detective controls shall beproportionate to the nature, scale andcomplexity of the operations and risks involved.

Periodic reviews of the adequacy andeffectiveness of internal controls shall becarried out.

The Board of Directors is ultimately responsible forthe internal control framework. The AuditCommittee is responsible for assessing theadequacy of the internal control system. The AuditCommittee receives an annual report from themanagement concerning internal control, as well asindependent reports from the internal auditors on

the adequacy and effectiveness of the internalcontrol system.

The CEO must ensure that the organisation has anadequate and effective internal control system inplace, with suitable processes, systems andactivities to control and monitor that Gard’sbusiness is conducted properly.

B 4.2 Implementation of compliancefunctionCompliance risk management is executed in thethree lines of defence structure, as previouslydescribed.

Gard has established a Group Compliance function(Head of Compliance) and Regional Compliancefunctions (Regional Compliance Officer) (togetherreferred to as the Compliance Function). TheRegional Compliance Officers are located in thecountries where Gard has a branch registration inplace. The Head of Compliance has a directreporting line to the CEO and the Audit Committeeof Gard Bermuda and to the Board of Directors andManaging Directors of each legal entity in thegroup.

The Head of Compliance is responsible for ensuringthat the Gard organization operates within a clearlydefined compliance framework. The Head ofCompliance supports the Regional ComplianceOfficers and business functions in identifying,assessing, monitoring and reporting risks. Thefunction provides advice and challenges theRegional Compliance Officers and businessfunctions, contributing to adequate management ofcompliance risk.

The Regional Compliance Officers are led by theHead of Compliance and are responsible forensuring that the regional branches and officesoperate within a clearly defined complianceframework. The Regional Compliance Officersupports the Head of Compliance in identifying,assessing, monitoring and reporting risks. Thefunction shall provide advice to and challenge thelocal business functions and contribute to adequatemanagement of compliance risk. The role of theRegional Compliance Officers is to secure that the


entities registered in the specific jurisdiction remainin compliance with governing laws, regulations andadministrative provisions. They are also the localcontact point towards local FSAs. The RegionalCompliance Officers report to the GroupCompliance Officer.

The Head of Compliance has the following rolesand responsibilities:

• monitor the group’s compliance with relevantlaws and regulations;

• provide yearly and half-yearly reports to theCEO, the Audit Committee of Gard Bermuda.and to the Boards of the key subsidiaries withrespect to compliance with applicable laws,regulations and administrative provisions;

• assess the appropriateness of Gard’scompliance procedures and guidelines, followup identified deficiencies promptly and makesuggestions for improvements as required;

• promptly report any major cases of non-compliance to the CEO, the Audit Committeeand/or the Board(s) of the relevant legal entityas required.

The Regional Compliance Officers are responsiblefor the local compliance work and have thefollowing roles and responsibilities:

• monitor the branch and regional office’scompliance with applicable laws andregulations which govern Gard’s operationaland business activities;

• provide yearly reports to the Head ofCompliance with respect to local compliancewith applicable laws, regulations andadministrative provisions;

• promptly report any major cases of non-compliance to the Head of Compliance.

The compliance function shall to the extent possiblebe independent and separate from other businessactivities. The compliance function should normallynot have operational responsibility or authority forany of the activities or operations it reviews. Giventhat the number of employees in the regional officesare limited and nature of Gard’s business iscomplex, the Regional Managing Directors may actas Regional Compliance Officers.

Gard has implemented separate internal risk andcompliance policies.

B 5 Implementation of internal audit function

The internal audit function is part of Gard’s ‘threelines of defence’ operating model and forms part ofthe 3rd line of defence – providing assurance toGard’s management and Audit Committee thatmaterial risks are identified and managed within thegroup’s stated risk appetite. The internal auditfunction also provides independent and objectiveassurance that the governance processes andsystems of internal control are adequate andeffective to identify and mitigate the most significantrisks that could threaten the achievement of Gard’sobjectives. By doing so the internal audit functionhelps improving the control culture of Gard.

The scope of work of the internal audit function is todetermine whether Gard’s system of riskmanagement, internal control, and governanceprocesses, as designed and represented by themanagement, is adequate and functioning in aneffective manner to ensure that:

a) Material risks are appropriately identified andmanaged.

b) Established policies, procedures and processesare adequate and appropriate to manage riskswithin defined risk appetite, and are effective tomeet regulatory and legal requirements.

c) Significant financial, managerial, and operatinginformation is accurate, reliable, and timely.

d) Employees’ actions are in compliance withpolicies, standards, procedures, and applicablelaws and regulations.

e) Significant legislative or regulatory issuesimpacting the organisation are recognised andaddressed properly.

f) Opportunities for improving management control,profitability, business processes and Gard’sreputation may be identified during audits. They will


be communicated to the appropriate level ofmanagement.

The internal audit function in Gard has beenoutsourced to EY. To provide for independence, theInternal Audit function principally reports to theAudit Committee of Gard Bermuda, as well as toother governing bodies in the Gard group that theAudit Committee may determine.

An annual plan is prepared based on the internalaudit’s risk assessment and Gard’s targets. Theaudit plan is prepared in dialogue with theadministration and is approved by the Board ofDirectors. The internal audit function evaluates theappropriateness and effectiveness of the group’smanagement and control processes. The functionalso provides targeted and structured feedback onthe organization’s compliance with guidelines andrelevant legal requirements. The internal auditfunction shall contribute to continuous improvementin management and control. All critical and lesscritical suggestions for improvements in internalcontrol, established routines and control plans aresummarized in internal audit reports, which arepresented to the Board of Directors. The groupassess whether the suggested recommendationsare appropriate and should be implemented.

The internal audit function is delivered by EY.

The principal point of contact and administrativereporting line is to the Head of Compliance andQuality Management.

The internal audit teams are functionallyindependent and objective from the activitiesaudited and the day-to-day internal controlprocesses of the organisation, and shall be able toconduct an assignment on its own initiative, withfree and unfettered access to people andinformation, in respect of any relevant department,establishment or function of the organisation,including the actions of outsourced activities.

Internal Audit is authorised to:

Have unrestricted access to all functions,records, property, and personnel, including alldocuments pertaining to meetings of the boardsand other governing bodies of the organizationObtain the necessary assistance of personnel inthe organisation, as well as other specialisedservices from within or outside the organisation.Have full and free access to management andthe Audit Committee.Allocate resources, set frequencies, selectsubjects, determine scopes of work, and applythe techniques required to accomplish auditobjectives.Report any material solvency challenges orother fraudulently activity directly to theSupervisory. Under normal considerations thiswill only take place after discussion and writtenconsent from the Audit Committee leader.

Internal Audit is not authorised to:

Perform any operational duties for theorganisation.Initiate or approve accounting transactions.Direct the activities of any organisationemployee not employed by the internal auditdepartment, except to the extent suchemployees have been appropriately assigned toauditing teams or to otherwise assist theinternal auditors


B 6 Implementation of actuarial function

The actuarial function is organized in the actuarialdepartment and led by the head of the Actuarial andRisk Capital Model function. The head of theActuarial and Risk Capital Model function is theChief Actuary of all group companies with a parttime employment in Gard Norway and Gard M&EEurope.

The actuarial function operates to complete thefollowing tasks:

∂ Review and evaluate the calculation andcoordination of the technical provisions. Inparticular, that they are appropriate and adhereto standard actuarial practices in regards to itsmethods, data used, and reporting to companymanagements.

∂ Review the overall underwriting policy with anexpressed opinion on itsadequacy/appropriateness.

∂ Review the adequacy of the current andprevious reinsurance arrangements with anexpressed opinion on its adequacy/appropriateness.

∂ Contribute to the risk management system, andin particular, to the calculation of the solvencycapital requirement from our internal risk capitalmodel, inputs into our Own Risk and SolvencyAssessment, and data qualityreconciliations/assessments.

∂ Submit an annual actuarial function holderreport.

The actuarial function contributes to the riskmanagement function in the following ways:

∂ Designs, develops and maintains the riskcapital model.

∂ Provides quantitative and qualitative input intothe own risk and solvency assessment process.

∂ Completes reconciliation review on the databetween the actuarial department, the datawarehouse, and the accounting system.

∂ Provides analysis into the business results andprofitability by reviewing the model results tohistorical and expected loss experience.

The actuarial function completed this assessmentand provided further detail in the 20 February 2017Actuarial Function Holder report.


B 7 Outsourcing

Gard’s core purpose is delivered through threepillars of excellence - knowledge and expertise,financial strength and long-term relationships. Thisalso governs our approach to external serviceproviders. We assess service providers thoroughly,ensuring that we only enter into contractualrelationships with providers that support our valuesand ethical standards. We take a long-termperspective when entering into agreements withexternal service providers.

An important element of Gard’s value proposition toits members and customers is a cost efficientoperation. To achieve this, our first option should beto use the group’s internal resources to deliverinsurance products and services to our membersand customers. By not outsourcing this to anexternal third party provider, we keep thecompetence in house and we do not have tocompensate any third party’s need for profit orcompensate a third party for the risks it hasassumed in entering an agreement with Gard. Theinternal outsourcing arrangement is established inline with the business strategy, and is managed ona long term perspective.

Gard’s code of ethics and business conduct appliesto all Gard employees at all times. All negotiationsand dealings with service providers shall beconducted in a transparent, honest and professionalmanner.

Once a decision to outsource is made, Gard shallidentify service providers, evaluate their capabilitiesand select the most suitable option.

Once a provider has been selected, whetherinternal or external, an appropriately detailed legalagreement capturing the key services establishedshall be put in place. Gard’s legal department shallbe consulted in all cases, with additional externallegal advice sought where appropriate.

Outsourcing contracts must comply with all of therelevant regulatory requirements.

Internal ControlTo ensure that the outsourcing of any critical orimportant functions or activities does not lead to amaterial impairment of the quality of Gard’sgovernance system, the service provider must have

in place an adequate risk management and internalcontrol system, and Gard must maintain thecontractual right to issue instructions concerning theoutsourced function or activity.

Business continuity and exit strategyThe outsourcing arrangement must be establishedin such a way that business can continue in theevent the contract with the licensee is terminated.Thus, Gard shall secure title and ownership to allrecords, documents and information and rights touse computer software systems and programs for acertain period of time after the relevant outsourcingagreement has been terminated, as required tomanage and operate the business without anyinterruptions.

The contractual terms and conditions with theservice provider must have an agreed andembedded workable exit plan placing obligations onall parties to fully assist and co-operate to ensurethe contract is terminated with the minimumdisruption.

Monitoring and oversightThe governing body or role that has entered into anoutsourcing contract is responsible for monitoringthat the contractual terms are being adhered to, andthat all parties honour their obligations under thecontract. Monitoring of significant outsourcingcontracts should take place as part of the annuallegal entity review.

Monitoring should include (but should not be limitedto) the following:

∂ A review of performance (exact intervalsmust be determined per type of serviceprovider). If applicable this may include a sitevisit and/or meetings with management andkey personnel of the service provider whenapplicable.

∂ A review of the service provider’s continuingsuitability in line with the selection criteriaoutlined in this policy. This should beconducted in light of any significant change tothe service provider’s business that pertainsto the outsourced functions.

If the service provider does not carry out thefunctions or activities effectively and in compliance


with the terms of the outsourcing agreement,appropriate actions must be taken.

ReportingGard shall notify the relevant supervisory authoritiesprior to the outsourcing of critical or importantfunctions or activities as required, and of anysubsequent material developments with respect tothose functions or activities. This may includematerial changes in the outsourcing arrangements,a change of service provider or major problems withthe performance of the service provider.

Roles and responsibilitiesThe CEO shall administer the daily business of theGroup on behalf of the Executive Committee. TheCEO is responsible for entering into contracts onthe group’s behalf when this is required toimplement its strategy, goals and financial plan,taking into consideration the risk appetite andComfort Zone as determined by the Company’sBoard of Directors.

Major contracts which may significantly impact theway a Gard entity operates shall be signed by thatentity’s CEO or Managing Director. The ExecutiveCommittee shall be informed prior to the entry intoany contracts that may alter the group’s operatingmodel and/or that may involve significant risk orcosts.

All Senior Vice Presidents and most seniormanagers have been delegated authority to enterinto contracts in their respective area ofresponsibility, however, the CEO shall be informedof any significant engagements prior to theirexecution. Contracts entered into in the ordinarycourse of business, for example, a contract with alocal loss adjustor, can be signed by personnel withthe relevant level of authority.

When Gard legal entities enter into contractsbetween themselves, the signatory for each legalentity may be the same person, acting in a differentcapacity. For example, the Managing Director ofLingard may sign the contract on behalf of GardBermuda as its insurance manager, and on behalfof Gard M&E as its insurance manager.

The Legal Department shall be responsible forreviewing significant contracts before they aresigned. They shall also keep a record of allcontracts made between Gard legal entities.

Gard outsources the internal audit function, ITservices and fund management. The Internal Auditfunction is based in Norway, the IT servicesprovider is based in India and the Philippines andthe fund management company is based in Ireland.

B 8 Any other informationThere is no other material information to be disclosed.


C RISK PROFILE

In the context of its operations Gard enters into abroad variety of risks. Gard aims to a have acomprehensive understanding of its risk profile byidentifying, assessing and measuring its riskthrough multiple approaches.

The material risks which Gard group is facing, arebelieved to be captured in the risk landscape. Therisk landscape comprises both quantifiable risksand non-quantifiable risks that arise from doingbusiness. The risk landscape is shown in the figurebelow.

Gard uses the BSCR for calculating regulatorycapital requirements for the Bermuda insuranceentities. However, to determine the economiccapital, Gard uses an internal risk capital model. Allmaterial quantifiable risk types are within theinternal risk model scope. This includes

underwriting risk (insurance risk), market risk,counterparty default risk and operational risk. Inaddition, Gard uses various exposure measuresand stress tests to quantify its risk profile. Allmaterial risks are assessed at least annuallythrough the ORSA process and quarterly throughthe model updates. Significant internal or externalevents may require additional assessments. To testGard’s ability to withstand severe conditions, anumber of stress tests are conducted regularly.

The risk identification process ensures that materialrisks are identified and assessed from a group andlegal entity perspective. It takes into account theindustry, the type of members and clients and theglobal nature of the organization, and coversexisting and emerging risks.

Gard’s risk landscape

The material risks for Gard M&E are described insections C1.

Concentration

Total risk

Counterpartydefault

Operational LiquidityMarketInsurance Other risks


C 1 Material risks

The below table summarizes the various risks included in the Bermuda Solvency Capital Requirement:

BSCR risk type 2017 2016Market riskFixed Income Investment Risk 2 3Equity Investment Risk 19 15Interest Rate / Liquidity Risk 4 5Currency Risk 7 9Concentration Risk 2 7Underwriting riskPremium Risk 42 52Reserve Risk 50 54Credit Risk 14 18Catastrophe Risk 45 58Diversification -98 -118BSCR (after diversification) 87 103Operational Risk 2 3BSCR 89 106

Market risk is defined as the risk of economiclosses resulting from deviations in the value ofassets and/or liabilities caused by market prices orvolatilities of market prices differing from theirexpected values.

Gard is mainly exposed to market risk through theinvestment portfolio. The investment portfolio is setup to match the maturity of the liabilities. Gard M&Eis part of a cash pool with Gard Bermuda,AS Assuransegården and Gard AS with an attachedoverdraft facility of USD 40 million.

Gard obtains diversification in its investmentportfolio through asset allocation within andbetween different asset classes. On the liability sideGard is exposed to market risk through changes ininterest rates and exchange rates.

The BSCR calculation for market risk is factorbased.

Market risk includes fixed income investment risk,equity investment risk, interest rate/liquidity risk,currency risk and concentration risk.

The BSCR for market risk was USD 33 million as of20 February 2017. The overall capital requirementdecreased compared to the year up to 20 February2016. The main reason for the decrease is less

concentration risk. Equity investment risk increasedfrom USD 15 million to USD 19 million last yearmainly driven by an increase in balances receivableon sale of investments. For the other market risksthe changes from last year are not material.

Underwriting risk arises from existing claims(reserve risk) and future claims (premium risk) andcatastrophe risk (cat risk), and originates fromclaims being different from what is expected. Manyof the covers provided by Gard have highexposures, and potentially, very high severity.These claims fluctuate from year to year and theresults are volatile.

The premium and reserve risk capital requirementcalculation has a factor based approach, based ongeographical diversified net premium written andgeographical diversified net loss & loss expenseprovisions. The basis for catastrophe risk is netprobable maximum loss for natural catastrophes(after reinsurance) plus 10 per cent credit riskcharge on reinsurance share of maximum probablecatastrophe loss less total catastrophe premium.

The BSCR for premium risk was reduced by 19 percent, due to reduction in both rates and volume.BSCR for reserve risk decreased by 7 per cent, dueto the reduction in premium rates and volume aswell as a reduction in net loss and loss expense


provisions. Catastrophe risk was down 22 per centfrom last year. The cause of the change is areduction in net probable maximum loss to Garddue to a change in method of calculation. Grossprobable maximum loss has changed insignificantlyfrom last year.

Credit risk is calculated as a factor-based chargeon receivables and reinsurance receivablesdepending on credit rating, and has been somewhatreduced for the company due to a reduction in thereceivables balances.

Operational risk is the risk of losses occurringbecause of the inadequacy or failure of internalprocesses or as a result of events triggered byemployee-related, system-induced or externalfactors. Operational risks are an “invisible” part of

our business activities, and the focus is therefore onrisk avoidance and risk minimisation.

Operational risk is reviewed annually through aninternal self-assessment and reported to the AuditCommittee. Within this operational risk review weconsider, in particular, business process risks(including data quality), compliance risks, fraudrisks and information security risks. This processenables us, among other things, to prioritise risks.The operational risk factor under BSCR is based onan assessment of Corporate Governance, RiskManagement Function, Risk Identification, RiskMeasurement, Risk Response and Risk Monitoring& Reporting, from where the operational risk capitalcharge is derived.

The operational risk capital requirement was downby 42 per cent last year due to higher overall"Commercial Insurer Risk Assessment" score aswell as a reduction in BSCR after covarianceadjustment.

C 2 Other risks

Business risksBusiness risk is the risk of losses or failure to meetbusiness objectives due to unexpected changes tolegal and regulatory conditions, changes in theeconomic and social environment, as well aschanges in business profile and the generalbusiness cycle.

Compliance risksCompliance risk is the risk of legal or regulatorysanctions, material financial loss, or loss toreputation the group may suffer as a result of itsnon-compliance with laws and regulations whichgovern our business activities.

Gard group comprises companies and branches inseveral jurisdictions, as well as captive reinsurancecompanies, insurance intermediary companies,subsidiaries, and a property company. As a naturalconsequence of the group structure Gard is subjectto several regulatory regimes such as that ofNorway, Bermuda, Hong Kong, Singapore andJapan. Unexpected changes in legal and regulatoryconditions as well as changes in the economic andsocial environment in which the group operates maypose a risk to Gard.

Compliance risk is managed through ongoingmonitoring of regulatory environments that weoperate in, as well as periodic regulatory reviews

with participants from all jurisdictions where Gardconduct business. Tools that are implemented toreduce compliance risk is supplemented bycompliance training programmes.

Reputational risksGard’s business is built on the trust of its membersand clients, reinsurers, regulators and otherstakeholders. The group must be seen to act withintegrity towards all its members and clients,regulators and other stakeholders.

Gard incurs its key reputational risk in claimshandling in that the reputation of the associationmay take damage because of poor claims handling,in addition to the risk of being associated with amajor public claim such as an oil spill or acatastrophe involving loss of life or damage topublic property.

Policies and procedures are documented in thequality management system. The process forfollowing up on measures planned andimplemented to mitigate operational risk has beenstrengthened through an improved system formonitoring and control.

Gard does not calculate BSCR for reputational risk,but holds capital against many of the risk eventsthat could damage the reputation of the company.


C 3 Risk mitigationGard uses reinsurance to manage its risk profile.

Reinsurance is used to meet Gard’s businessobjectives ensuring continuity after an extreme lossevent; providing flexibility to help Members andclients manage new risks and pursue businessopportunities with control mechanisms for ensuringthat the reinsurance cover is adequate and alignedwith Gard’s risk appetite and corporate objectives.

Reinsurance is a method to ensure that insuranceliability risk is kept within the overall risk appetiteand Comfort Zone and that rating and regulatoryrequirements are met. The reinsurance program isestablished to provide protection in respect of highseverity, low frequency claims.

Gard has different reinsurance programs fordifferent classes of business and follows thecustomary insurance practice of reinsuring withother insurance and reinsurance companies aportion of the risks under the policies it writes.These reinsurance arrangements are maintained toprotect Gard against the severity of losses onindividual claims and unusually serious occurrencesin which a number of claims produce an aggregateextraordinary loss.

The collectability of reinsurance retrocessions islargely a function of the solvency of reinsurers. Thecredit exposure on Gard’s reinsurance program is in

accordance with the guidelines of only acceptingreinsurers with an A- (Stable) or higher rating.

Risk mitigation techniques are embedded in Gard’smanagement of market risks.

A neutral matching portfolio is generally consideredas a base when looking at investment portfolios forinsurance companies, and risk mitigationtechniques are already applied in matching theassets against liabilities for interest rate durationand currency exposures.

There is also a tolerance for taking on more risk ontop of the matching portfolio and risk mitigationtechniques are incorporated to stay within allowedranges and limits.

The investment portfolio also has a derivativeoverlay in place, which efficiently can adjust marketexposures. Through Gard’s equity futures overlayprogram, part of the equity allocation is sold outusing equity futures to bring the net equity exposuredown to the strategic asset allocation weighting.This is a portable alpha program for which theactive equity fund manager’s ability to outperformthe market is benefited and the systematic marketrisk is reduced by selling equity futures.

C 4 Risk concentration

Risk concentration cuts through and across risktypes as well as within single risks. The mostmaterial risk concentrations are considered to bewithin insurance and market risk.

Concentration within and between the other singlerisks are not considered material.

C 5 Prudent person principle

The Board of Directors of Gard Bermuda approvesthe overall investment policy. The investment policycontains the objectives, principals, risk appetite andconstraints governing the investment relateddecisions.

The Board of Directors has ultimate overallresponsibility for decision-making on investment

matters. The Board of Directors has delegatedresponsibility for implementing the investmentstrategy to the Executive Committee. The ExecutiveCommittee is responsible for determining theinvestment strategy and sets the Strategic AssetAllocation and benchmark. The compositebenchmark is defined to make a representation ofthe asset allocation and liability structure of thegroup. The allocation should be reviewed at leastannually. In addition, the Executive Committee


monitors compliance with the Investment Policy hasset specific limits and restrictions for deviations fromthe strategic asset allocation and is required tonotify the Board of Directors when it is necessary tooperate outside of the target ranges. The ExecutiveCommittee takes a total market risk view whenimplementing strategies within the overall policy.Market risk reflects the risk of economic losses, netof asset and liabilities, resulting from price changesin capital markets. The Executive Committee isresponsible for reporting to the Board of Directors.

The management is responsible for implementingthe asset management strategy as determined bythe Board of Directors and the ExecutiveCommittee. The actual asset management isoutsourced to independent fund managers and ismainly coordinated through the Gard CommonContractual Fund (Gard CCF) for insurers within thegroup. Gard is not doing any active internal assetmanagement.

Gard’s investment portfolio shall be designed andmaintained to support Gard as an enduring

association of mutual shipowners by focussing onlong term preservation of the owners’ capital andthereby having strong security for paying claims, as

well as to minimise the risk that investment lossescould cause non-compliance with regulatory capitalrequirements.

Gard’s objective for its investment portfolio is tomaximise long-term investment returns within itsrisk appetite and accompanying risk tolerances.Hence, the Gard group seeks to take on thoseinvestment risks that are expected to be rewardedover the long-term, in the form of excess returnsrelative to liabilities, in a diversified manner. Thecombination of assets and investment managementapproaches shall be selected to be consistent withthe investment objectives, risk tolerances andinvestment constraints detailed in the InvestmentPolicy and in the Risk Management Policy.

The currency exposure and maturity profile of theinvestments should broadly reflect the Gard group’sliability structure, liquidity and cash flowrequirements and solvency position. In effect, Gardconsiders its investment strategy on a holistic basisand assesses the risks of its investment portfolio ona net basis, after allowing for liabilities. Derivativesare permitted, but shall only be used for riskmitigation, efficient portfolio management or costefficient execution.

As a general principle, Gard does not rely only onone source of information to base its investmentsdecisions on. Gard uses information provided bythird parties (e.g. financial institutions, assetmanagers and rating agencies) in addition to aninternal assessment of risk and return. The internalrisk capital model provides an estimate of theSolvency Capital Requirement of a new investment.


C 6 Risk sensitivity

Gard performs a various set of stress tests. Themain methods used are the following:

Insurance risk stress testsA set of extreme events for insurance risk havebeen identified and the realistic possible loss toGard has been estimated. The scenarios arecalculated using Gard’s exposure to actual insuredobjects, showing the expected loss, gross and netof external reinsurance, by line of business. Further,to calculate the loss by each legal entity, theinternal reinsurance is applied. The scenarios havebeen selected to test the reinsurance protection andto illustrate extreme combinations of losses, not toexemplify losses with a given probability ofoccurring. The highest insurance loss for GardM&E’s own account from the identified extremeevents corresponds to approximately 14 per cent ofequity. The most severe losses from a singleextreme event would be a scenario where Gard isexposed across several product areas withseparate reinsurance programs. Gard group mayexperience multiple extreme events in a single year.

Reverse stress testsComplementary to insurance risk stress tests andmarket risk stress tests, reverse stress testing hasbeen carried out to identify scenarios that would bethe likely cause of business failure. “Businessfailure” is defined as the solvency position fallingbelow a level where the business model becomesunviable. A consequence of this would be thatcounterparties and other stakeholders could beunwilling to transact with or provide capital to theassociation and, where relevant, existingcounterparties may seek to terminate theircontracts.

The reverse stress tests identify events that willjeopardize the association’s solvency, but notcircumstances which will cause Gard group to

“cease being a going concern”. The results of thereverse stress test answer the question of whichscenarios that represent real risks to the existenceof the company.

The reverse stress tests are based on oneinsurance scenario and one market scenario. Wehave chosen not to do a combination of these twoscenarios. Historically, insurance and market losseshave been uncorrelated for the type of insurancerisk Gard is exposed to.

The stress tests are of a quantitative nature. Gard isaware of other non-quantifiable situations whichcould also render the business model unviable.

The reverse stress test conducted for Gard M&E,showed that an additional 6 claims in excess ofUSD 40 million will bring the solvency ratio down to75 per cent.

There are policies and contingency plans in placedescribing how to take immediate action, or act asprecautionary measures in advance, to restore orimprove the solvency capital adequacy.

Market risk stress and drawdown risk testsA set of stress tests and market scenarios forvarious asset classes have been identified and thepossible loss to Gard has been estimated.

Drawdown for various asset classes over differenthistorical time periods has been observed.Especially drawdown risk happening at the sametime for multiple asset classes constitute anadverse tail event and reduce diversificationbenefits.

C 6 Any other information regarding the risk profileThere is no other material information to bedisclosed.


D VALUATION FOR ECONOMIC BALANCE SHEET PURPOSES

This section specifies and describes the valuation ofassets and liabilities for Economic Balance Sheet(EBS) purposes, the differences between thebases, methods and main assumptions used for thevaluation of assets for EBS purposes and thoseused in statutory financial statements.

The bases, methods, and assumptions are similarfor all legal entities:

∂ Assets shall be valued at the amount forwhich they could be exchanged betweenknowledgeable willing parties in an arm’slength transaction (fair value).

∂ Liabilities shall be valued at the amount forwhich they could be transferred, or settled,between knowledgeable willing parties in anarm's length transaction.

∂ The materiality principle shall be consideredwhen valuing assets and liabilities.Information is material if its omission ormisstatement influences the decision-makingor the judgement of the users of thatinformation, including the supervisoryauthorities.

∂ The valuation shall be based on theassumption that the company will continue tooperate and write new business for theforeseeable future (going concern basis)

The economic balance sheet represents a risk-based view of the entire balance sheet as at a givendate, where assets and liabilities are valuated in linewith the above concepts. The table belowsummarises for each material class of assets andliabilities the value according to EBS together withthe values of the assets recognised and valued inthe statutory accounts.


Economic balance sheet, Gard M&E

USD million

EconomicBalanceSheet

StatutoryFinancialStatement Difference

AssetsCash and cash equivalents 44 44 -0Total bonds and debentures 192 104 88Total equity investments 88 177 -88Advances to affiliates 27 27 0Total accounts and premiums receivable 101 101 0Total reinsurance balances receivable 18 18 0Total sundry assets 29 41 -12Total assets 499 511 -12

USD million

EconomicBalanceSheet

StatutoryFinancialStatement Difference

LiabilitiesNet premium provisions 48 48Net unearned premium reserves 50 -50Net loss and loss expense provisions 157 159 -2Risk margin 7 7Technical provisions – non-life 212 209 2

Insurance and reinsurance balances payable 46 46 0Tax liabilities 2 2 0Amounts due to affiliates 1 1 0Accounts payable and accrued liabilities 1 13 -12Total sundry liabilities 24 24 0Total other liabilities 74 86 -12

Total statutory economic capital andsurplus 213 216 -2

Total liabilities 499 511 -12

The classification of Statutory Financial Statementvalues in the balance sheet is classified accordingto Bermuda rules and is different from the balancesheet in the Financial Statements

No changes has been made to the recognition andvaluation bases used or to estimations during thereporting period.

For Gard M&E, only the line of business "EnergyOffshore / Marine’" is applicable.

For the majority of the balance sheet items thereare no differences in the valuation for solvency

purposes and those used for the valuation instatutory accounts. The subsequent chaptersdescribe assets and liabilities where the valuationdiffers.


D 1 Valuation of assets

Gard group has mainly investments in the followingasset classes; bonds and debentures, commonstocks, preferred stocks and mutual funds. Theinvestment assets are held in custody at NorthernTrust.

In the statutory accounts balance sheet, the fairvalue of assets is mainly measured on a mark-to-market basis. The fair value is determined byreference to published price quotations in an active

market. For unquoted financial assets, the fair valuehas been estimated using a valuation techniquebased on assumptions that are supported byobservable market prices (mark-to-model). Overall,there are no significant differences between thevaluation of statutory accounts and EconomicBalance Sheet. However, between categories thereare differences that will be described in thefollowing.

D 1.1 Total bonds and debenturesThe main difference between the statutory accountsand Economic Balance Sheet is related to thederivative overlay program, where equity exposureis hedged out and interest rate exposure is gainedthrough interest rate futures. The valuation of the

assets is the same, but the effect of the overlayprogram is reflected in the ESB value whereexposure is moved from equity investments tobonds and debentures.

USD million EBS valueStatutory

accounts valueTotal bonds and debentures 192 104

D 1.2 Total equity investmentsThe main difference between the statutory accounts and Economic Balance Sheet is related to the derivativeoverlay program as described above. The EBS value is shown net of the overlay program.


accounts valueTotal equity investments 88 177

D 1.3 Total sundry assetsThe difference between EBS value and statutory accounts value is mainly the presentation of balancesreceivable on sale of investments.


accounts valueTotal sundry assets 29 41


D 2 Valuation of technical provisions

This section specifies and describes the valuation oftechnical provisions and reinsurance recoverablesfor solvency purposes, the differences between thebases, methods and main assumptions used for thevaluation of technical provisions for solvencypurposes compared to those used in the statutoryaccounts.

The technical provisions under EBS are determinedas the sum of best estimate liabilities and the riskmargin. Determining the technical provisions, weuse a risk-free yield curve in line with EBSrequirements. For EBS purposes, all policies areevaluated to ultimate.

The best estimate liabilities is shown both on agross basis and for the reinsurers' share. The riskmargin is shown on a net basis reflecting the riskmitigation effect. For Gard M&E the only the line ofbusiness " Energy Offshore / Marine’" is applicable.

Best estimate provisionsThe calculation of the best estimate provisions isbased on the projection of future cash inflows andoutflows like premiums, claims and expenses.

Risk marginA risk margin is included in the technical provisions.The risk margin is calculated in accordance with therequirement set out for the EBS.

Risk margin is not included in the statutoryaccounts.

D 2.1 Valuation of technical provisions –basis (data) and methods

BasesIn the calculation of the best estimate liabilitiesunder EBS the business is split in homogenous riskgroups, such that the nature, scale, complexity ofthe business is taken into account.

There is no deviation regarding the valuationmethods between the different lines of business.Therefore the following valuation methodsdescribed are valid for all risk categories.

Methods

The evaluation of the best estimate provisions isbased on the estimation of future cash flows,including all expected (future) cash inflows andoutflows. The best estimate provisions is calculatedseparately with respect to the best estimatepremium provisions and the best estimate claimsprovisions.

The best estimate premium provisions relates toclaim event occurring after the valuation date. Allfuture cash flows from premium, losses and costsrelating to unearned incepted and bond but notincepted business is calculated.

The best estimate claim provision relates to claimevents occurring before the valuation date. Allfuture cash flows from losses and costs relating tothese losses are calculated taking into account thediscounting effects.

The cash flows for premiums, claims and costs aremodelled separately.

Claim provisionsFor the evaluation of claim provisions, totaloutstanding liabilities due to loss and Allocated LossAdjustment Expenses, the reserves held are basedon the following:

∂ For the calculation of the incurred but notreported claims (IBNR) we use thedevelopments of the claim incurred (i.e., claimpaid plus claim reserves) as the basis for futureexpected developments. This is primarily dueto the volatility of large single payments thatcan drastically distort any paid developmentfactors.

∂ For the analysis of IBNR, we use accident anddevelopment quarters to calculate the ultimateincurred claims

∂ We use three main criteria for the definition ofrisk categories:

o A fit with our established businessdimensions.

o Similar underlying drivers of risk.o Sufficient amount of data within each

risk category.∂ The financial plan is used as the initial

expected ultimate incurred (also known as


"Apriori"). The financial plan provides a lossfigure that is used as an alternative to astandard initial expected ultimate loss ratio onthe gross and/or net premium.

∂ The current reinsurance program

The claim provisions are broken down into casereserves, IBNR, unallocated loss adjustmentexpenses (ULAE) and Binary events. The casereserves and IBNR figures are the reserves thatdirectly attribute to the claims, while the ULAEestimate is related to expenses that cannot bedirectly attributed to a specific claims or incident.Binary events are the provisions held for potentialclaims that we do not have events for in the data.The IBNR, binary event and ULAE reserves arecalculated and reported by the actuarialdepartment.

The only differences between the EBSI and thestatutory account figures for claims provisions isthat the EBS figures includes the discounting effect.

IBNRThe development of losses for the Gard group aretypically analysed using standard actuarial methodssuch as the Chain ladder, Bornhuetter Fergusonand Benktander methods. The method selection isbased on the quarter and the significance of largelosses that may have occurred. External reinsurer’sshare is based on the reinsurer’s share of theindividual losses including develop in excess of theretention. All internal reinsurance is calculated netof the effect of external reinsurance.

ULAETo calculate ULAE, we divide the claim provisions(case reserves and IBNR) between reports claimprovision and unreported claim provision.

The unreported claim provision is multiplied with aratio of payment related to unallocated expensesdivided by the claims payment during the year, πand the reported future claim reserves is multiplieswith π and (1-r) where r is the proportion of claimshandling cost due to claim registration.

Binary eventsGard includes provisions for binary events or‘events not in data’. The events that are not in thedata are a measure of the potential volatility that weenvisage but have not experienced to date andfollow the definition so that the technical provisions“provide a best estimate for "all possible outcomes”.To bring the best estimate to include ‘all possible

outcomes’, we turn to our internal model reserverisk where we select the difference betweenconfidence intervals. We also monitor the reservewith other industry benchmark methods to makesure that the amount is reasonable.

Best estimate premium provisionsThe calculation of best estimate premium provisionsis the best estimate of all future cash flows (claimpayments, expenses and future premiums due)relating to future exposure arising from unearnedincepted and bond but not incepted business. Thefuture expected cash flow calculation is based onthe expected combined ratio for the relevantbusiness. This estimation is done on gross basesand for the reinsurer’s share of the business.

The difference in method for calculating premiumprovision under EBS and the statutory accounts isthat the EBS method calculate the effect of allexpected future cash flows, while the statutoryaccounts is depositing the unearned premium in full.

Main assumptionsThe calculation of the best estimate provisions,development pattern and estimated ultimates areapplied on the segments used for statutoryaccounts reserving. The pattern and ultimates aredetermined on run-off triangles using state of the artactuarial methods. The triangles are generatedusing reconciled data.

D 2.2 Uncertainty associated with thevalue of technical provisionsAs with all insurance businesses, there is a degreeof uncertainty over the exact provision needed.There are a number of specific sources whichcontribute to increasing this uncertainty.

∂ Claims environment: One of the keyassumptions for the claim liabilities is thathistorical claim developments are an indicatorfor future developments. Uncertainty surroundshow changes in the claims environment mayaffect the final settlement of claims.Unanticipated changes in the legislative andjudicial environments, for example, could leadto a significant increase of the uncertainty withinthe reserves. We have completed a sensitivitytest on the loss development factors selectedand found that with a 10 per cent point increasein the incremental development factor, thegross IBNR increases by 6.0 per cent.


Conversely, with a 10 per cent decrease thegross IBNR reduces by 6.4 per cent.

∂ Financial Plan: Another assumption for theclaim liabilities is that our financial planindication of the pure loss (Apriori) can be usedto help assess the amount of liabilities for lessmature development periods. This means thatany uncertainty in the financial plan also appliesin the best estimates. We have reviewed thesensitivity on the IBNR if the Apriori estimatewere increased by 10 per cent (gross IBNRincreased by 6.4 per cent) and if the Aprioriestimate were decreased by 10 per cent (grossIBNR decreased by 7.2 per cent).

∂ Currency: Even though we report our reservesin USD, parts of the liabilities are exposed toexchange rate fluctuations and inflation rates inother currencies. This means that fluctuations inforeign exchange rates can influence ultimateclaims.

∂ Long-tailed claims: Uncertainty remainssurrounding the ultimate outcome for long-tailed

casualty claims. The early years are notnecessarily fully developed and the incurredvalues on these years help inform our estimatesfor the more recent years. We will continue tomonitor these claims but would note that theseincreases the volatility of the association'sliabilities.

D 2.3 Best estimate liabilitiesThe difference in technical provisions is due todiscounting effects and BBNI (bound but notincepted) gross, which are reducing the value oftechnical provisions for EBS values compared tothe statutory account values. Further, commissionprovisions are deducted from the EBS values in thetechnical provisions, while they are reported asdeferred acquisition costs for the statutory accountvalues. For the statutory account values of technicalprovisions the retained earnings are included.


accounts valueTechnical provisions – non-life 205 209Risk margin 7Technical provisions 212 209

D 2.4 Risk marginTechnical provisions includes a provision for riskmargin. The risk margin is an estimated cost of

capital due to the unpaid claim provisions held. Wecalculate the cost of capital by using a capital toprovision percentage (6 per cent), payment pattern,and expected yield of capital.

D 2.5 Reinsurance recoverablesThe difference in valuation in reinsurancerecoverables is due to discounting effects,reinsurers’ share of bound but not incepted (BBNI)net and losses occurring during (LOD) net, whichare all reducing the value of reinsurancerecoverables for EBS values compared to statutory

account values. Additionally, reinsurancecommission provisions are deducted fromreinsurance recoverables in the EBS values and areincluded in any other liabilities, not elsewhereshown in the statutory account values.


accounts valueTechnical provisions – total recoverable from reinsurance 203Best estimate – total recoverable from reinsurance 189Technical provisions

Total other liabilitiesThe difference in valuation is for Accounts payable and accrued liabilities which is mainly related to thepresentation of balances receivable on sale of investments. See comment under D 1.3.


accounts valueAccounts payable and accrued liabilities 1 13


D 3 Alternative methods for valuationsWhen determining the value of an asset it isnecessary to assess whether the market is active ornot. If the market is active, the value can be takendirectly from the market or from comparable assetstraded in the same market. If the market cannot becategorised as active, the market value isdetermined using valuation models. Gard’s assetsare mainly valued using quoted market prices inactive markets for the same or similar assets. Listedshares are valued on an item-by-item basis and

bonds are valued on the basis of realised quotedprices in active markets. Alternative valuationmethods can occur for real estate funds, wherethere are no active markets or the relevant marketsare deemed to be inactive.

Alternative valuation methods are only used for anon-significant part of the investment portfolio andthe same principles are used both in the EBS andstatutory balance sheet.

D 4 Any other material informationGard has no material provisions other thantechnical provisions.


E CAPITAL MANAGEMENT

Gard group has a policy in place that sets out theprinciples and guidelines for capital management.The policy describes the main activities andgovernance structure that supports capitalmanagement, and is part of the risk managementframework.

The Group Risk Policy states the following:

“Gard should hold sufficient capital and liquidity aswell as constrain its risk-taking to ensure that thegroup can continue to operate following an extremeloss event with the same risk tolerance forinsurance risk.”

In which “extreme loss event” means an annual losswith a probability of occurring once every 100 years.

The probability that Gard would have to raiseadditional capital from its mutual members by wayof unbudgeted supplementary calls should be low.In addition to the statement given about capitaladequacy in the Group Risk Policy, Gard bases itscapital management on following three generalprinciples:

Simple capital structure: Gard aims to have asimple capital structure and seeks to fund expectedgrowth in required capital through internal capitalgeneration.

Efficient use of capital: Capital is scarce andhas a cost. The approach to capital managementshall balance the needs and requirements of allstakeholders, including mutual members,policyholders, regulators and rating agencies.

Pooling and upstreaming capital: Availablecapital and liquidity, as well as risks, shall be pooledcentrally as much as possible to minimize the risk oflimited capital transferability. This also allows thegroup to take into account the benefits that arisefrom such pooling in those jurisdictions where thesebenefits are recognized under the capital adequacyregime.

The group shall maintain sufficient capital andliquidity to be able to respond to potential capitaland cash calls from its legal entities withoutjeopardizing regulatory requirements and theminimum financial strength rating.

There is established procedures for when a breachof limits has occurred to ensure that appropriateand proportionate remedial actions are duly taken,including reporting requirements. The proceduresinclude increased frequency of monitoring,escalation of reporting, and procedures forproposing and approving mitigating actions.

E 1 Eligible capital

E 1.1 Eligible capitalEligible capital is made up of total statutoryeconomic capital and surplus less encumberedassets.

Eligible capital can be classified in tiers 1, 2 or 3,based on "permanence" and "loss absorbency". Tier1 funds are the highest quality.

The classification into tiers is relevant to thedetermination of eligible capital, that is capital whichqualifies for covering the regulatory capitalrequirements – BSCR and Minimum Margin ofSolvency (MMS) i.e., minimum capital requirement.Minimum capital requirement must be covered byTier 1 and Tier 2 basic own funds.

E 1.2 Available capitalGard M&E has a simple capital structure consistingof Tier 1 capital through equity capital, which is fullypaid in and available, Tier 2 capital consisting ofexcess of encumbered assets less capitalrequirement applicable to the encumbered assets,and no Tier 3 capital.

The Gard group aims to manage its capital suchthat all its regulated entities meet local regulatorycapital requirements at all times. In each country inwhich the group operates, the local regulatorspecifies the minimum amount and type of capitalthat each of the regulated entities must hold, i.e.,Gard is subject to different capital requirementsdepending on the country in which it operates andthe type of business conducted. If an entity should


fall below the target capital level, the managementaction will be to increase capitalisation or derisk tobring the solvency ratio back to an acceptable level.

The total statutory capital and surplus was USD 216million for Gard M&E per 20 February 2017.

Technical provisions are calculated according to therequirements under EBS. The risks arising from theuncertainties connected to the calculation oftechnical provisions are quantified as part of thereserve risk.

The total statutory economic capital and surplus ascalculated in the EBS was USD 213 million for Gard

M&E (see table Economic balance sheet, in chapterD Valuation for solvency purposes

The first table below explain the difference betweentotal assets, total liabilities and total statutoryeconomic capital and surplus between EBS andstatutory accounts as per 20 February 2017.

The second table below shows eligible capitalclassified in tiers.

Difference between statutory accounts and EBS:

USD million, as of 20.02 2017Capital and surplus statutory accountCapital and surplus EBSDifference between statutory accounts and EBSSpecification of difference:Gross Loss and Loss Expense ProvisionGross Premium ProvisionsReinsurance RecoverablesRisk MarginDeferred Acquisition CostsReinsurance Commission Provisions

216213

2

-4-15147

12-12

Total 2

Total eligible capital as under EBS:

USD million, as of 20.02 2017 2016Tier 1 209 184Tier 2 4 6Tier 3Total 213 190

E 2 Capital requirements

E 1.3 Bermuda Capital Requirement (BSCR) and Minimum Margin of Solvency (MMS)RequirementBSCR under EBS was USD 89 million as per20.02.2017. Total eligible capital to meet the BSCRwas USD 213 million. The BSCR ratio was 240 percent.

MMS under EBS standard formula was USD 23million. Eligible capital to meet MMS was USD 213million.

The MMS is calculated based on defined factors.

The MMS is calculated as the higher of:∂ 15 per cent of statutory accounts Net loss

and loss expense provisions∂ 25 per cent of BSCR


Material changes to BSCR in the period is mainlydue to:

∂ Reclassification of assets∂ Reduced premium volumes and rates

∂ Increased investment exposure∂ Reduction in best estimate loss and loss

expense provisions

E 3 Internal modelGard Group has an internal risk capital model whichis used to manage risk at both group and entitylevel.

Gard does not use the internal risk capital forcalculation of solvency capital requirements forregulatory purposes.

E 4 Compliance with MMS/BSCRGard M&E has been in compliance with both theMinimum Margin of Solvency and the BSCR duringthe last financial year.

E 5 Any other informationThere is no other material information to bedisclosed.

E SIGNIFICANT EVENTS

There has been no significant event which hasimpacted or will impact, any information provided inthe most recent financial condition report.


Appendix 1 Abbreviations Gard companies

Gard companies

Below is the full names of all Gard companies withthe short names in brackets. The short name isbeing used in the report.

Insurance Companies• Gard P. & I. (Bermuda) Ltd. (“Gard Bermuda”)• Assuranceforeningen Gard – gjensidig – (“GardNorway”)• Gard Marine & Energy Limited (“Gard M&E”)• Gard Marine & Energy Insurance (Europe) AS(“Gard M&E Europe”)• Gard Reinsurance Co Ltd (“Gard Re”)• Hydra Gard Cell (“Hydra”)• Safeguard Guarantee Company Ltd. (“Safeguard”)

Branches to the insurance companies• Gard P. & I. (Bermuda) Ltd. Norwegian Branch(“Gard Bermuda NUF”)• Gard P. & I. (Bermuda) Ltd. Singapore Branch(“Gard Bermuda Singapore”)• Assuranceforeningen Gard – gjensidig – JapanBranch (“Gard Norway Japan”)• Assuranceforeningen Gard – gjensidig – HongKong Branch (“Gard Norway Hong Kong”)• Assuranceforeningen Gard – gjensidig – UKBranch (“Gard Norway UK”)• Gard Marine & Energy Limited Norwegian Branch(“Gard M&E NUF”)• Gard Marine & Energy Limited Singapore Branch(“Gard M&E Singapore”)• Gard Marine & Energy Limited Hong Kong Branch(“Gard M&E Hong Kong”)• Gard Marine & Energy Insurance (Europe) AS -UK Branch – (“Gard M&E Europe UK”)

Subsidiaries to Gard Marine & Energy Limited• Gard Marine & Energy Ltd.- Escritório deRepresentacao no Brasil Ltda.

Management company• Lingard Limited (“Lingard”)

Insurance Intermediary company• Gard AS (“Gard AS”)

Subsidiaries to Gard AS• Gard (Singapore) Pte. Ltd.• Gard (Japan) K.K.• Gard (UK) Limited• Gard (HK) Limited• OY Gard (Baltic) Ab• Gard (North America) Inc.• Gard (Greece) Ltd.

Property company• AS Assuransegården (“Assuransegården”)

All above companies and branches• Jointly referred to as Gard group (“Gard” or“group”)


Appendix 2 Other abbreviations

ALAE: ALLOCATED LOSS ADJUSTMENT EXPENSES

BBNI: BOUND BUT NOT INCEPTED

BEL: BEST ESTIMATE LIABILITY

BOF: BASIC OWN FUNDS

BSCR: BERMUDA SOLVENCY CAPITAL REQUIREMENT

CEO: CHIEF EXECUTIVE OFFICER

CFO: CHIEF FINANCIAL OFFICER

CIO: CHIEF INVESTMENT OFFICER

EBS: ECONOMIC BALANCE SHEET

ETC: ESTIMATED TOTAL CALL

FSA: FINANCIAL SERVICES AUTHORITY

GLT: GROUP LEADERSHIP TEAM

IBNR: INCURRED BUT NOT REPORTED

IFRS: INTERNATIONAL FINANCIAL REPORTING STANDARDS

IG: INTERNATIONAL GROUP

LOD: LOSSES OCCURRING DURING

MCR: MINIMUM CAPITAL REQUIREMENT

MMS: MINIMUM MARGIN OF SOLVENCY

ORSA: OWN RISK AND SOLVENCY ASSESSMENT

RM: RISK MANAGEMENT

SAA: STRATEGIC ASSET ALLOCATION

SCR: SOLVENCY CAPITAL REQUIREMENT

SVP: SENIOR VICE PRESIDENT

ULAE: UNALLOCATED LOSS ADJUSTMENT EXPENSES

VP: VICE PRESIDENT

QRT: QUANTITATIVE REPORTING TEMPLATE

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