2018 Financial Statements

SELECTA INSURANCE AND REINSURANCE COMPANY (CARIBBEAN) LTD.

Statements of Changes in Shareholder’s Equity Years Ended December 31, 2018 and 2017

Statements of Cash Flows

Years Ended December 31, 2018 and 2017

NOTE 1 — NATURE OF BUSINESS AND STATEMENT OF COMPLIANCE

Nature of Business

Selecta Insurance and Reinsurance Company (Caribbean) Ltd. (the Company) was established in December of 2013 within the Island of Nevis to carry on Insurance Business in the class of Reinsurance, under the Nevis International Insurance Ordinance of 2004, as amended. The purpose of the Company is to issue inward reinsurance treaties and facultative policies in the following risk categories: property, casualty, aviation, space, marine, cargo, guarantee, liability, energy, and specialty. The Company is 100% owned by RIGV&I Limited.

The financial statements were authorized for issuance by the Board of Directors on September 30, 2019.

Statement of Compliance

The accompanying financial statements have been prepared in accordance with International Financial Reporting

Standards (IFRS) as issued by the International Accounting Standards Board (IASB). When IFRS is silent, as it is in respect of the measurement of insurance products, the IFRS framework allows reference to another comprehensive body of accounting principles. In this instance, the Company defers to accounting principles generally accepted in  the United States (US GAAP).

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES

Functional and Presentation Currency

These financial statements are presented in United States Dollars ($) which is the Company’s functional and reporting currency.

Monetary assets and liabilities denominated in foreign currencies are translated into United States Dollars ($) at the closing rates of exchange prevailing at the reporting date. Foreign currency transactions are translated at the rates prevailing on the transaction dates. Foreign exchange gains or losses arising from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies are recognized in the statement of profit or loss and comprehensive income.

Basis of Presentation

The financial statements of the Company have been prepared on the accrual basis of accounting where revenue is recognized when earned and expenses are recognized when incurred.

The statements of financial position of the Company is presented in order of increasing liquidity.

Accounting Judgements and Estimates

The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting

estimates. It also requires management to exercise its judgment in the process of applying the Company’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in Note 2 below.

Grouping of Items

Certain items in the accompanying financial statements are grouped together to facilitate their understanding; however, whenever the amounts involved are material, the information is broken down in the related notes to the financial statements.

Reclassification

Certain amounts for the year ended December 31, 2017, have been reclassified in the comparative financial statements. These reclassifications had no effect on the net loss for that year.

Cash and Cash Equivalents

The Company classifies all highly liquid investments with a maturity of three months or less when purchased as cash and cash equivalents.

Investments

The Company’s investment security portfolio consists of a related party corporate bond, which has been classified as held to maturity based on the Company’s positive intent and ability to hold it to maturity. The investment security held to maturity is carried at amortized cost. The amortization of premiums and accretion of discounts are recognized in interest income using a method that approximates the effective interest method.

The Company’s investments are exposed to various risks, such as interest rate, market, currency and credit risks. Due to the level of risk associate with certain investments and the level of uncertainty related to changes in the value of investments, it is at least reasonably possible that changes in risks in the near term would materially affect investment assets reported in the financial statements.

Impairment of Financial Assets

Non-financial assets are subject to impairment tests whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Where the carrying value of an asset exceeds its recoverable amount, which is the higher of value in use and fair value less costs to sell, the asset is written down accordingly.

For the purpose of assessing value in use, the estimated future cash flows are discounted to their present value using discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

Where it is not possible to estimate the recoverable amount of an individual asset, the impairment is carried out on the asset’s cash-generating unit, which is the lowest group of assets in which the asset belongs for which there are separately identifiable cash flows. The Company has one cash-generating unit for which impairment testing is performed.

Impairment charges are included in the statement of profit or loss and comprehensive income, except to the extent they reverse gains previously recognized in other comprehensive income.

Insurance Contracts

Insurance contracts are those contracts where the Company (the Insurer) has accepted significant insurance risk from another party (the Policyholders) by agreeing to compensate the Policyholders if a specified uncertain future event (the Insured Event) adversely affects the Policyholders. These contracts are accounted for in accordance with IFRS 4, Insurance Contracts. As a general guideline, the Company determines whether it has significant insurance risk by comparing benefits that would be payable if the Insured Event did or did not occur. Insurance contracts can also transfer financial risk.

Once a contract has been classified as an insurance contract, it remains an insurance contract for the remainder of its lifetime, even if the insurance risk reduces significantly during this period, unless all rights and obligations are extinguished or expire.

Reinsurance

The Company assumes reinsurance risk in the normal course of business. Premiums and claims on assumed reinsurance are recognized as income and expenses in the same manner as they would be if the reinsurance were considered direct business.

Insurance and reinsurance receivables are recognized when due and are measured on initial recognition at the fair value of the consideration received or receivable. The carrying value of the insurance receivables is reviewed for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable, with the impairment loss recorded in the statements of profit or loss.

Revenue Recognition

Premium Revenue and Unearned Revenue

Premiums written comprise the premiums on contracts incepting in the financial year. Premiums written are stated gross of commissions’ payable to agents and exclusive of taxes levied on premiums. The Company earns premium income evenly over the term of the insurance policy generally using the pro rata method. The portion of the premium related to the unexpired portion of the policy at the end of the fiscal year is reflected in unearned premiums.

The underwriting results are recognized principally by reference to the annual accounting basis and are determined after making provisions for claims incurred. Income is accounted for in the year in which the risks are assumed. Premiums are recognized as revenue over the period of insurance coverage. Unearned premium represents that portion of premiums written and assumed that apply to the unexpired terms of policies in force.

Fair Value of Financial Instruments

The Company measures its financial assets and liabilities in accordance with IFRS. The carrying amounts reported on the balance sheet for cash and cash equivalents, premium receivable, prepaid reinsurance and reinsurance payable approximate the respective fair value. This is generally due to their short maturities.

Provisions

A provision is recognized if, as a result of a past event, the Company has a present legal or constructive obligation that can be estimated reliably and it is probable that an outflow of economic benefits will be required to settle the obligation.

Loss and Loss-Related Expenses

The reserves for unpaid losses and loss adjustment expenses are estimated using individual case-basis valuations and statistical analysis. Management believes that the reserves for losses and loss adjustment expenses are adequate to cover the ultimate cost of losses and loss adjustment expenses thereon. However, because of the limited population of insured risk, limited historical data, economic conditions, judicial decisions, legislation, and other reasons, actual loss experience may not conform to the assumptions used in determining the estimated amounts for such liability at the financial position date. Loss and loss adjustment expenses reserve estimated are reviewed periodically and adjusted as necessary as experience develops or new information becomes known. As adjustments to these estimates become necessary, such adjustments are reflected in current operations.

Critical Accounting Judgements and Estimates

The Company’s financial statements and its financial results are influenced by accounting policies, assumptions, estimates and management judgement, which necessarily have to be made in the course of preparation of the financial statements. Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The Company makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the actual results. The estimates that have a significant risk of causing material adjustments to the carrying amounts of assets within the next financial year are discussed below:

• (a) Held-to-maturity- investments

In classifying non-derivative financial assets with fixed or determinable payments and fixed maturity, such as life insurance policy, as held-to-maturity investments the Company evaluates its intention and ability to hold such investments up to maturity. Management has confirmed its intention and determined its ability to hold investments up to maturity. If the Company fails to keep these investments to maturity other than for specific circumstances as allowed under the standards, it will be required to reclassify the whole class as available-for-sale financial assets. In such a case, the investments would therefore be measured at fair value, not amortized cost.

• (b) Estimation of the provision for losses

There are several sources of uncertainty that need to be considered in the estimate of a loss provision liability for claims incurred prior to the date of the statement of financial position. For insurance contracts, estimates have to be made both for the expected ultimate cost of claims reported at the reporting date. It can take a significant period of time before the ultimate claims cost can be established with certainty. Management has determined the current year loss provisions based on an individual case-basis valuation  and statistical analysis.

NOTE 3 – FUTURE ACCOUNTING AND REPORTING CHANGES 

Future accounting and reporting changes that may impact the Company’s financial reporting and disclosure are as follows:

• (a)    Proposed Amendments to IFRS 4 “Insurance Contracts”

In December, 2015, the IASB issued proposed amendments to IFRS 4 which address concerns about the different effective dates of IFRS 9 and the new insurance contracts standard that will replace IFRS 4. The amendments propose an optional temporary exemption from applying IFRS 9 “Financial Instruments” that would be available to companies whose predominant activity is to issue insurance contracts. The amendments would permit deferral of adopting IFRS 9 until annual periods beginning on or after January 1, 2021 or until the new insurance contract standard becomes effective if at an earlier date. The amendments also propose an option for entities issuing insurance contracts within the scope of IFRS 4 to apply the “overlay approach” to the presentation of qualifying financial assets, removing from net income and presenting instead in OCI, the impact of measuring Fair Value Through Profit and Loss (“FVTPL”) financial assets at fair value through profit or loss under IFRS 9 when they would not have been so measured under IAS 39. The Company is assessing the impact of these proposed amendments.

• (b)    IFRS 17 “Insurance Contracts”

In May 2017, the IASB issued IFRS 17 that will replace IFRS 4 on its effective date for accounting periods beginning on or after January 1, 2021. IFRS 17 is the first comprehensive and truly international IFRS Standard establishing the accounting for insurance contracts. Under the IFRS 17 model, insurance contract liabilities will be calculated as the present value of future insurance cash flows with a provision for risk. The discount rate will reflect current interest rates. If the present value of future cash flows would produce a gain at the time a contract is issued the model would also require a «contractual service margin» to offset the day 1 gain. The contractual service margin would amortize over the life of the contract. There would also be a new income statement presentation for insurance contracts, including a revised definition of revenue, and additional disclosure requirements.

• (c)    IFRIC 23 “Uncertainty Over Income Tax Treatment”

In June, 2017, the IASB issued IFRIC that will clarify the accounting for uncertainties in income taxes on its effective date for annual periods beginning on or after January 1, 2019. The standard is to bring unity to the practice regarding the recognition and measurement of deferred tax assets and liabilities and current taxes as defined by paragraph 5 of IAS 12 Income Taxes.

NOTE 4 — REINSURANCE

Certain premiums and losses are ceded to other unrelated insurance companies through quota share reinsurance arrangements and various excess of loss reinsurance agreements. The ceded reinsurance agreements are intended to provide the Company with the ability to minimize its exposure to losses within its surplus resources. These reinsurance agreements do not relieve the Company from its primary obligation to its policyholder. The Company remains liable to its policyholder to the extent that any reinsurer does not meet its obligations for reinsurance ceded to it under reinsurance contracts. Therefore, the Company is subject to credit risk with respect to the obligations of its reinsurers, and any failure on the part of these reinsurers could have a material adverse effect on the Company’s business, financial condition, and results of operations.

The effects of reinsurance on premiums written and earned were as follows:

NOTE 5 – FAIR VALUE MEASUREMENTS

The fair value of financial instruments is measured according to a fair value hierarchy which reflects the significance of market inputs in the valuation. The hierarchy is described and discussed below.

Level 1

Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access.

Level 2

Inputs to the valuation methodology include:

• • Quoted prices for similar assets or liabilities in active markets;
  • Quoted prices for identical or similar assets or liabilities in inactive markets;
  • Inputs other than quoted prices that are observable for the asset or liability;
  • Inputs that are derived principally from or corroborated by observable market data by correlation or other

Level 3

Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The methods described may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation  methods  are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine fair value of certain financial instruments could result in a different fair value measurement at the reporting date.

The following table sets forth the level within the fair value hierarchy, for the Company’s investments at fair value as of December 31:

NOTE 6 – INVESTMENTS

The portfolio of investments is carried at their fair market value. Market values and unrealized gains and losses pertaining to the investment portfolio as of December 31:

NOTE 7 – CASH AND CASH EQUIVALENTS

 The portfolio cash and cash equivalents are comprised of the following as of December 31:

NOTE 8 – RELATED PARTIES

As of December 31, 2018 and 2017, the Company has amounts due from affiliates of $147,240 and $35,938, respectively. These amounts consist of fees and expenses paid by the Company on behalf of these affiliates.

The Company assumes premiums from Selecta Insurance and Reinsurance Company (Moscow) Ltd. which is an affiliate by means of the same ultimate beneficial owner and management team. For the years ended December 31, 2018 and 2017, the Company assumed premiums totaling $0 and $670,692, respectively from Selecta Insurance and Reinsurance Company (Moscow) Ltd. As of December 31, 2018 and 2017, the Company is the holder of a bond issued by Selecta Insurance and Reinsurance Company (Moscow) Ltd. with principle and carrying value of $1,007,868 and $775,663, respectively yielding interest of 30% per annum, which appropriately includes accrued interest totaling $477,468 and $245,263, respectively.

NOTE 9 — LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES

 Activity in the liability for unpaid loss and loss adjustment expense reserves is summarized for the year ended December 31:

As a result of changes in estimates of insured events in prior years, the provision for losses and loss adjustment expenses decreased by $435,411 and $439,600 in 2018 and 2017, respectively. Typically, increases or decreases of this nature occur as a result of claim settlements during the current year, and additional information received regarding individual claims causes changes from the original estimates of the cost of these claims. Recent loss development trends are also taken into account in evaluating the overall adequacy of the unpaid loss and loss adjustment expenses.

NOTE 10 – GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses are comprised of the following for the years ending December 31:

NOTE 11 – RISK MANAGEMENT

The Company’s exposure to potential loss from financial assets and insurance contracts primarily relates to governance risk, regulatory risk, insurance risk, financial risk, and operational risk. The Company’s objectives, policies and processes for managing those risks and the methods used to measure them are summarized below:

Governance Framework

Professional and effective risk management is essential to maintaining a favorable financial performance for all insurance companies.

The Company evaluates every risk underwritten by using a rating scale system and overall knowledge of the account.

Regulatory Framework

Regulators are primarily interested in protecting the rights to the policyholders and monitor them closely to ensure that the Company is satisfactorily managing affairs for their benefit. At the same time, regulators are also interested in ensuring that the Company maintains an appropriate solvency position to meet unforeseen liabilities arising from economic shocks or external disasters.

The Company is regulated by the Registrar of Insurance of the Nevis Financial Services Department (the NFSD). The NFSD regulates, supervises and inspects all insurance companies, insurance managers and other intermediaries operating within the island of Nevis to ensure compliance with the provisions established in the Nevis International Ordinance, 2004 (as amended).

The regulations not only prescribe approval and monitoring activities, but also impose certain restrictive provisions (e.g. capital adequacy) to minimize the risk of default and insolvency on the part of insurance companies to meet unforeseen liabilities as they arise.

Insurance Risk

The principal risk the Company faces under insurance contracts is that the actual claims and benefit payments or the timing thereof, differ from expectations. Therefore, the objective of the Company is to ensure sufficient reserves are available to cover the claims and payments.

In order to minimize the Company’s exposure arising from large claims, in the normal course of business, the Company may enter into contracts with other parties for reinsurance purposes. Such reinsurance is to offset a portion of the claims exposure that may arise. The Company has also limited its exposure by imposing maximum claim amounts on its insurance contracts and limiting the period when claims should be reported.

Financial Risk

The Company’s principal financial instruments are financial assets held to maturity and cash and cash equivalents.

The main risks arising from the Company’s financial instruments are interest rate risk, foreign currency risk, and credit risk. Management reviews and agrees policies for managing each of these risks and they are summarized below:

Interest Rate Risk

Interest rate risk arises from the possibility that changes in interest rates will affect future profitability or the fair values of financial instruments. The Company is exposed to interest rate risk on some of its investments and cash and cash equivalents. The Company limits interest rate risk by monitoring changes in interest rates in the currencies in which its cash and interest bearing investments and borrowings are denominated.

Foreign Currency Risk

Foreign currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates.

Management believes that there is minimal risk of significant losses due to exchange rate fluctuations since predominantly all of the business transactions are in U.S. Dollars and U.S. Dollars pegged currencies and consequently the Company does not hedge its foreign currency exposure.

Credit Risk

Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss.

The maximum exposure to credit risk before any credit enhancements is the carrying amount of the financial assets.

Operational Risk

Operational risk is the risk of loss arising from system failure, human error, fraud or external events. When controls fail to perform, operational risk can cause damage to reputation, have legal or regulatory implications or can lead to financial loss. The Company cannot expect to eliminate all operational risks, but by initiating an effective control framework and by monitoring and responding to potential risks, the Company is able to manage risk.

The Company contracts for its supervisory, general and administrative and insurance services with service providers and professional organizations. As a result the Company has no employees of its own. The financial statements reflect the costs of the various service providers.

Capital Management

The Company’s objective when managing capital is to comply with the insurance capital requirements which are set and regulated in accordance with the provision of the Ordinance. In order to be licensed as a reinsurance business, a reinsurance company is required to have a minimum fully paid up capital of $75,000. The Company fully complied with this requirement during the reported financial period.

Minimum Margin of Solvency

The Company’s ability to pay dividends and other distributions is subject to statutory restriction. As a licensed reinsurer, the Company is required under the terms of the Ordinance to maintains a minimum margin of solvency (the amount by which its “allowable assets” exceed its liabilities) equivalent to the greater of the minimum amount of contributed capital or 20% of the net retained premium up to $5,000,000. Net premiums in excess of $5,000,000 shall have an additional required solvency margin of $1,000,000 plus 10% of the amount by which the net retained premium exceeds $5,000,000.

The Company’s minimum margin of solvency is as follows:

NOTE 12 – CONTINGENCIES AND COMMITMENTS

In June 2019, a loss notification was made to the Company by PSTV Energy DMCC (“PSTV”), a policyholder, in relation to Trade Credit Insurance policy covering a customer of the Sonara refinery in the Cameroons. The claim of $15.3 million was submitted for the fire incident at the refinery which closed down the facility. After evaluating the claims facts and supporting details, the Company has rejected the claim on a number of bases that includes i) the cause of the fire was apparently an act of terrorism and thus a political risk and such risks are excluded under the Company’s policy, ii) PSTV failed to lodge a surety to cover its exposure to any loss thus mitigating its financial exposure pursuant to the policy terms, iii) the loss submission was premature under the policy provisions as there has been no formal certification of the quantum of the loss, iv) it appears that PSTV may have other insurance policies which would cover such loss and those policies would be triggered before the Company’s policy. Further, there is a financial limitation in the Company’s policy of $2 million per loss. No legal action has been commenced by PSTV. Hence, management believes that there is no adverse outcome expected from this claim and accordingly no provision is required in the Company’s financial statements.

NOTE 13 – SUBSEQUENT EVENTS

Subsequent events are events or transactions that occur after the financial statement date but before the financial statements are issued or available to be issued. Recognized subsequent events consist of events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet including the estimates inherent in the process of preparing the financial statements. Non-recognized subsequent events consist of events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date. Management has evaluated subsequent events through September 30, 2019, the date of which the financial statements were available to be issued.