Notes to Consolidated Financial Statements

31 December 2018 and 2017

(Expressed in thousands of United States Dollars)

Tokio Millennium Re AG (the ‘Company’ or ‘TMR’), formerly known as Tokio Millennium Re Ltd., is a Swiss-based reinsurance company and is licensed and regulated by the Swiss Financial Market Supervisory Authority (‘FINMA’). TMR’s registered office is located at Beethovenstrasse 33, 8002 Zurich, Switzerland. The Company is a wholly owned subsidiary of Tokio Marine and Nichido Fire Insurance Co., Ltd. The ultimate parent company is Tokio Marine Holdings, Inc., a company incorporated in Japan.

The Company was formed in Bermuda on 15 March 2000 and redomesticated to Switzerland on 15 October 2013. TMR has become subject to Swiss law without liquidation and re-establishment.

The Company participates in various excess of loss property catastrophe, workers’ compensation catastrophe, crop/hail and terrorism reinsurance contracts. Catastrophe reinsurance covers unpredictable events such as hurricanes, windstorms, hailstorms, earthquakes, fires, freezes, floods and other man-made or natural disasters. The Company also offers non-catastrophe property and casualty covers on both proportional and per risk excess of loss treaties, with an emphasis on the higher frequency/lower severity category of exposures. Casualty lines of business include motor, general liability, excess casualty, auto liability, employer’s liability, professional liability, workers’ compensation, directors and officers, errors and omissions and medical malpractice. In addition, TMR assumes credit insurance contracts.

The Company also provides non-traditional customised reinsurance and financial solutions for its clients’ world-wide property and casualty exposures on both a treaty and facultative basis.

A branch in the United Kingdom (‘TMRUK’) was formed on 17 September 2014. TMR received authorisation from the Prudential Regulation Authority (‘PRA’) to operate as a branch in the United Kingdom on 8 April 2015. TMRUK commenced writing business on 1 July 2015, which included the new and renewal business formerly written by TMR’s affiliate, Tokio Millennium Re (U.K.) Ltd.

9 | Tokio Millennium Re AG – TMR

Notes to Consolidated Financial Statements (continued)

31 December 2018 and 2017

(Expressed in thousands of United States Dollars)

The Company formed a branch in the United States (‘TMRUS’) and was issued a licence by the New York State Department of Financial Services on 2 June 2014. TMRUS was established to further expand TMR’s non-catastrophe portfolio and focuses on non-catastrophe product lines.

TMR Management, Inc. (‘TMRM’), a wholly owned subsidiary of the Company, was incorporated in the State of Connecticut, United States of America, on 18 December 2013, with an initial share capital of USD 1,000 (authorised and issued shares of 1,000 at USD 1 per share). TMRM, pursuant to a management agreement with TMR, acts as a manager for TMRUS.

On 15 October 2013, the Company formed a branch in Bermuda and is licensed as a Class 3B reinsurer under the Insurance Act, 1978, of Bermuda and related regulations to write all classes of property and casualty business. The Company’s branch in Switzerland, originally formed on 31 August 2010, was discontinued as part of the redomestication of the Company effective 15 October 2013.

Tokio Millennium Agency Ltd. (‘TMA’), a wholly owned subsidiary of the Company, was incorporated in Bermuda on 28 May 2003, with an initial share capital of USD 12,000. Its primary activity was to facilitate risk swap agreements between Tokio Marine and Nichido Fire Insurance Co., Ltd. and other insurance companies for which it received agency fees. In 2012, TMA was renamed Tokio Solution Management Ltd. (‘TSM’). The Bermuda Monetary Authority (‘BMA’) issued a licence to TSM to conduct business as an insurance management company on 24 August 2012.

TSM manages and facilitates transactions through Shima Reinsurance Ltd. (‘Shima Re’) or other third party vehicles. In addition, TSM facilitates clients’ fronting and leveraging agreements and also provides professional claims and loss reserving services.

10 | Tokio Millennium Re AG – TMR

Notes to Consolidated Financial Statements (continued)

31 December 2018 and 2017

(Expressed in thousands of United States Dollars)

The Company’s wholly owned subsidiary, Shima Re, a Class 3 segregated accounts company, was incorporated under the laws of Bermuda on 30 July 2012 and registered under the Segregated Companies Act of 2000. With TSM as its manager, Shima Re provides its clients with a platform to transform either fronted or direct reinsurance transactions.

The Company formed a branch in Australia on 22 October 2010. The Australian Prudential Regulation Authority (‘APRA’) issued a licence to the Company’s Australian branch to conduct business as a general insurer on 1 March 2011.

The consolidated 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 certain insurance products, the IFRS framework (IFRS 4, Insurance Contracts ) allows reference to another comprehensive body of accounting principles. Accordingly, to the extent that IFRS 4 does not specify the recognition or measurement of insurance contracts, transactions reported in these consolidated financial statements have been prepared in accordance with another comprehensive body of accounting principles for insurance contracts, namely U.S. GAAP.

The consolidated financial statements are presented in U.S. Dollars, which is the Company’s reporting currency. They are compiled on a going concern basis. The consolidated financial statements have been prepared on the historical cost basis. See Note 3 for exceptions to this.

The preparation of the consolidated financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected.

The most significant estimate made by management is in relation to outstanding losses and loss expenses. Estimates in relation to losses and loss expenses are discussed in Note 3(b) – Insurance contracts. Also refer to Note 17 – Insurance liabilities.

The financial statements consolidate the accounts of the Company, its branches and its wholly owned subsidiaries. A subsidiary is an entity that is controlled by TMR. TMR controls an entity when it is exposed to or has the rights to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The financial statements of the subsidiaries are included in the consolidated financial statements from the date on which control commences until the date on which control ceases. The financial statements of the subsidiaries are prepared for the same reporting year as the parent company, using consistent accounting policies. All significant intercompany transactions and balances are eliminated on consolidation.

11 | Tokio Millennium Re AG – TMR

Notes to Consolidated Financial Statements (continued)

31 December 2018 and 2017

(Expressed in thousands of United States Dollars)

Classification

Contracts that transfer significant insurance risk are considered insurance contracts, while contracts without significant insurance risk are classified as investment contracts.

Reinsurance premiums assumed and acquisition costs

Reinsurance premiums assumed are recorded on the accruals basis and are included in income over the period of exposure to risk with the unearned portion deferred in the consolidated balance sheet. Premiums assumed are stated before the deductions of brokerage, commissions and taxes.

For excess of loss contracts, the ultimate premium is estimated at contract inception. Subsequent premium adjustments, if any, are recorded in the period in which they are determined. For proportional treaties, the amount of premium is normally estimated at inception by management based on information provided by the ceding company. The Company accounts for such premium using initial estimates, which are reviewed regularly with respect to the actual premium reported by the ceding company. Changes in estimates are recognised in the period in which they are determined.

For certain property catastrophe contracts, the Company earns reinstatement premiums upon the occurrence of a loss under the reinsurance contract. Reinstatement premiums are calculated in accordance with the contract terms based upon the ultimate loss estimate associated with each contract.

Premiums for retroactive exposures in reinsurance contracts are earned at the inception of the contract, as all of the underlying loss events covered by these exposures occurred in the past. Any underwriting profit at inception related to retroactive exposures in a reinsurance contract is deferred and recognised over the estimated future payout of the outstanding losses and loss expenses. Any underwriting loss at inception related to retroactive exposures in a reinsurance contract is recognised immediately.

Premiums receivable from brokers, insureds and cedants are recognised when due and recorded net of commissions, brokerage, premium taxes and other levies on premiums, unless the contract specifies otherwise. These balances are reviewed for impairment, with any impairment loss recognised as an expense in the period in which it is determined.

Acquisition expenses, mainly commissions and brokerage, related to unearned premiums are deferred and amortised to income over the periods in which the premiums are earned. The method followed in determining the deferred acquisition expenses limits the amount of the deferral to its realisable value, by giving consideration to losses and expenses expected to be incurred as premiums are earned.

Where applicable, no-claims bonuses and profit commissions are accrued based on claims experience.

Reinsurance premiums ceded

Reinsurance premiums ceded comprise the cost of reinsurance contracts entered into. Premiums ceded are accounted for in the period in which the contract is bound, and are similarly earned over the period of exposure to risk, with the unearned portion being deferred in the consolidated balance sheet as prepaid reinsurance premiums.

Premiums payable to agents and brokers are recognised when due.

12 | Tokio Millennium Re AG – TMR

Notes to Consolidated Financial Statements (continued)

31 December 2018 and 2017

(Expressed in thousands of United States Dollars)

Outstanding losses and loss expenses

Losses and loss expenses paid are recorded when advised by the ceding insurance companies. Outstanding losses comprise estimates of the amount of reported losses and loss expenses received from the ceding insurance companies plus a provision for losses incurred but not reported (‘IBNR’). The IBNR provision is estimated by management based on reports from industry sources, including initial estimates of aggregate industry losses, individual loss estimates received from ceding companies and brokers, output from commercially available catastrophe loss models and actuarial analysis using historical data available to the Company on the business assumed together with industry data.

Given the inherent nature of major catastrophic events, considerable uncertainty underlies the assumptions and associated estimated reserve for losses and loss expenses. These estimates are reviewed regularly and, as experience develops and new information becomes known, the reserves are adjusted as necessary. Such adjustments, if any, are reflected in income in the period in which they are determined.

Due to the inherent uncertainty in estimating the liability for losses and loss expenses, there can be no assurance that the ultimate liability will not be settled for a significantly greater or lesser amount than that recorded.

Based on the current assumptions used, management believes that the Company’s recorded amount is a reasonable estimate of the ultimate cost of losses incurred to the consolidated balance sheet date. Reserves for non-catastrophe property and casualty covers are based on individual claims, case reserve and other reserve estimates reported by insureds and ceding companies, as well as the Company’s actuarial estimates of ultimate losses. Inherent in the estimates of ultimate losses are expected trends in claim severity and frequency and other factors that could vary significantly as claims are settled. The Company does not have the benefit of a significant amount of its own historical experience with non-catastrophe lines of business. Accordingly, the setting and reserving for incurred losses in these lines of business could be subject to greater variability.

Ultimate losses may vary materially from the amounts provided in the consolidated financial statements. These estimates are reviewed regularly and, as experience develops and new information becomes known, the reserves are adjusted as necessary. Such adjustments, if any, are reflected in the consolidated statement of comprehensive income in the period in which they become known and are accounted for as changes in estimates.

Amounts recoverable from reinsurers are estimated in a manner consistent with the underlying liabilities. Reinsurance recoverable on dual trigger reinsurance contracts require the Company to estimate its ultimate losses applicable to these contracts, as well as to estimate the ultimate amount of industry losses that will be reported by the applicable statistical reporting agency, as per contract terms.

Liability adequacy tests

At each balance sheet date, the Company performs a liability adequacy test using current best estimates of future cash outflows generated by its reinsurance contracts. If, as a result of these tests, the carrying amount of the Company’s reinsurance liabilities is found to be inadequate, the deficiency is charged to income for the period, initially by writing off deferred acquisition costs and subsequently by establishing a provision.

13 | Tokio Millennium Re AG – TMR

Notes to Consolidated Financial Statements (continued)

31 December 2018 and 2017

(Expressed in thousands of United States Dollars)

Cash and cash equivalents

The Company considers all cash at bank and on hand, short term deposits and other short term highly liquid investments that are subject to insignificant risk of changes in fair value as cash and cash equivalents. Cash equivalents are financial investments with less than three months to maturity at the date of acquisition.

Cash and cash equivalents are carried in the consolidated balance sheet at amortised cost. Carrying amounts approximate fair value due to the short term nature and high liquidity of the instruments.

Funds withheld

Funds withheld are contractual receivables due to reinsurers from their clients; they are valued at original cost (nominal amount) at the date of acquisition. In addition, also included in funds withheld are amounts arising from the application of the deposit method of accounting. Appropriate allowance is made for credit risks.

Investments

The Company’s investments comprise short term investments and investments in fixed interest, equity and other securities and catastrophe bonds. The classification is determined at the time of initial purchase. Purchases and sales of investments are recognised at fair value on the trade date. Transaction costs are treated in accordance with the investment classification.

The cost of investments is adjusted for amortisation of premiums and discounts. Realised gains and losses on investments are recognised in net investment income using the specific identification method (as securities are purchased by lot). Interest income on investments is accrued to the consolidated balance sheet date.

Investments are derecognised when the Company has transferred substantially all of the risks and rewards of ownership. On derecognition of an available for sale investment, previously recorded unrealised gains and losses are removed from accumulated other comprehensive income in shareholder’s equity and included in current period income.

The Company, together with its investment managers, reviews investments on an individual security basis for evidence of impairment. This is performed on a quarterly basis as part of the financial close process. Impairment losses are recognised when there is objective evidence that the Company will be unable to collect all amounts due according to contractual terms of the individual security.

An available for sale debt security is impaired if there is objective evidence that a loss event has occurred after initial recognition of the security and up to the relevant consolidated balance sheet date, and that loss event has negatively affected the estimated future cash flows, i.e., amounts due according to the contractual terms of the security are not considered collectible. Impairment losses on available for sale debt securities are recognised by reclassifying the losses from accumulated other comprehensive income to the consolidated statement of comprehensive income. The amount reclassified is the difference between the amortised cost and the current fair value, less any impairment loss previously recognised in profit or loss. If the fair value of an impaired available for sale debt security subsequently increases and the increase can be related objectively to an event occurring after the impairment loss was recognised, then the impairment loss is reversed through profit or loss; otherwise it is reversed through other comprehensive income.

14 | Tokio Millennium Re AG – TMR

Notes to Consolidated Financial Statements (continued)

31 December 2018 and 2017

(Expressed in thousands of United States Dollars)

Investments (continued)

An available for sale equity security is considered to be impaired if there is objective evidence that the cost may not be recovered. Objective evidence that the cost may not be recovered, in addition to qualitative impairment criteria, includes a significant or prolonged decline in the fair value below cost. If an available for sale equity security is impaired, any further declines in the fair value at subsequent reporting dates are recognised as impairments. Therefore, at each reporting period, for an equity security that was determined to be impaired, additional impairments are recognised for the difference between the fair value and the original cost basis, less any previously recognised impairment. Reversals of impairments of available for sale equity securities are not recorded through the income statement but recycled out of other comprehensive income when sold.

The identification of impairment is an inherently uncertain process involving various assumptions and factors, including the financial condition of the counterparty, expected future cash flows, observable market prices, etc. Estimates and assumptions are based on management’s judgment and other information available prior to the issuance of the consolidated financial statements. Significantly different results can occur as circumstances change and additional information becomes known.

The Company’s investments are managed following prudent standards of diversification. Specific provisions limit the allowable holdings of a single issue and issuers.

Short term investments

Short term investments represent bank deposits and investments in money market funds with an original term of greater than 90 days but less than one year. The carrying value reported in the consolidated balance sheet for these short term investments approximates their fair value due to the short term nature of the investments.

Fixed interest securities – available for sale

This consists of debt securities which are classified as available for sale and are carried at fair value, with any unrealised gains and losses (difference between amortised cost and fair value), with the exception of currency valuation differences, included in accumulated other comprehensive income as a separate component of equity. The amortisation and currency valuation differences are included in profit or loss.

The fair value of fixed interest securities is based on prices provided by internationally recognised independent pricing services. The independent pricing sources obtain actual transaction prices for securities that have quoted prices in active markets. For securities that are not actively traded, the pricing services typically uses ‘matrix pricing,’ which uses observable inputs including reported trades, benchmark yields, broker/dealer quotes, interest rate spreads, prepayment spreads and other such inputs from market sources to determine a reasonable fair value.

Investments in catastrophe bonds – available for sale

The Company’s investments in catastrophe bonds are classified as available for sale and are carried at fair value, with any unrealised gains and losses (difference between amortised cost and fair value), with the exception of currency valuation differences, included in accumulated other comprehensive income as a separate component of equity. The amortisation and currency valuation differences are included in profit or loss.

15 | Tokio Millennium Re AG – TMR

Notes to Consolidated Financial Statements (continued)

31 December 2018 and 2017

(Expressed in thousands of United States Dollars)

Investments (continued)

Equity securities – available for sale

The Company’s equity securities are classified as available for sale and are carried at fair value, with any unrealised gains and losses (including currency valuation differences), included in accumulated other comprehensive income as a separate component of equity.

Other securities – fair value through profit and loss

Other securities consist of investments in investment funds organised as limited partnerships, investments in funds organised as limited liability companies and investment in an absolute return fund. These are designated at fair value through profit or loss from the date of acquisition.

Derivative financial instruments

From time to time, the Company enters into catastrophe swap derivatives, under which certain catastrophe reinsurance exposures are ceded to or assumed from the swap counterparty. The Company does this to facilitate institutional investors who seek to diversify their portfolios by adding non-correlated reinsurance risks to their portfolio. The Company transforms such risks by selling reinsurance and buying derivatives from the institutional investors, or vice versa. The Company earns a fee for its role in facilitating such transactions. Since there is no right of offset, all transactions are presented on a gross basis in the consolidated financial statements. Although the derivatives provide an economic hedge against the assumed or ceded reinsurance contract, the Company designates its derivatives as non-hedging derivative instruments based upon criteria established by IAS 39, Financial Instruments: Recognition and Measurement . Catastrophe swaps are recorded at fair value with changes in fair values recorded in the consolidated statement of comprehensive income. Fair value is estimated by management primarily based on the unexpired period of risk, an evaluation of the probability of loss and other unobservable inputs. The Company’s catastrophe swap derivatives are initially priced at fair value in a non-stressed market and amortisation reflects the change in fair value in the absence of any loss events. The inputs for catastrophe swap derivatives are purely based on management’s evaluation and are unobservable.

Receivables

The Company’s receivables have fixed or determinable payments and are carried at cost less any provision for impairment in value. Refer to Note 3(b) – Insurance contracts for discussion on receivables arising from reinsurance contracts.

Impairment of financial assets

Objective factors that are considered when determining whether a financial asset or group of financial assets may be impaired include, but are not limited to, the following:

16 | Tokio Millennium Re AG – TMR

Notes to Consolidated Financial Statements (continued)

31 December 2018 and 2017

(Expressed in thousands of United States Dollars)

Certain contracts do not transfer sufficient insurance risk and are accounted for using the deposit method of accounting. Management exercises judgment in determining whether contracts contain sufficient risk to be accounted for as reinsurance contracts. Under the deposit method of accounting, the deposit asset or liability is initially measured based on the consideration paid or received. In subsequent periods, the deposit asset or liability is adjusted by calculating the effective yield on the deposit to reflect actual receipts or payments to date and future expected receipts or payments.

The Company earns fee income for the provision of these contracts. Fee income is based upon the terms of the contracts, with the unearned portion deferred in the consolidated balance sheet, as deferred fee income. The revenue and expense recorded for such contracts are included in other underwriting income.

Property and equipment are stated at cost less accumulated depreciation calculated on a straight-line basis over the estimated useful lives of the assets. The specific depreciable rates of the significant asset classes are as follows:

Intangible assets are stated at cost less amortisation calculated on a straight-line basis over the estimated useful lives of the assets. The Company’s intangible assets comprise of computer software with a specific amortisation rate of 3 years.

Assets that are subject to amortisation are tested for impairment when there is an indication of a possible impairment at the reporting date.

Objective factors that are considered when determining whether a non-financial asset (such as an intangible asset or item of property and equipment) or group of non-financial assets may be impaired include, but are not limited to, the following:

An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash generating units).

17 | Tokio Millennium Re AG – TMR

Notes to Consolidated Financial Statements (continued)

31 December 2018 and 2017

(Expressed in thousands of United States Dollars)

Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, to the extent that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior periods. A reversal of an impairment loss is recognised as income immediately.

The Company reviews receivables on a quarterly basis and a bad debt provision is recorded only to the extent that repayment is unlikely or no longer expected in full amount. In addition, the Company considers known and emerging credit events to determine if other provisions are necessary.

The consolidated financial statements of the Company are presented in U.S. Dollars.

Foreign currency transactions are recorded in the functional currency for each entity using the exchange rates prevailing at the dates of the transactions, or at the average rate for the period when this is a reasonable approximation. Monetary assets and liabilities denominated in foreign currencies are translated at period end exchange rates. The resulting exchange differences on translation are recorded in profit or loss. Non-monetary assets and liabilities carried at historical cost denominated in a foreign currency are translated at historic rates. Non-monetary assets and liabilities carried at fair value denominated in a foreign currency are translated at the exchange rate at the date the estimated fair value was determined, with resulting exchange differences recorded in accumulated other comprehensive income in shareholder’s equity.

The functional currency of the Bermuda and U.S. branches is the U.S. Dollar. The functional currencies of the Company’s Swiss, Australian and U.K. operations are the Euro, Australian Dollar and Pound Sterling, respectively. In translating the financial results of those entities whose functional currency is other than the U.S. Dollar, reporting currency, assets and liabilities are converted into U.S. Dollars using the rates of exchange in effect at the balance sheet dates, and revenues and expenses are converted using the average foreign exchange rates for the period. The effect of translation adjustments are reported in the consolidated balance sheet and consolidated statement of changes in shareholder’s equity as a foreign currency translation adjustment, a separate component of accumulated other comprehensive income.

All leases are classified as operating leases and are not recognised in the consolidated balance sheet. Rentals payable under operating leases are charged to income on a straight-line basis over the lease term.

In 2008, the Board approved a compensation program for employees. In the first quarter of 2016, the Compensation and Nominations Committee of the Board approved an amendment to the compensation program that changed the metric used to calculate the value of awards. Under the amended long term incentive compensation plan, the value of awards is based on the difference between the actual profit and target profit over the performance period. The accounting for the compensation program is in accordance with IAS 19, Employee Benefits .

18 | Tokio Millennium Re AG – TMR

Notes to Consolidated Financial Statements (continued)

31 December 2018 and 2017

(Expressed in thousands of United States Dollars)

The Swiss operation and the Australia, U.S. and U.K. branches of the Company operate in jurisdictions where they are subject to taxation. Income taxes have been provided for in accordance with the provisions of IAS 12, Income Taxes . Current and deferred income taxes are charged or credited to profit or loss. Deferred income taxes are provided for all temporary differences between the bases of assets and liabilities used in the consolidated balance sheet and those used in the various jurisdictional tax returns. Deferred tax assets are recognised for unused tax losses, unused tax credits and deductible temporary differences to the extent that it is probable that future taxable profits will be available against which they can be used. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised.

The Company recognises a tax benefit relating to uncertain tax positions only where the position is probable to be sustained assuming examination by tax authorities. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, using tax rates enacted or substantively enacted at the reporting date.

Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes relate to the same fiscal authority.

Defined contribution plans

TMR has defined contribution plans where the Company pays fixed contributions into a separate entity from which post-employment and other benefits are paid. The Company has no legal or constructive obligation to pay further contributions if the plan does not hold sufficient assets to pay employees the benefits relating to employee service in the current and prior periods. Payments to the defined contribution plans are recognised as an expense when employees have rendered services entitling them to the contributions. This is generally in the year of contribution. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in future payments is available.

Defined benefit plan

The Company also has a defined benefit post-retirement plan in relation to the Swiss operation. The net retirement benefit obligation in relation to this plan is based on, among other things, assumptions of the discount rate, estimated return on plan assets and salary increases. The cost of providing benefits is determined using the Projected Unit Credit Method, with actuarial valuations being carried out at the end of each reporting period. Actuarial gains and losses are recognised in other comprehensive income. Past service costs are recognised immediately in the period of a plan amendment. The Company recognises the overfunded or underfunded status of the defined benefit post-retirement plan as an asset or liability in its consolidated balance sheet and recognises changes in the funded status in the year in which the changes occur through other comprehensive income. Any asset resulting from this calculation is limited to the sum of any cumulative unrecognised net losses and the present value of any economic benefits available in the form of refunds or reductions in future contributions to the plan.

19 | Tokio Millennium Re AG – TMR

Notes to Consolidated Financial Statements (continued)

31 December 2018 and 2017

(Expressed in thousands of United States Dollars)

Accounting standards and amendments issued but not yet adopted

Accounting standards issued and amendments to published standards that are not yet effective up to the date of issuance of the Company’s consolidated financial statements are listed below.

IFRS 17, Insurance contracts

In May 2017, the IASB finished its long-standing project to develop an accounting standard on insurance contracts and published IFRS 17. IFRS 17 replaces IFRS 4, which currently permits a wide variety of practises in accounting for insurance contracts. IFRS 17 will fundamentally change the accounting by all entities that issue insurance contracts, reinsurance contracts and investment contracts with discretionary participation features.

IFRS 17 is effective for annual periods beginning on or after 1 January 2022, with earlier application permitted if IFRS 15, Revenue from Contracts with Customers , and IFRS 9, Financial Instruments , are also applied. TMR plans to adopt the standard on its effective date. The standard requires entities to retrospectively apply IFRS 17 unless impracticable. At transition date, TMR will need to: (a) identify, recognise and measure each group of insurance contracts as if IFRS 17 had always applied; (b) derecognise any existing balances that would not exist had IFRS 17 always applied; and (c) recognise any resulting net difference in equity.

The adoption of IFRS 17 will bring forth significant changes regarding the Company’s measurement and disclosure of reinsurance contracts both in terms of liability measurement and profit recognition. TMR has completed a preliminary impact analysis in 2017 and a wider project was established involving all concerned functions within the Company in 2018.

IFRS 9, Financial instruments

IFRS 9, published in July 2014, replaces the existing guidance in IAS 39, Financial Instruments: Recognition and Measurement . IFRS 9 includes revised guidance on the classification and measurement of financial assets and liabilities, including a new expected credit loss model for calculating impairment of financial assets, and the new general hedge accounting requirements. It also carries forward the guidance on recognition and derecognition of financial instruments from IAS 39. IFRS 9 is effective for annual reporting periods beginning on or after 1 January 2018, with early adoption permitted.

The amendments to IFRS 4 (Applying IFRS 9, Financial Instruments with IFRS 4, Insurance contracts ) issued in 2016 allow entities that issue insurance contracts within the scope of IFRS 4 to defer the implementation of IFRS 9 until 1 January 2021.

To qualify for the temporary exemption, an entity has to prove that its activities are predominantly connected with insurance. Per the amendment, an entity’s activities are predominantly connected with insurance if the entity’s carrying amount of its liabilities arising from contracts within the scope of IFRS 4 is significant and if the carrying amount of liabilities connected with insurance represents more than 90% of the total carrying amount of all its liabilities as at 31 December 2015. If this predominance ratio would be between 80% and 90%, a more detailed analysis would be required. In case if, and only if, there was a significant change in the entity’s activities during the annual periods that ended after 31 December 2015, a reassessment whether the entity’s activities remain to be predominantly connected with insurance is required.

20 | Tokio Millennium Re AG – TMR

Notes to Consolidated Financial Statements (continued)

31 December 2018 and 2017

(Expressed in thousands of United States Dollars)

Accounting standards and amendments issued but not yet adopted (continued)

The Company applies the temporary exemption from IFRS as the carrying amount of its liabilities arising from contracts within the scope of IFRS 4 represented more than 90% of the total carrying amount of the liabilities as at 31 December 2015. No significant changes in the activities of the Company were noted subsequent to 31 December 2015 which would require a reassessment.

Details on the fair value as at 31 December 2018 and the amount of change in the fair value during the reporting period, separately for financial assets eligible for amortised cost or fair value through other comprehensive income measurement under IFRS 9 and for financial assets mandatorily measured at fair value through income under IFRS 9 are provided below:

Details on the credit risk exposures for financial assets that are eligible for amortised cost or at fair value through other comprehensive income measurement under IFRS 9 are provided below; applying IAS 39, all instruments are carried at fair value:

21 | Tokio Millennium Re AG – TMR

Notes to Consolidated Financial Statements (continued)

31 December 2018 and 2017

(Expressed in thousands of United States Dollars)

Accounting standards and amendments issued but not yet adopted (continued)

Amendment to IFRS 9, Financial instruments, on prepayment features with negative compensation

This amendment, published in October 2017, confirms that when a financial liability measured at amortised cost is modified without this resulting in de-recognition, a gain or loss should be recognised immediately in profit or loss. The gain or loss is calculated as the difference between the original contractual cash flows and the modified cash flows discounted at the original effective interest rate. This means that the difference cannot be spread over the remaining life of the instrument, which may be a change in practise from IAS 39, Financial Instruments: Recognition and Measurement .

The amendment is effective for annual periods beginning on or after 1 January 2019, that is, one year later than the effective date of IFRS 9. As mentioned above, the Company has opted to defer the application of IFRS 9 until annual periods beginning on or after 1 January 2021 (the ‘deferral approach’) in order to align with the IFRS 17 implementation.

IFRS 16, Leases

IFRS 16 was issued in January 2016. It will result in almost all leases being recognised on the balance sheet by lessees, as the distinction between operating and finance leases is removed. Under the new standard, an asset (the right to use the leased item) and a financial liability to pay rentals are recognised. The only exceptions are short-term and low-value leases.

The Company will apply the standard from its mandatory adoption date of 1 January 2019. The Company intends to apply the simplified transition approach and will not restate comparative amounts for the year prior to first adoption. Right-of-use assets for property leases will be measured on transition as if the new rules had always been applied. All other right-of-use assets will be measured at the amount of the lease liability on adoption (adjusted for any prepaid or accrued lease expenses).

The Company has set up a project team which has reviewed all of the group’s leasing arrangements over the last year in light of the new lease accounting rules in IFRS 16. The standard will affect primarily the accounting for the Company’s operating leases.

As at the reporting date, the Company has non-cancellable operating lease commitments of USD 6.7 million. Refer to Note 26 - Commitments. The Company also holds other lease commitments, approximately USD 0.4 million relates to short-term leases and USD 0.1 million to low value leases which will both be recognised on a straight-line basis as expense in profit or loss.

For the remaining lease commitments, the Company expects to recognise right-of-use assets of approximately USD 8.0 million on 1 January 2019, lease liabilities of USD 8.0 million (after adjustments for prepayments and accrued lease payments recognised as at 31 December 2018). There will be USD nil impact to net assets.

22 | Tokio Millennium Re AG – TMR

Notes to Consolidated Financial Statements (continued)

31 December 2018 and 2017

(Expressed in thousands of United States Dollars)

Accounting standards and amendments issued but not yet adopted (continued)

IFRS 16, Leases (continued)

The Company expects that net profit after tax will decrease by approximately USD 0.1 million in 2019 as a result of adopting the new rules.

Cash flows from operating activities will increase and cash flows from financing activities will decrease by approximately USD 0.3 million, as repayment of the principal portion of the lease liabilities will be classified as cash used in financing activities.

Annual improvements to IFRSs 2015–2017 cycle

In December 2017, the IASB published its annual amendments to IFRSs and the related bases for conclusions and guidance. The IASB uses the annual improvements process to make necessary, but non-urgent, amendments to IFRSs that will not be included as part of a major project. These amendments affect one standard, namely:

This amendment will have no impact on the Company’s consolidated financial statements.

Amendments to IAS 19, Employee benefits, on clarifying how to account for defined benefit plan amendments, curtailments and settlements

The amendments to IAS 19 clarify the accounting for defined benefit plan amendments, curtailments and settlements. These amendments confirm that entities must:

These amendments are effective for annual periods beginning on or after 1 January 2019 and are not expected to have an impact on the Company’s results.

23 | Tokio Millennium Re AG – TMR

Notes to Consolidated Financial Statements (continued)

31 December 2018 and 2017

(Expressed in thousands of United States Dollars)

The Company, through its Enterprise Risk Management (‘ERM’) function, Risk Management Working Group (‘RMWG’) and Risk Management Committee (‘RMC’), seeks to identify all material risks inherent in its business, including emerging risks; to understand the manifestations of each risk; and to assess, control, mitigate and manage these risks appropriately.

The objectives of TMR’s risk management process are to ensure that:

The oversight of the Company’s risk management program is provided by the Board of Directors and senior management, assisted by the RMC.

In the course of the Company’s risk identification, assessment, control, monitoring and reporting process, it has identified and categorised all of its risks into the following categories:

Underwriting risk consists of premium risk, catastrophe risk and reserve risk.

Underwriting risk may be due to either the acceptance of risks that do not comply with the Company’s underwriting guidelines and corporate strategy, or the acceptance of risks that result in losses and expenses greater than it had anticipated at the time of underwriting.

As a reinsurance company, TMR is in the business of taking underwriting risk and therefore has a high appetite for underwriting risk. TMR’s risk limits are defined in its Risk Appetite and Risk Tolerance/Limit Policy for underwriting risk and reserve risk combined.

24 | Tokio Millennium Re AG – TMR

Notes to Consolidated Financial Statements (continued)

31 December 2018 and 2017

(Expressed in thousands of United States Dollars)

The Company has underwriting guidelines in place that clearly define the territorial scope, risks to be written, business to be avoided, acceptance limits, maximum policy period, maximum net retention, outward reinsurance, security requirement (for retrocessionaires) and underwriting authority.

The Company employs experienced catastrophe analysts and modellers, as well as experienced and credentialed actuaries, to perform pricing analyses to ensure that each risk is adequately priced.

Premium risk

Premium risk is the risk that the premium to be earned over the period of exposure to risk from the in-force, new or renewal reinsurance contracts is insufficient to cover the claim costs, claim adjustment expenses as well as the acquisition expenses to be incurred by those contracts over the same period.

The Company has purchased retrocessions in the past several years to enhance the diversity of the portfolio, improve capital efficiency, manage the net retention and protect the capital of TMR. The Company will continue to utilise this important risk management tool when the pricing and risk mitigation impact justifies doing so.

Details of annual premiums assumed by geographic area of risk insured are provided below:

25 | Tokio Millennium Re AG – TMR

Notes to Consolidated Financial Statements (continued)

31 December 2018 and 2017

(Expressed in thousands of United States Dollars)

Premium risk (continued)

Details of annual premiums assumed by line of business are provided below:

Catastrophe risk

Catastrophe risk is the risk that the premium to be earned over the next twelve-month period from the catastrophe exposed reinsurance contracts (in-force, new or renewal) is insufficient to cover potential claim costs, claim adjustment expenses as well as the acquisition expenses associated with those contracts that may originate from extreme or exceptional catastrophic events over the same period, such as hurricanes, earthquakes, windstorms, landslides and terrorist attacks.

Catastrophe risk is classified as a separate and distinct class of underwriting risk mainly due to its low-frequency and high-severity characteristics and its potential to affect numerous contracts simultaneously and inflict significant erosion of TMR’s capital.

A core element of TMR’s book of business continues to be property catastrophe reinsurance. Therefore, TMR has a high appetite for catastrophe risk as long as this business is adequately priced. The Company writes reinsurance risks for periods of mainly one year so that the contracts can be assessed for pricing and terms and adjusted to reflect any changes in market conditions.

The Company has made a series of strategic moves to diversify, spread and dilute its catastrophe exposures as well as optimise its underwriting portfolio through geographical diversification and by writing casualty and specialty lines and lower layers of business.

Catastrophe risk is the dominant contributor and driver of TMR’s total risk. TMR’s catastrophe exposures are managed by limiting the amount of exposure in any one geographic area.

Retrocession is purchased to enhance the diversity of TMR’s portfolio, maintain the net retention and even out peak exposures and more effectively manage the volatility of TMR’s book of business.

26 | Tokio Millennium Re AG – TMR

Notes to Consolidated Financial Statements (continued)

31 December 2018 and 2017

(Expressed in thousands of United States Dollars)

Reserve risk

Reserve risk is the risk that the best (point) estimate of unpaid loss and loss adjustment expense reserves are inadequate to cover all future payments for the full settlement of claims from all prior accident years (on or prior to the valuation date).

Reserve risk is distinct from premium risk and is related to exposures that have already been earned and claims that have already been incurred but have not yet been reported (‘IBNR’) or fully settled.

TMR has focused on short-tailed property lines of business in the past but now has increased its appetite for longer-tailed casualty and specialty lines of business. The proportion of medium and long-tailed lines of business underwritten by the Company continues to create a shift towards a greater proportion of reserving risk in the risk profile. TMR’s risk limits are not defined separately for catastrophe risk, non-catastrophe premium risk and reserve risk, but are defined for insurance risk as a whole.

To manage reserving risk, TMR’s actuarial team use a range of recognised actuarial techniques to project gross premiums written, monitor claims development patterns and stress-test ultimate insurance liability balances. An independent actuary also performs a half-yearly review for the Company.

A full analysis of loss and loss adjustment expense reserves is performed on a quarterly basis. The reserve analyses are reviewed by and discussed with underwriters, actuaries, claims, finance and senior management prior to submission to the Reserve Committee. The Reserve Committee is appointed by the Executive Committee to review the sufficiency of the estimated loss reserves and to appraise the adequacy and effectiveness of the loss reserving practises of TMR. The Reserve Committee is comprised of the Chief Executive Officer (‘CEO’), Chief Risk Officer (‘CRO’), Chief Operating Officer (‘COO’), and Chief Financial Officer (‘CFO’).

27 | Tokio Millennium Re AG – TMR

Notes to Consolidated Financial Statements (continued)

31 December 2018 and 2017

(Expressed in thousands of United States Dollars)

Reserve risk (continued)

The table below illustrates the development of the estimates of ultimate cumulative claims for the Company after the end of the accident year, illustrating how amounts estimated have changed from the initial estimates made.