Financial Statements Austral Seguradora S.A. · 6º ao 10º andar - Botafogo 22250-040 - Rio de Janeiro - RJ - Brasil Tel: +55 21 3263-7000 ey.com.br Uma empresa-membro da Ernst &

Financial Statements

Austral Seguradora S.A.December 31, 2017 and 2016with Independent Auditor´s report

Financial statements

December 31, 2017 and 2016

Contents

Austral Seguradora S.A. management report ....................................................................................... 1

Independent auditor’s report on financial statements ........................................................................... 3

Audited financial statements

Statement of financial position ............................................................................................................. 6Statement of profit or loss .................................................................................................................... 8Statement of comprehensive income ................................................................................................... 9Statement of changes in equity .......................................................................................................... 10Statement of cash flows ..................................................................................................................... 11Notes to financial statements ............................................................................................................. 12Independent actuaries’ opinion .......................................................................................................... 64

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Management Report

In compliance with legal and regulatory provisions, we present the financial statements for the yearended December 31, 2017.

Austral Seguradora S.A. (hereinafter referred to as “Austral” or “Insurer”) received the approval byBrazil’s Private Insurance Supervisory Office (SUSEP) to begin its operations on October 25, 2010,and its strategic focus is to provide specialized insurance for corporate risks, operating in the followinglines: surety, Rental bondsrental bonds, CAR/EARCAR/EAR risks, operational risks, general liability,energyEnergy, marine hull and Miscellaneousmiscellaneous risks.

Among the highlights of this year, we emphasize the best historical net income and the beginning ofthe sale of named perils and all risks operational property policiesNamed, a strategy that confirms theobjective of working in new market niches.

In 2017, Austral completed seven years of operation, consolidating itself as an important player in thecorporate risk segments, confirming the recognition of customers and Reinsurers for its technicalcapacity and differentiation in service delivery.

Gross written premium increased from R$308.1 in 2016 to R$347.5 million in 2017, which evidencesthe success of the strategies outlined by Austral during the year.

We emphasize that administrative expenses remained stable in relation to premiums, where the rateof the latter on written premium showed a slight improvement, decreasing from 5.6% in 2016 to 5.3%in 2017.

Financial result improved significantly in relation to the previous year, reaching R$19.3 million in 2017compared with R$16.6 million in 2016. We emphasize that Austral has achieved positive financialresults following a conservative investment policy.

As a consequence of the above factors, Austral posted a record historical net income of R$27.5 millionin 2017, an increase of 38% over 2016.

The investment policy adopted by Austral is in line with the best asset and liability risk managementpractices. This policy ensures that Austral is financially capable of meeting its commitments, inaccordance with National Council for Private Insurance (CNSP) Ruling No. 321/2015, as amended.Securities are stated under “held for trading” and “available for sale” categories, as mentioned in thefinancial statements, and has no marketable securities classified as "held to maturity".

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Management Report (Continued)

At the year-end, equity totaled R$138.1 million and assets amounted to R$982.1 million.

The Insurer, as part of its profit reinvestment policy, intends to reinvest part of the net income in thebusiness itself. Under the articles of incorporation, shareholders are entitled to receive, as mandatoryminimum dividend, the portion equivalent to twenty-five percent (25%) of net income for each yearended December 31, adjusted in accordance with the Brazilian Corporation Law.

Austral plans to continue its growth trajectory and strong presence in the market, maintaining its policyof technical underwriting, adequate capital structure, qualified team and focus on efficiency and agilityin serving clients and business partners.

Lastly, Austral is grateful to its team for the commitment and dedication, to Brazil’s Private InsuranceSupervisory Office (SUSEP), as well as to its customers, partners, suppliers, and shareholders for thetrust placed.

Rio de Janeiro, February 26, 2018

The Management

Centro Empresarial PB 370Praia de Botafogo, 3706º ao 10º andar - Botafogo22250-040 - Rio de Janeiro - RJ - BrasilTel: +55 21 3263-7000ey.com.br

Uma empresa-membro da Ernst & Young Global Limited

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A free translation from Portuguese into English of independent auditor’s report on financial statements prepared inBrazilian currency in accordance with accounting practices adopted in Brazil applicable to entities under Brazil’sPrivate Insurance Supervisory Office (SUSEP) supervision

Independent auditor’s report on financial statements

TheShareholders, Board of Directors and OfficersAustral Seguradora S.A.Rio de Janeiro - RJ

Opinion

We have audited the financial statements of Austral Seguradora S.A. (“Insurer”), which comprise thestatement of financial position as at December 31, 2017, and the related statements of profit or loss, ofcomprehensive income, of changes in equity, and of cash flows for the year then ended, and notes tothe financial statements, including a summary of significant accounting practices.

In our opinion, the accompanying financial statements present fairly, in all material respects, thefinancial position of Austral Seguradora S.A. as at December 31, 2017, its financial performance andits cash flows for the year then ended, in accordance with accounting practices adopted in Brazilapplicable to entities under Brazil’s Private Insurance Supervisory Office (SUSEP) supervision.

Basis for opinion

We conducted our audit in accordance with Brazilian and international standards on auditing.Our responsibilities, under those standards, are further described in the “Auditor’s responsibilities foraudit of financial statements" section of our report. We are independent of the Company and complywith the relevant ethical principles set forth in the Code of Professional Ethics for Accountants and theprofessional standards issued by Brazil’s National Association of State Boards of Accountancy (CFC),and we have fulfilled our other ethical responsibilities in accordance with these requirements. Webelieve that the audit evidence we have obtained is sufficient and appropriate to support our opinion.

Other information accompanying the financial statements and the auditor’s report

Management is responsible for such other information that is included in the Management Report.

Our opinion on the financial statements does not cover the Management Report and we do notexpress any form of audit conclusion thereon.

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In connection with the audit of the financial statements, our responsibility is to read the managementreport and, in so doing, consider whether this report is materially inconsistent with the financialstatements or with our knowledge obtained in the audit or otherwise appear to contain materialmisstatements. If, based on our work, we conclude that there is a material misstatement in themanagement report, we are required to report this fact. We have nothing to report in respect of thismatter.

Responsibilities of management and those charged with governance for the financialstatements

Management is responsible for the preparation and fair presentation of the financial statements inaccordance with accounting practices adopted in Brazil applicable to entities under SUSEPsupervision, and for such internal control as management determines is necessary to enable thepreparation of financial statements that are free from material misstatement, whether due to fraud orerror.

In preparing the financial statements, management is responsible for assessing the Insurer’s ability tocontinue as a going concern, disclosing, as applicable, matters related to going concern and using thegoing concern basis of accounting unless management either intends to liquidate the Company or tocease operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Insurer’s financial reportingprocess.

Auditor’s responsibilities for audit of the financial statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a wholeare free from material misstatement, whether due to fraud or error, and to issue an auditor’s report thatincludes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee thatan audit conducted in accordance with Brazilian and International standards on auditing will alwaysdetect material misstatement when it exists. Misstatements can arise from fraud or error and areconsidered material if they could reasonably be expected to influence the economic decisions of usersmade on the basis of these financial statements.

As part of the audit conducted in accordance with Brazilian and International standards on auditing,we exercise professional judgment and maintain professional skepticism throughout the audit. Wealso:

· Identify and assess risks of material misstatements of the financial statements, whether due to fraudor error, design and perform audit procedures responsive to those risks, and obtain audit evidencethat is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting amaterial misstatement resulting from fraud is higher than one resulting from error, as fraud mayinvolve override of internal controls, collusion, forgery, intentional omissions or misrepresentations.

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· Obtain an understanding of internal control relevant to the audit in order to design audit proceduresthat are appropriate in the circumstances, but not for the purpose of expressing an opinion on theeffectiveness of the Insurer’s internal control.

· Evaluate the appropriateness of accounting policies used and the reasonableness of accountingestimates and related disclosures made by management.

· Conclude on the appropriateness of management's use of the going concern basis of accountingand, based on the audit evidence obtained, whether a material uncertainty exists related to events orconditions that may cast substantial doubt as to the Insurer’s ability to continue as a going concern.If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’sreport to the related disclosures in the financial statements or, if such disclosures are inadequate, tomodify our opinion. Our conclusions are based on the audit evidence obtained up to the date of ourauditor’s report. However, future events or conditions may cause the Insurer to cease to continue asa going concern.

· Evaluate the overall presentation, structure and content of the financial statements, including thedisclosures, and whether the financial statements represent the corresponding transactions andevents in a manner that achieves fair presentation.

We communicate with those charged with governance regarding, among other matters, the plannedscope and timing of the audit and significant audit findings, including any significant deficiencies ininternal controls that we identify during our audit.

Rio de Janeiro, February 26, 2018

ERNST & YOUNGAuditores Independentes S.S.CRC2SP015199/O-6

Marcelo Felipe L. de SáAccountant CRC1RJ094644/O-0

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A free translation from Portuguese into English of financial statements prepared in Brazilian currency in accordance with accountingpractices adopted in Brazil applicable to entities under Brazil’s Private Insurance Supervisory Office (SUSEP) supervision

Statement of financial positionDecember 31, 2017 and 2016 (In thousands of reais)

12/31/2017 12/31/2016AssetsCurrent assets 705,646 478,306

Cash and cash equivalents 7,217 23,096Cash and banks 7,217 23,096

Short-term investments (Note 6) 243,832 215,237Fixed income securities – government 126,545 123,978Investment fund shares 26,317 25,230Investment fund shares – DPVAT 74,778 66,029Foreign investments 16,192 -

Receivables from insurance and reinsurance operations 119,949 90,169Premiums receivable (Note 8) 108,616 83,363Insurers 3,308 3,242Reinsurers 8,025 3,564

Other operating receivables 68,774 2,264

Reinsurance assets – technical reserves (Notes 9 and 15) 236,373 124,179Unearned premium reserve 141,258 105,368Incurred but not reported claims reserve (Note 16) 45,642 10,793Outstanding claims reserve (Note 16) 49,473 8,018

Securities and credits receivable (Note 10) 6,909 5,180Receivables 3,934 2,255Tax credits (Note 10) 2,932 2,841Other receivables 43 84

Deferred acquisition costs (Note 11) 22,592 18,181Deferred brokerage – insurance 20,502 15,751Deferred brokerage – co-insurance 2,090 2,251Other deferred acquisition costs - 179

Noncurrent assets 276,463 189,711

Long-term receivables 270,314 183,880

Short-term investments (Note 6) 39,651 12,334Fixed income securities – government 39,651 12,334

Receivables from insurance and reinsurance operations 53,649 49,210Premiums receivable (Note 8) 53,542 48,568Insurers 107 642

Reinsurance assets – reserves (Notes 9 and 15) 119,550 98,321Unearned premium reserve 107,885 90,156Outstanding claims reserve (Note 16) 10,349 7,161Related expenses reserve 1,316 1,004

Notes and credits receivable (Note 10) 28,443 -Judicial deposits (Note 10) 28,443 -

Deferred acquisition costs (Note 11) 29,021 24,015Deferred brokerage – insurance 26,268 20,030Deferred brokerage – co-insurance 2,753 3,985

Property and equipment (Note 12) 3,283 3,383Personal properties 2,980 3,138Other property and equipment 303 245

Intangible assets (Note 13) 2,866 2,448Other intangible assets 2,866 2,448

Total assets 982,109 668,017

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Statement of financial positionDecember 31, 2017 and 2016(In thousands of reais)

12/31/2017 12/31/2016Liabilities and equityCurrent liabilities 567,817 334,362

Accounts payable 7,950 8,065Liabilities payable 5,032 5,326Taxes and social charges payable 1,779 1,553Labor charges 768 799Taxes and contributions 371 387

Insurance and reinsurance payables 180,863 87,831Refundable premiums 183 486Insurers 7,591 4,133Reinsurers (Note 14) 160,108 73,535Insurance and reinsurance brokers 12,503 9,388Other operating payables 478 289

Third-party deposits 2,545 768Third-party deposits 2,545 768

Technical reserve – insurance and reinsurance (Note 15) 376,459 237,698Unearned premium reserve 210,655 161,387Outstanding claims reserve 51,613 10,824Incurred but not reported claims reserve 113,774 64,981Other reserves 417 506

Noncurrent liabilities 276,159 221,455

Accounts payable 2,270 1,059Deferred taxes 2,270 1,059

Insurance and reinsurance payables 35,109 32,328Insurers 425 2,993Reinsurers (Note 14) 27,821 24,284Insurance and reinsurance brokers 6,863 5,051

Technical reserve – insurance and reinsurance (Note 15) 238,770 188,058Unearned premium reserve 189,631 167,454Outstanding claims reserve 47,653 19,449Related expenses reserve 1,486 1,155

Other payables 10 10Administrative proceedings 10 10

Equity (Note 17) 138,133 112,200Capital 63,837 44,360Capital increase under approval 5,984 19,477Capital reserve (Note 21) 1,938 1,754Income reserve 66,153 46,628Marketable securities adjustments 221 (19)

Total liabilities and equity 982,109 668,017

See accompanying notes.

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Statement of profit or lossYears ended December 31, 2017 and 2016(In thousands of reais, except earnings per share - in reais)

12/31/2017 12/31/2016

Gross written premium 347,548 308,139Changes in technical premium reserves (68,009) (68,663)Earned premiums (Note 22.a) 279,539 239,476

Revenue from issued policies – DPVAT 2,262 2,172Incurred claims (Note 22.b) (131,646) (14,971)Acquisition costs (Note 22.c) (23,398) (18,765)Other operating income and expenses (Note 22.e) (3,061) (3,136)Reinsurance result (Note 22.d) (73,678) (163,117)Administrative expenses (Note 22.f) (18,486) (17,191)Tax expenses (Note 22.g) (2,415) (6,083)Financial result (Note 22.h) 19,324 16,564

(=) Operating income (expenses) 48,441 34,949

Gain (loss) on noncurrent assets (326) (3)

(=) Income before taxes and profit sharing 48,115 34,946

Income tax (Note 18) (8,684) (6,026)Social contribution tax (Note 18) (7,167) (5,110)Profit sharing (4,738) (3,878)

(=) Net income for the year 27,526 19,932

Number of shares 56,566,347 53,941,999

Earnings per share:Basic - Earnings per thousand shares - in reais 0.49 0.37


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Statement of comprehensive incomeYears ended December 31, 2017 and 2016(In thousands of reais)

12/31/2017 12/31/2016

Net income for the year 27,526 19,932

Other comprehensive income to be reclassified to P&L for the year in subsequentperiods:

Changes in fair value of financial assets available for sale 436 1,114Income and social contribution tax effect (196) (501)Other comprehensive income for the year, net of taxes 240 613

Total other comprehensive income for the year, net of taxes 27,766 20,545


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Statement of changes in equityYears ended December 31, 2017 and 2016(In thousands of reais)

Income reserves

CapitalCapital (under

approval)Capitalreserve Legal reserve

Retainedprofits reserve

Marketablesecurities

adjustmentRetainedearnings Total

Balances at December 31, 2015 41,548 2,812 1,311 2,074 30,502 (632) - 77,615

Approval of capital increase (Note 17.a) 2,812 (2,812) - - - - - -Capital increase under approval (Note 17.a) 19,477 - - - - - 19,477Net income for the year - - - - - - 19,932 19,932Unrealized gains on securities available for sale - - - - - 613 - 613Share-based payment (Note 21) - - 443 - - - - 443Proposal for profit sharing:Legal reserve - - - 997 - - (997) -Income reserve - - - - 13,055 - (13,055) -Interest on equity (Note 17.c) - - - - - - (5,880) (5,880)

Balances at December 31, 2016 44,360 19,477 1,754 3,071 43,557 (19) - 112,200

Approval of capital increase (Note 17.a) 19,477 (19,477) - - - - - -Capital increase under approval (Note 17.a) 5,984 - - - - - 5,984Net income for the year - - - - - - 27,526 27,526Unrealized gains on securities available for sale - - - - - 240 - 240Share-based payment (Note 21) - - 184 - - - - 184Proposal for profit sharing:Legal reserve - - - 1,376 - - (1,376) -Income reserve (Note 17.c) - - - - 18,149 - (18,149) -Interest on equity (Note 17.c) - - - - - - (8,001) (8,001)

Balances at December 31, 2017 63,837 5,984 1,938 4,447 61,706 221 - 138,133


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Statement of cash flowsYears ended December 31, 2017 and 2016(In thousands of reais)

12/31/2017 12/31/2016Cash flow from operating activities

Net income for the year 27,526 19,932

Adjustments:Depreciation and amortization 1,399 1,286Loss on disposal of property and equipment (336) (4)Share-based payment 184 443

28,773 21,657Changes in assets and liabilities

Financial assets (55,672) (60,645)Receivables from insurance and reinsurance operations (100,729) 15,653Reinsurance assets – technical reserves (133,423) 79,665Deferred tax asset 1,211 1,059Notes and credits receivable (30,172) (2,294)Deferred acquisition costs (9,417) (5,350)Taxes and contributions 10,837 12,683Insurance and reinsurance payables 95,813 (26,180)Accounts payable (7,126) (4,872)Third-party deposit 1,777 17Technical reserves – insurance and reinsurance 189,473 (31,525)Income and social contribution taxes paid (11,828) (11,764)Net cash from (used in) operating activities (20,483) (11,896)

Cash flow from investing activitiesReceipt for disposal of property and equipment 1 -Acquisition of property and equipment (61) (513)Acquisition of intangible assets (1,320) (1,065)Net cash used in investing activities (1,380) (1,578)

Cash flow from financing activitiesCapital increase 5,984 19,477Dividends paid - (384)Net cash used in financing activities 5,984 19,093

Net decrease in cash and cash equivalents (15,879) 5,619Cash and cash equivalents at beginning of year 23,096 17,477Cash and cash equivalents at end of year 7,217 23,096


Notes to financial statementsDecember 31, 2017 and 2016(In thousands of reais)

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1. Operations

Austral Seguradora S.A (“Insurer” or “Company”) is a privately-held entity incorporated onDecember 29, 2009, registered with the Rio de Janeiro State Commercial Registry on January 15,2010, headquartered in Brazil, with head offices in the city of Rio de Janeiro.

On October 6, 2011, Austral Participações S.A. became the holder of 100% of the Insurer’sshares.

On September 5, 2014, the shareholders of Austral Participações S.A. approved InternationalFinance Corporation - IFC as a shareholder of the Insurer, upon increase in capital of AustralParticipações S.A.

The inclusion of International Finance Corporation – IFC as an indirect qualified shareholder ofAustral Seguradora S.A. was approved by SUSEP Administrative Ruling No. 6,130/2014,published in the Federal Official Gazette on December 24, 2014, which also ratified that there wasno change in the control structure of Austral Participações S.A.

2. Preparation and presentation of financial statements

a) Going concern

Management evaluated the Insurer's ability to continue as a going concern and is convincedthat the Insurer is able to continue as a going concern in the future. Furthermore,management is not aware of any material uncertainty that may cast significant doubt upon theInsurer’s ability to continue as a going concern. Therefore, the financial statements wereprepared based on this principle.

b) Statement of compliance

The financial statements were prepared according to the provisions of SUSEP Circular No.517, of July 30, 2015, related amendments and accounting pronouncements, guidelines, andinterpretations issued by the Financial Accounting Standards Board (CPC), and the rules ofCNSP (hereinafter “accounting practices adopted in Brazil applicable to entities under SUSEPsupervision”).

Notes to financial statements (Continued)December 31, 2017 and 2016(In thousands of reais)

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2. Preparation and presentation of financial statements (Continued)

b) Statement of compliance (Continued)

SUSEP Circular No. 517, issued on July 30, 2015, and subsequent amendments, provide foramendments to accounting standards to be complied with by publicly-held supplementarysocial security entities, companies engaged in selling certificate accounts with lottery prizes,and insurance and local reinsurance entities, effective as from its publication date. SuchCircular repeals SUSEP Circular No. 508 issued on January 9, 2015.

Authorization to complete the preparation of the financial statements was granted by Insurermanagement on February 26, 2018.

c) Functional and reporting currency

The Insurer’s functional currency is the Real (R$). This is the currency of the main economicenvironment in which the Insurer operates. Transactions in foreign currency are initiallytranslated at the exchange rate to the functional currency at the transaction date. Monetaryassets and liabilities stated in foreign currency are translated into the functional currency atthe exchange rate in force at the closing date of the statement of financial position.Differences arising from the translation are posted directly against P&L for the year.

d) Measurement basis

The amounts in the financial statements are stated in Brazilian reais (R$), rounded tothousands (R$000), unless otherwise stated, and were prepared on a historical cost basis,except for the following material items recognized in the statement of financial position:

· Financial instruments measured at fair value through profit or loss.

· Financial assets available for sale measured at fair value.

· Technical reserves, measured in accordance with SUSEP guidelines.

· Receivables.


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2. Preparation and presentation of financial statements (Continued)

d) Measurement basis (Continued)

As allowed by CPC no 11 – Insurance Contracts, the Insurer applied accounting practicesadopted in Brazil on its insurance contracts, in accordance with the standards issued byCNSP and by SUSEP.

Preparation of the financial statements requires that management make judgments indetermining and recording accounting estimates.

Significant assets and liabilities subject to these estimates and assumptions include, amongothers, the evaluation of insurance contract liabilities, fair value measurement of financialassets, impairment testing of non-financial assets, provision for contingencies and deferredtaxes.

Settlement of transactions involving these estimates may present changes in relation to theestimated amount due to uncertainties inherent in their estimate process, as mentioned inNote 4.

3. Summary of significant accounting policies

The significant accounting practices adopted in the preparation of these financial statements aredescribed below. These policies were consistently applied to all comparative years presented.

a) Cash and cash equivalents

These include cash and positive balances in checking accounts, with insignificant risk ofchange in fair value, and are used by the Insurer to manage its short-term commitments.


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3. Summary of significant accounting policies (Continued)

b) Financial assets

Classification depends on the purpose for which each financial asset was acquired.Management determines the classification of financial assets on the initial acquisition dateand reassesses their classification at least at the statement of financial position date. TheCompany classifies its financial assets in accordance with the categories under CPC no 38 –Financial Instruments: Recognition and Measurement:

I) Securities measured at fair value through profit or loss

Financial assets at fair value through P&L are financial assets held for trading. Afinancial asset is classified in this category if it was acquired particularly to be sold in theshort term, and is initially recognized at fair value. These assets are measured atrestated cost, plus yields, and subsequently measured at fair value, with changes in fairvalue posted directly to P&L for the period. Transaction costs incurred in the acquisitionof financial assets classified under this category are immediately posted to P&L for theperiod as incurred. Securities under this category are classified as current assets,irrespective of their maturity dates.

II) Securities available for sale

The Insurer classifies in this category all non-derivative financial assets not designated inthe previous category. After initial recognition, they are measured at fair value and anychanges other than those arising from impairment are recognized under othercomprehensive income and stated in equity. When an investment is derecognized,accumulated gains and losses in other comprehensive income are transferred to P&L.

III) Receivables

Receivables are non-derivative financial assets, with fixed or determinable payments,not quoted in an active market. They are recorded under current assets, except thosewith maturity exceeding twelve months from the statement of financial position date(classified as noncurrent assets). Receivables arising from insurance contracts, such asbalance of premiums receivable from policyholders, are classified by the Insurer underthis category, initially measured at fair value and, subsequently, at amortized cost lessprovision for impairment. In practice, receivables are usually recognized at the amountbilled when the policy is issued, adjusted by provision for impairment, if necessary.


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c) Derivative financial instruments

Derivative financial instruments designated as hedge operations are initially recognized atfair value on the date on which the derivative instrument is taken out, and subsequentlyrestated at fair value also.

Upon initial recognition of a hedge operation, the Insurer formally classifies and documentsthe hedge contract to which it intends to apply hedge accounting, as well as management’srisk management objective and strategy to implement the hedge. The documentationincludes identification of the hedging instrument, the hedged item or transaction, the natureof the hedged risk, the nature of the risks excluded from the hedging relationship, theprospective statement of effectiveness of the hedging relationship and how the Insurer willevaluate the effectiveness of the hedging instrument to offset exposure to changes in the fairvalue of the hedged item.

d) Recognition and measurement of insurance and reinsurance contracts

Insurance contracts are those wherein the Insurer accepts the significant insurance risk ofanother party (the policyholder), agreeing to pay insurance indemnity to policyholders in caseof a specific uncertain future event (the insured event), with adverse effect on thepolicyholder. Generally, the Insurer determines whether the insurance risk is significant bycomparing premiums received with losses payable, had the insured event taken place.

The insurance premiums and acquisition costs are recorded when the policies are issued oron the policy effective date, whichever occurs first, and the earned premium is recognized inP&L according to lapse of the period of effectiveness of the risk covered.

The accepted co-insurance operations and those carried out through DPVAT are recordedbased on information received from other insurance companies and from Seguradora Líderdos Consórcios do Seguro DPVAT S.A., respectively.


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d) Recognition and measurement of insurance and reinsurance contracts (Continued)

Reinsurance assets consist of receivables from reinsurers in the short and long terms,depending on the time expected for realization or receipt of assets from reinsurers.Reinsurance assets are consistently valued with insurance liabilities submitted to reinsuranceand with the terms and conditions of each contract. Liabilities payable to reinsurers comprisemainly premiums payable under reinsurance contracts. Any gains or losses from reinsurancecontracts are amortized over the duration of the contracted risks.

Reinsurance premiums ceded are recorded when the policies are issued or on the policyeffective date, whichever occurs first, and allocated to P&L according to lapse of the periodof effectiveness of the risk covered. The deferral of the reinsurance premium ceded isconsistent with the related insurance premium.

The Insurer analyzes the recoverability of reinsurance assets on a regular basis. When thereis objective evidence of impairment, the Insurer tests reinsurance assets for impairment andimmediately recognizes any loss in P&L for the period.

For the years ended December 31, 2017 and 2016, there was no need to record provision forimpairment of the Insurer’s reinsurance assets.

e) Insurance liabilities

The Insurer relied on the CPC no 11 – Insurance Contracts guidance to evaluate insurancecontracts, applying the rules on minimum procedures to evaluate insurance contracts,e.g. liability adequacy test, assessment of the recoverable amount of reinsurance assets,adequacy of the retention limit adopted, among other applicable policies.

Also, management did not identify any situations in which excessive caution was used toevaluate insurance contracts according to accounting practices adopted in Brazil applicableto entities under SUSEP supervision.


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e) Insurance liabilities (Continued)

The technical reserves for guarantee the insurance contracts are set up according toaccounting practices adopted in Brazil, applicable to insurers authorized by SUSEP tooperate insurance contracts covering damages, and are in accordance with the guidelines ofCNSP and SUSEP, disclosed in CNSP Ruling No. 321, of July 15, 2015, as amended, andSUSEP Circular No. 517, of July 30, 2015, as amended.

For each technical reserve specified below, the actuary in charge prepared an actuarial notedescribing the calculation method adopted.

Unearned premium reserve (PPNG)

Pursuant to SUSEP Circular No. 517, of July 30, 2015, and subsequent amendments, thisreserve is set up to cover payables related to claims and expenses to be incurred, whilepolicies remain effective, regarding risks undertaken on the calculation evaluated date,subject to the criteria set forth in the referred to Circular.

The Unearned Premium Reserve for Policies in Force but not Issued (PPNG-RVNE) is set upto cover losses to be incurred, considering indemnities and related expenses while thepolicies remain effective, regarding policies in force at the calculation evaluated date, but notissued by the Insurer.

The calculation method adopted by the Insurer is based on the choice of an average delayfactor in accordance with an analysis of rates of delay identified in the Insurer's portfolio. Thisdelay factor is applied on PPNG of policies in force and already issued, resulting in theunearned premium reserve for policies in force but not issued (PPNG-RVNE). In addition, theInsurer individually addresses cases of large insurance policies already known by theunderwriters of each line of business, but not yet issued.

This calculation methodology enables the reserve to be quickly adjusted to any inconsistencydetected in the reserve consistency test for previous months.

Reserve for DPVAT administrative expense

This is set up in light of the amounts reported solely by Seguradora Líder dos Consórcios doSeguro DPVAT S.A.


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e) Insurance liabilities (Continued)

Outstanding claims reserve (PSL)

This is recorded on a monthly basis to cover expected payables for unpaid reported claims tothe calculation evaluated date, including administrative and legal claims. PSL includesmonetary restatement, interest, exchange rate variation and contractual fines, whennecessary. For claims relating to the financial risks group, the Insurer estimates refunds inview of the likelihood of success in the enforcement of its counter-guarantee agreements.

The outstanding claims reserve for DPVAT is set up in light of the amounts reported solely bySeguradora Líder dos Consórcios do Seguro DPVAT S.A.

Incurred but not reported claims reserve (IBNR)

This is set up to cover amounts expected to be settled related to claims incurred but notreported to the calculation evaluated date, including accepted co-insurance operations, grossof reinsurance operations and net of ceded co-insurance operations. For calculation of IBNR,the Insurer adopts the percentages informed in SUSEP Circular No. 517, of July 30, 2015, asthe results of consistency tests are satisfactory and the monthly reserves are sufficient tocover delays in claims observed by the Insurer.

Once the Insurer presents a mature database that allows the statistical calculation of theIBNR, a specific methodology will be used for all business lines in which it operates. Inaddition to the amount determined above, the final IBNR amount may be increased by anadditional portion of the expected loss for the group of financial risks. This portion should bereported by the respective areas involved with all the expectations not yet classified asclaims informed to the Insurer.

Incurred but not Reported Claims Reserve (IBNR) for DPVAT is set up in light of the amountsreported solely by Seguradora Líder dos Consórcios do Seguro DPVAT S.A.

Related expenses reserve (PDR)

This is set up on a monthly basis to cover expenses related to payment of indemnities,comprising both expenses that can be assigned individually to each claim and expenses thatcan only be related to claims as a group.


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f) Deferred acquisition costs

Expenses incurred with brokerage are recorded when the policies are issued or on the policyeffective date, whichever occurs first, and allocated to P&L according to lapse of the periodof effectiveness of the risk covered. These expenses are deferred through the methodologyused for deferral of the related insurance premium.

The average insurance line deferral periods are as follows:

12/31/2017

Insurance linesAverage policy period

In days In months

0141 Loss of profits 427 140167 CAR/EAR risks 732 240171 Miscellaneous risks 732 240196 Named risks 366 120234 Energy 458 150351 General liability 671 220746 Rental bonds 397 130775 Surety bond – public sector 1,342 440776 Surety bond – private sector 885 291433 Marine hull 336 11

12/31/2016

Insurance linesAverage policy period

In days In months

0141 Loss of profits 397 130167 CAR/EAR risks 824 270171 Miscellaneous risks 397 130196 Named risks 366 120234 Energy 488 160351 General liability 793 260746 Rental bonds 488 160775 Surety bond – public sector 1,251 410776 Surety bond – private sector 946 311433 Marine hull 397 13

g) Recognition of claims and expenses

Claims from general insurance include all events occurring over the year, either reported ornot, the related internal and external costs with treatment of claims directly related toprocessing and settlement thereof, the reduced amount consisting of salvage and otherrecoveries, and any adjustments to prior years’ unsettled claims.


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h) Property and equipment

Property and equipment items are measured at historical cost, less accumulateddepreciation. The historical cost includes expenses directly attributable to acquisition ofitems. Costs subsequently incurred are included in the carrying amount of the asset orrecognized as a separate asset, as appropriate, if, and only if it is probable that futureeconomic benefits associated with the item will flow to the entity and the cost of the item canbe measured reliably. The carrying amount of those items or parts that are replaced isderecognized. All other repair and maintenance costs are posted against P&L for the year,as incurred.

Depreciation of other assets is calculated using the straight-line method.

The carrying amount of an asset is immediately discounted to its recoverable amount whenthe carrying amount exceeds the estimated recoverable amount.

i) Intangible assets

Costs associated with the maintenance of software are recognized as expenses, as incurred.Development costs of third-party software that is directly used by the Insurer are recognizedas intangible assets whenever the following criteria are met:

· Software completion is technically feasible so that it is available for use.

· Management intends to complete the software and use it.

· It is possible to prove that it is likely that the software will generate future economicbenefits.

· Appropriate technical, financial and other resources are available to complete the softwaredevelopment so that it can be used.

· The expenditure attributable to the software development can be reliably measured.


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i) Intangible assets (Continued)

Directly attributable costs capitalized as a portion of the software product includedevelopment costs and an appropriate portion of applicable direct expenses.

Other development costs that do not meet these criteria are recognized as expense, asincurred. Development costs previously recognized as expense are not recognized in assetsin subsequent periods.

The software development costs recognized as assets are amortized throughout theirestimated useful lives.

j) Impairment of financial assets

Upon closing of the statement of financial position, the Insurer assesses whether there isobjective evidence that a certain financial asset or group of financial assets is impaired. Anasset or group of financial assets is impaired and impairment losses are incurred only if thereis objective evidence of impairment in connection with one or more events after initialrecognition of the assets.

k) Assets recorded at amortized cost

When there is clear evidence of impairment of the assets recorded at amortized cost, theamount of loss is measured as the difference between the carrying amount of the asset andthe present value of future estimated cash flows (excluding future expected losses on creditnot yet incurred), discounted at the original effective interest rate of the financial asset. Thecarrying amount of the asset is reduced, and the amount of loss is recognized in P&L.

The Insurer initially assesses individually each financial asset that is individually significantas to whether there is clear evidence of impairment, or in groups, for financial assets that arenot individually significant. If it concludes that there is no actual evidence of impairment of afinancial asset individually tested, whether or not significant, the asset is included in a groupof financial assets with similar credit risk characteristics and is jointly tested for impairment.


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k) Assets recorded at amortized cost (Continued)

Any loss in the recoverable amount is always assessed at the year-end closing date.

For impairment purposes, the Insurer designates unearned insurance premiums based oneconomic studies of losses, risks of default, among others. The provision for impairment isrecorded when necessary, according to SUSEP Circular No. 517, of July 30, 2015.

If, in a subsequent period, there is decrease in impairment loss clearly related to an eventtaking place after recognition of said loss, this impairment previously recognized is reversed.Any subsequent impairment reversal is recognized in P&L to the extent that the assetcarrying amount does not exceed its respective amortized cost as of the reversal date.

l) Income and social contribution taxes

Current tax assets and liabilities for the year ended December 31, 2017 and prior years aremeasured at the estimated amount recoverable from or payable to tax authorities. Incometax was calculated based on P&L for the period, at the rate of 25%. Social contribution taxwas calculated based on P&L for the period, at 20%, adjusted for additions and exclusionsprovided in tax legislation in force.

Deferred income and social contribution taxes reflect the effects of temporary differences asof the statement of financial position date between tax bases of assets and liabilities andtheir carrying amounts.

Deferred tax assets are recognized for all deductible temporary differences, unused taxcredits and tax losses to the extent that it is probable that temporary differences will bereversed in a near future and taxable profit will be available so that the deductible temporarydifferences may be realized and unused tax credits and losses may be used.


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l) Deferred income and social contribution taxes (Continued)

Temporary differences will be used to reduce or increase future taxable profits. The Insurerevaluates, on a semiannual basis, the amount of deferred income and social contribution taxassets in relation to its operating performance and projected taxable profit, and, whennecessary, reduces the expected realizable value.

m) Liability adequacy test

As required by Accounting Pronouncement CPC no 11 – Insurance Contracts, at eachstatement of financial valuation date, the Insurer evaluates the obligations in connection withthe insurance contracts in force as of the reporting date by means of the liability adequacytest. SUSEP set and defined the rules for preparation of this test by way of SUSEP CircularNo. 517, of July 30, 2015, and subsequent amendments and guidelines.

The liability adequacy test does not apply to DPVAT-related insurance contracts and wasconducted with caution and objectivity, considering use of applicable, appropriate andsignificant statistical and actuarial methods, based on updated and true information andrealistic considerations.

Briefly, the liability adequacy test is determined by the difference between current estimatesof cash flows and total book balance of technical reserves at the test reporting date, lessdeferred acquisition costs and intangible assets directly related to the technical reserves.

The Insurer prepared a methodology that represents the best estimate of all future cashflows by using current, realistic and unbiased assumptions for each variable involved in theliability adequacy test. Pursuant to SUSEP Circular No. 517, of July 30, 2015, andsubsequent amendments, estimated cash flows in the liability adequacy test are gross ofreinsurance amounts.

The Insurer presents asset and liability flows only in domestic currency and in US dollar.Consequently, ANBIMA’s fixed risk-free ETTJ index, disclosed by SUSEP, was applied forcash flow estimates at nominal values. Similarly, the dollar exchange coupon curve,disclosed by SUSEP, was applied for dollar-based cash flow estimates.


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m) Liability adequacy test (Continued)

The liability adequacy test for the years ended December 31, 2017 and 2016 indicated thatthe booked reserves, net of deferred acquisition costs and related intangible assets, aresufficient to secure the expected present value of cash flows in connection with compliancewith insurance contracts.

In addition, the comparison between the booked PPNG, net of deferred acquisition costs andrelated intangible assets, and the present value of flow of losses to be incurred by the Insurershowed no need to record a supplementary reserve.

n) Other provisions, contingent assets and liabilities

Pursuant to CPC no 25 - Provisions, Contingent Liabilities and Contingent Assets, a provisionfor labor, civil and tax contingencies is recognized when there is a present legal orconstructive obligation as a result of past events, whose amounts can be reliably estimated,and the settlement of which is expected to result in an outflow of funds. When any of thesecharacteristics is not met, the Company does not recognize a provision. Provisions arerecorded based on a number of individual analyses, made by the Insurer’s legal advisors, ofadministrative and legal proceedings pending judgment and based on the likelihood of anunfavorable outcome leading to future outflow of funds. An increase in liability due to lapse oftime is recognized as financial expenses.

Contingent assets, if any, are not recognized until the Insurer is awarded a final favorabledecision, and when the likelihood of asset realization is considered probable.

o) Determination of profit and loss (P&L)

Profit and loss is determined on an accrual basis, considering that insurance premiums arerecorded on the date policies are issued or at the policy effective date, whichever occurs first.


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o) Determination of profit and loss (P&L) (Continued)

Insurance premiums and the related acquisition costs are recognized in P&L according tolapse of the period of effectiveness of the risk covered. Insurance premium revenues areposted to P&L when the related insurance policies are issued or at the policy effective date,whichever occurs first, and deferred for allocation, on a straight-line basis, during validity ofthe policies by setting up and reversing the Unearned Premium Reserve (PPNG). Premiumsreferring to reinsurance contracts are recorded in P&L as reinsurance premiums ceded anddeferred for allocation through set-up and reversal of Unearned Premium Reserve (PPNG),according to the methodology described in actuarial note.

p) Earnings per share

In compliance with CPC no 41 – Earnings per Share, the Insurer presents basic and dilutedearnings per share for the years ended December 31, 2017 and 2016. Basic earnings pershare are calculated by dividing P&L for the year, attributed to the Insurer commonshareholders, by the number of shares outstanding on the date. As of December 31, 2017and 2016, the Insurer had no preferred shares.

Earnings per thousand shares are stated in P&L for the year. To calculate diluted earningsper share, the Insurer adjusts profit attributable to common shareholders (common stock) ofthe Insurer, as well as the weighted average number of total (outstanding) shares held by theshareholder, to reflect the effects of all potential dilutive common shares.

The purpose of diluted earnings per share is to provide a measure of the participation ofeach common share in the Insurer’s performance and, at the same time, to reflect the effectsof all potential dilutive common shares outstanding in the period.

q) Share-based payment

Share-based payment to Insurer executives is measured and recognized at fair value as ofthe date options are granted, in a specific account in equity and in the statement of profit orloss, as contractual conditions are met. The cost of transactions settled in shares isrecognized over the year in which conditions are fulfilled, ending on the date the employeebecomes entitled to the premium (vesting date). The cumulative expense recognized throughthe vesting date reflects the extent to which the vesting period has expired and the Insurer’sbest estimate of the number of shares to be acquired.


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r) Standards, amendments and interpretations of existing standards that are not yet effectiveand were not early adopted by the Company

CPC no 48 (IFRS 9) - Financial Instruments was issued in December 2016 and is the firststep in the project to replace IAS 39 “Financial Instruments: Recognition andMeasurement". CPC no 48 includes new models for classification and measurement offinancial instruments and the measurement of expected credit losses for financial andcontractual assets, as well as new hedge accounting requirements. The standard will beeffective for years beginning on or after January 1, 2018, but has not yet been approved bySUSEP.

CPC no 47 (IFRS 15) - Revenue from contracts with customers: the CPC issued in May 2014the new pronouncement on revenue recognition, converged to this new pronouncement,which has mandatory adoption for the years beginning on or after January 1, 2018, with fullor modified retrospective approach.This new pronouncement creates a single standard for revenue recognition applicable to allcompanies in all industries, except insurance contracts. The creation of a single standardrepresents a significant change in the current practice, which contains various specificliteratures for industries and transactions. IFRS 15 was approved by SUSEP through SUSEPCircular No. 561/17, but there are no significant impacts on the Company.

IFRS 17 - Insurance Contracts was issued in May 2017 and establishes principles forrecognition, measurement and presentation and disclosure of insurance contracts issued. Italso requires similar principles to be applied to reinsurance contracts held and investmentcontracts issued with discretionary participation characteristics. The objective is to ensurethat entities provide relevant information in a way that faithfully represents such contracts.IFRS 17 is applicable as of January 1, 2021, and early adoption is permitted.

The Company did not adopt these changes in the preparation of these financial statements,and there are no efforts for its early adoption. There are no other IFRS standards orinterpretations not yet effective that could have a significant impact on the Company.


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4. Significant accounting judgments, estimates and assumptions

The preparation of financial statements requires the use of certain accounting estimates and ahigh level of management judgment in using certain accounting practices. Nevertheless,uncertainty associated with those estimates and assumptions could lead to results that wouldrequire significant adjustment to the carrying amount of assets or liabilities affected in futureperiods.

In applying the accounting practices, management made the following judgments, in addition tothose involving estimates and assumptions, whose significant effects were recognized in thefinancial statements.

a) Evaluation of insurance contract liabilities

As permitted by CPC no 11 - Insurance Contracts, the Insurer applied the accountingpractices generally accepted in Brazil to its insurance contracts. The technical reserves thatrepresent the insurance contract liabilities of the Insurer’s lines are as follows: unearnedpremium reserve for policies in force and already issued (PPNG-RVE), unearned premiumreserve for policies in force but not issued (PPNG-RVNE), outstanding claims reserve (PSL),incurred but not reported claims reserve (IBNR), and related expenses reserve (PDR).

Insurer’s reserves are determined based on methodologies known in the Brazilian insurancemarket, in compliance with all SUSEP requirements. The behavior of the Insurer's insuranceportfolio is monitored on a monthly basis in order to foresee and define proper criteria formeasurement of reserves.

b) Reserve for recovery of insurance, co-insurance and reinsurance assets

These reserves are recorded under SUSEP Circular No. 517, of July 30, 2015, and set up atan amount deemed sufficient to cover probable losses on receivables from insurance, co-insurance and reinsurance.

c) Useful life of property and equipment and intangible assets

Depreciation or amortization of property and equipment and intangible assets considersmanagement’s best estimate of the use of these assets during operations. Changes in theeconomic scenario and/or consumer market may require that the estimated useful life bereviewed.


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4. Significant accounting judgments, estimates and assumptions (Continued)

d) Impairment of non-financial assets

Management reviews the net carrying amount of assets on a monthly basis, so as to assessevents or changes in economic, operating or technological circumstances that may indicatedeterioration or impairment. When such evidence is identified and the net carrying amountexceeds the recoverable amount, a provision for impairment is set up by adjusting the netcarrying amount to the recoverable amount. As of December 31, 2017 and 2016, there wasno indication of impairment of non-financial assets.

e) Provisions for contingencies

The Insurer is exposed to legal, civil and labor claims arising from the ordinary course ofbusiness, and the assessment of related risks involves considerable judgment bymanagement. As a result of a past event, it is probable that an outflow of economic benefitswill be required to settle the obligation and a reasonable estimate can be made of theamount of that obligation.

Assessment of the likelihood of loss includes analysis of available evidence, the hierarchy oflaws, available case law, the most recent court decisions and their relevance in the legalsystem, as well as the opinion of outside legal advisors.

Provisions are reviewed and adjusted to take into consideration changes in circumstances,such as applicable statutes of limitation, conclusion from tax audits or additional exposuresidentified based on new matters or court decisions. Actual results could differ from estimates.

Settlement of transactions involving these estimates may result in amounts significantlydifferent from those recorded in the financial statements due to uncertainties inherent in theestimate process. The Insurer reviews its estimates and assumptions on a monthly basis.

At December 31, 2017, the Insurer had no labor or tax contingency, and had only civilcontingencies for which provisions were set up under the Outstanding Claims Reserve (PSL)- legal.


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5. Insurance and financial risk management

a) Insurance risk management

The main risk for the Insurer in insurance contracts consists of claim payments notcorresponding to expectations. This is influenced by the frequency of claims, their severity,amounts actually paid and history of long-term claims. Accordingly, the Insurer seeks toensure that sufficient reserves are available to cover these liabilities.

The aforesaid risk exposure is reduced by diversifying the portfolio in light of a judiciousanalysis of the risk acceptance, with implementation of healthy and prudent guidelines on theunderwriting strategy, as well as regular monitoring for possible adjustments.

The Insurer underwrites insurance listed in the table below, considering technical risk factors.For risk pricing purposes, in order to obtain consistent and stable results that are positiveboth individually and for the portfolio, the Insurer makes it a policy to underwrite insuranceand adopt operating procedures for risk assessment. A pricing model is used following therisk management assumptions. It is worth highlighting that the procedure includes thedecision-making level regime, the documents of which are formally approved and dulydisclosed to all levels involved.

The Insurer acquires reinsurance as part of its risk reduction program. The cededreinsurance is taken out on a proportional and non-proportional basis.

The following table presents the concentration of business risks by region and portfolio,based on the written premium amount, gross and net of reinsurance.

Distribution of gross written premium as of December 31, 2017Line/Geographical region Midwest Northeast North Southeast South Total

DPVAT 2,386 4,633 1,475 12,021 5,022 25,537Surety bond 11,484 6,554 7,916 132,860 3,067 161,881Rental bonds - 45 15 581 1 642CAR/EAR risks 1,354 47 - 5,698 7 7,106General liability 200 3 - 247 - 450Energy - - - 127,096 - 127,096Miscellaneous risks - - - (51) - (51)Loss of profits - 79 - 2,791 798 3,668Named risks 1,228 83 451 5,623 2,250 9,635Marine hull - 1,304 89 9,725 466 11,584Total 16,652 12,748 9,946 296,591 11,611 347,548


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5. Insurance and financial risk management (Continued)

a) Insurance risk management (Continued)

Distribution of gross written premium as of December 31, 2016Line/Geographical region Midwest Northeast North Southeast South Total

DPVAT 3,480 6,594 2,051 17,240 7,339 36,704Surety bond 15,805 12,945 3,510 104,299 3,457 140,016Rental bonds - - - 667 - 667CAR/EAR risks 32 57 2 9,433 14 9,538General liability 2 1 - 258 1 262Energy - - - 103,122 - 103,122Miscellaneous risks - - - 1,568 - 1,568Loss of profits - - - 4,141 1,361 5,502Named risks 1,168 - - 5,175 2,182 8,525Marine hull - 523 - 1,604 108 2,235Total 20,487 20,120 5,563 247,507 14,462 308,139

Distribution of net written premium as of December 31, 2017Line/Geographical region Midwest Northeast North Southeast South Total

DPVAT 2,386 4,633 1,475 12,021 5,022 25,537Surety bond 6,148 3,931 4,686 58,426 1,616 74,807Rental bonds - 30 10 352 1 393CAR/EAR risks 258 23 - 1,082 4 1,367General liability 42 1 - 69 - 112Energy - - - 3,816 - 3,816Miscellaneous risks - - - (35) - (35)Loss of profits - 4 - 228 32 264Named risks 262 4 79 117 90 552Marine hull - 574 35 2,553 168 3,330Total 9,096 9,200 6,285 78,629 6,933 110,143

Distribution of net written premium as of December 31, 2016Line/Geographical region Midwest Northeast North Southeast South Total

DPVAT 3,480 6,594 2,051 17,240 7,339 36,704Surety bond 9,581 7,301 2,191 49,234 2,103 70,410Rental bonds - - - 450 - 450CAR/EAR risks 16 29 1 2,565 7 2,618General liability 1 - - 126 - 127Energy - - - 4,518 - 4,518Miscellaneous risks - - - 1,281 - 1,281Loss of profits - - - 564 55 619Named risks 256 - - 799 88 1,143Marine hull - 158 - 1,015 42 1,215Total 13,334 14,082 4,243 77,792 9,634 119,085


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b) Financial risk management

The Insurer’s investment policy sets forth the guidelines to allocate the funds to marketablesecurities, as well as to monitor the risks inherent in its investment portfolio.

The investments rely on analysis of short-, medium- and long-term macroeconomicscenarios, observing the key variables of the Brazilian and global economy, such asexpectations of changes in interest, inflation and exchange rates, and economic growth,among others.

The Insurer’s investment decisions consider cash needs and the matching between assetsand liabilities following a conservative position in relation to counterparties’ credit andinvestments made. The financial investment risks are managed through daily analysis andmonitoring of the portfolio.

The Insurer has an Investment Committee that meets to analyze the portfolio performance,draw up prospective scenarios and thus set the overall guidelines for investments in theupcoming months.

c) Credit risk

This consists of losses resulting from agreed financial obligations not met by thecounterparties. The credit risk analyses are based on ratings determined by credit ratingagencies.

The Insurer conducts business with local, admitted and occasional reinsurers that are well-rated by rating agencies, with the following minimum ratings: Standard & Poor's (A-), FitchMoody's (A2), and A.M Best Company (B++).

Also, the Insurer’s co-insurance exposure is R$2,278, with other insurers as counterparties.This credit risk exposure was calculated in accordance with article 5, Annex I of CNSPRuling No. 321, of July 15, 2015, and subsequent amendments.

d) Market risk

This consists of losses arising from unfavorable variation in the Insurer’s investments.

The market risk control is based on the Value at Risk (VAR) model, which shows the greatestloss expected from an asset or portfolio for a given timeframe and a given likelihood ofoccurrence.


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d) Market risk (Continued)

Simultaneously to this control, the Insurer developed a calculation model for market riskcapital based on the principles established in CNSP Ruling No. 321, of July 15, 2015, andsubsequent amendments.

e) Liquidity risk

This refers to the likelihood of a company not being able to honor its payment commitmentsdue to mismatching of deadlines of assets and liabilities. Management has daily visibility ofthe Insurer’s portfolio, and regularly discusses the position of investments in its meetings, oron an ad hoc basis, when necessary, considering their liquidity and expected profitability.

The Insurer adopts a conservative approach regarding financial assets, considered as thesum of cash and cash equivalents plus short-term investments, prioritizing liquidity capacityat all times when choosing its financial assets, based on obligations to the counterparties.Currently, 67% (64% at December 31, 2016) of the Insurer´s portfolio was held in bankdeposits, LFT, NTN-B, and other securities with daily liquidity despite their maturity.Investment fund shares related to DPVAT account for 26% (26% at December 31, 2016) ofthe portfolio (these funds may only be invested in government bonds which, as alreadymentioned, are immediately redeemable). Furthermore, 4% (5% at December 31, 2016) offinancial assets comprise other investment funds with redemption term within 120 days.

We stress that the Insurer blocks assets accepted by the National Monetary Council to covertechnical reserves, in addition to 20% of risk capital, maintaining a liquidity position in relationto risk capital, as set forth in CNSP Resolution No. 321, of July 15, 2015.


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e) Liquidity risk (Continued)

December 31, 2017

Assets and liabilities Within 1 yearFrom 1 to 2

years Over 2 years Total

Cash and banks 7,217 - - 7,217Financial assets measured at fair value through profit or loss 236,684 7,148 - 243,832Financial assets available for sale 39,651 - - 39,651Receivables from insurance and reinsurance operations 119,949 23,343 30,306 173,598Other operating receivables 68,774 - - 68,774Notes and credits receivable 6,909 28,443 - 35,352Total assets 479,184 58,934 30,306 568,424

Accounts payable 7,950 2,270 - 10,220Insurance contract liabilities (net of reinsurance) 140,086 60,829 58,391 259,306Payables from insurance and reinsurance operations 180,863 11,894 23,215 215,972Third-party deposits 2,545 - - 2,545Total liabilities 331,444 74,993 81,606 488,043

December 31, 2016

Assets and liabilities Within 1 yearFrom 1 to 2

years Over 2 years Total

Cash and banks 23,096 - - 23,096Financial assets measured at fair value through profit or loss 203,180 12,057 - 215,237Financial assets available for sale 12,334 - - 12,334Receivables from insurance and reinsurance operations 92,432 21,696 27,514 141,642Notes and credits receivable 5,180 - - 5,180Total assets 336,222 33,753 27,514 397,489

Accounts payable 8,065 1,059 - 9,124Insurance contract liabilities (net of reinsurance) 113,519 61,200 28,537 203,256Payables from insurance and reinsurance operations 87,831 15,014 17,314 120,159Third-party deposits 768 - - 768Total liabilities 210,183 77,273 45,851 333,307


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f) Sensitivity analysis

The Insurer’s risk monitoring policy includes the periodical analysis of its investment portfolioin order to assess its volatility, through changes that could lead to significant changes in P&L.

According to Vinci Gestora de Recursos Ltda., the Insurer's fund administrator, suchinvestments led to an exposure whose parametric Value at Risk (VAR) with 95% confidencelevel, one-business-day timeframe and a 252-business-day history was 0.09% of the portfolioassets or 0.17% with 99% confidence level. The Insurer´s analysis also considers itsinvestment portfolio performance under stress scenarios of the major risk factors underlyingits assets, as follows:

· Forward yield curve structure of the Extended Consumer Price Index (IPCA): variation of300 base points or 3% on an equal basis in all of the forward yield curve vertices of theinflation forward curve - IPCA - inferred by the yield curve of National Treasury Notes(NTN-B).

· Foreign exchange: variation of 10% in the foreign exchange rate.

Scenario A (**) Scenario B (**)

Risk factors ShockImpact on P&Lbefore taxes Risk factors Shock

Impact on P&Lbefore taxes

Inflation +300bps (*) (10,750) Inflation -300bps (*) 10,750Foreign exchange +10% 2,340 Foreign exchange -10% (2,340)Total (8,410) Total 8,410

(*) bps = base points, where 1 bp = 0.01%.

(**) Information from the Insurer’s fund administrator (Vinci Gestora de Recursos Ltda.).


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f) Sensitivity analysis (Continued)

Loss ratio

In addition to the scenarios described above, the loss ratio observed in the business lineshas a direct impact on P&L reported at December 31, 2017.

In order to perform a loss ratio sensitivity test, a 10% increase in reported claims of the last 12months by line of business was adopted. This loss ratio test was limited to a minimum amount of10% of the earned premium, determined by line of business in the last 12 months. The amountsused are net of ceded co-insurance operations and gross of accepted coinsurance operations.Thus, it is possible to calculate the impact on the Insurer's P&L with these new amounts of claimsand, consequently, possible changes in claims incurred but not reported (IBNR).

The table below presents changes in claims reported, gross and net of reinsurance,considering the loss ratios below, segregated by insurance line of business:

December 31, 2017

Insurance lines

Change in reportedclaims, gross of

reinsurance

Change in reportedclaims, net ofreinsurance

Test on changes inIBNR, gross of

reinsurance

Test on changes inIBNR, net ofreinsurance

Loss of profits 379 25 - -CAR/EAR risks 256 5 41 1Miscellaneous risks 17 12 1 1Named risks 849 2 - -Energy 3,886 10 - -General liability 41 10 - -Rental bonds 43 19 4 2Surety bond - public sector 7,507 601 541 43Surety bond – private sector 3,553 333 256 24Marine hull 251 - - -Total 16,782 1,017 843 71

December 31, 2016

Insurance lines

Change in reportedclaims, gross of

reinsurance

Change in reportedclaims, net ofreinsurance

Test on changes inIBNR, gross of

reinsurance

Test on changes inIBNR, net ofreinsurance

Loss of profits 481 - - -CAR/EAR risks 981 9 - -Miscellaneous risks 1,256 855 10 7Named risks 786 - - -Energy 9,534 39 - -General liability 27 - - -Rental bonds 61 - - -Surety bond - public sector 6,621 2,715 - -Surety bond – private sector 2,044 920 79 36Marine hull 501 8 - -Total 22,292 4,546 89 43


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f) Sensitivity analysis (Continued)

Loss ratio (Continued)

The impact on the Insurer’s P&L and equity after taxes and contributions as of December 31,2017 would be a decrease in P&L and equity of R$667 (R$2,824 as of December 31, 2016).

6. Financial assets

a) Classification by category and aging list

December 31, 2017

Agreedrates No maturity

Up to 12months

From 13 to60 months

Over 60months

Market bookvalue Curve value

Investmentbook valuepercentage

Investmentcurve

percentage

I. Securities held for tradingInvestment fund shares – DPVAT - 74,778 - - - 74,778 74,778 26% 26%Financial Treasury Bills (LFT) SELIC - 86,016 40,529 - 126,545 126,541 45% 45%Certificates of Foreign Deposits 1.38% - 16,192 - - 16,192 16,192 6% 6%Investment fund shares - 26,317 - - - 26,317 26,317 9% 9%

II. Securities available for saleNational Treasury Notes (NTN-B) IPCA - - 8,452 31,199 39,651 39,284 14% 14%

Total 101,095 102,208 48,981 31,199 283,483 283,112 100% 100%

December 31, 2016

Agreedrates No maturity

Up to12 months

From 13 to60 months

Over 60months

Market bookvalue Curve value

Investmentbook valuepercentage

Investmentcurve

percentage

I. Securities held for tradingInvestment fund shares – DPVAT - 66,029 - - - 66,029 66,029 29% 29%Financial Treasury Bills (LFT) SELIC - 24,794 80,017 - 104,811 104,828 46% 46%National Treasury Notes (NTN-B) IPCA - - - 19,167 19,167 18,693 8% 8%Investment fund shares - 25,230 - - - 25,230 25,230 11% 11%

II. Securities available for saleNational Treasury Notes (NTN-B) IPCA - - 2,117 1 0,217 12,334 12,403 5% 5%

Total 91,259 24,794 82,134 29,384 227,571 227,183 100% 100%


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6. Financial assets (Continued)

a) Classification by category and aging list (Continued)

The market values for government bonds were determined based on the quotationsdisclosed by the Brazilian Financial and Capital Markets Association (ANBIMA).

The investment fund shares are valued based on the unit value of the share as of thestatement of financial position date reported by the respective investment fundadministrators.

The market value of the listed real estate funds that the Insurer holds in the portfolio wasobtained from the price disclosed by the administrator.

b) Fair value hierarchy

The table below presents financial instruments recorded at fair value and correspondingvaluation methods. The different levels were defined as follows:

· Level 01: securities traded in active market.

· Level 02: securities not traded in markets covered by “Level 01” whose pricing is directly orindirectly observable.

December 31, 2017 December 31, 2016Level 01 Level 02 Total Level 01 Level 02 Total

I. Securities held for tradingInvestment funds:Investment fund shares 6,342 19,975 26,317 - 25,230 25,230Investment fund shares – DPVAT - 74,778 74,778 - 66,029 66,029Fixed income securities – private:Certificates of Foreign Deposits 16,192 - 16,192 - - -Fixed income securities – government:Financial Treasury Bills (LFT) 126,545 - 126,545 104,811 - 104,811National Treasury Bills (LTN) - - - - - -National Treasury Notes (NTN-B) - - - 19,167 - 19,167

II. Securities available for saleFixed income securities – government:National Treasury Notes (NTN-B) 39,651 - 39,651 12,334 - 12,334

Total 188,730 94,753 283,483 136,312 91,259 227,571


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6. Financial assets (Continued)

c) Changes in short-term investments

Changes in short-term investments are as follows:

FVTPL Available for sale Total

Closing balance at December 31, 2015 150,034 16,279 166,313 (+) Investments 111,739 24,642 136,381 (-) Redemptions (87,724) (13,948) (101,672)(+/-) Change in classification 19,168 (19,168) -(+) Yield 18,678 2,941 21,619 (+/-) Fair value adjustment 3,342 1,588 4,930

Closing balance at December 31, 2016 215,237 12,334 227,571 (+) Investments 181,264 32,443 213,707(-) Redemptions (167,545) (8,168) (175,713)(+) Yield 14,854 2,606 17,460 (+/-) Fair value adjustment 22 436 458

Closing balance at December 31, 2017 243,832 39,651 283,483

7. Guarantee of technical reserves

The Central Bank of Brazil (BACEN), by means of Resolution No. 4444 of November 13, 2015,as amended, and SUSEP, by means of CNSP Ruling No. 321 of July 15, 2015, set thestandards for investment of the assets to guarantee of the technical reserves by insurers. Asof December 31, 2017 and 2016, the Insurer’s coverage was as follows:


40

7. Guarantee of technical reserves (Continued)12/31/2017 12/31/2016

Unearned premium reserve (PPNG) 400,286 328,841Outstanding claims reserve (PSL) 99,266 30,273Incurred but not reported claims reserve (IBNR) 113,774 64,981Related expenses reserve (PDR) 1,486 1,155Administrative expenses reserve - DPVAT 417 506Total reserves 615,229 425,756

Credit rights (141,403) (112,337)Deferred acquisition cost reducing PPNG (34,696) (30,438)Unearned premium reserve (PPNG) – reinsurance (139,497) (114,619)Recovery of outstanding claims reserve (PSL) (59,822) (15,179)Recovery of incurred but not reported claims reserve (IBNR) (45,642) (10,793)Related expenses reserve (PDR) (1,316) (1,004)Offsetting judicial deposits (28,443) -Consortium reserve - DPVAT (74,678) (66,014)Total exclusions (525,497) (350,384)

Total reserves for coverage 89,732 75,372

Breakdown of assets linked to coverage of reservesFinancial Treasury Bills (LFT) 43,100 60,848National Treasury Notes (NTN-B) 39,651 28,230Investment fund shares 17,184 15,367Real estate investment fund shares 6,342 -Total assets linked to coverage of reserves 106,277 104,445

Sufficiency 16,545 29,073

8. Receivables from insurance operations – Premiums receivable

12/31//2017 12/31/2016

Premiums receivable - current 108,616 83,363Premiums receivable - noncurrent 53,542 48,568Total current and noncurrent 162,158 131,931

Aging of premiums receivable:Premiums falling due

1 to 30 days 53,138 18,57431 to 60 days 16,835 23,09561 to 120 days 15,858 26,792121 to 180 days 7,506 2,382181 to 360 days 11,501 9,824Over 360 days 53,542 48,568

Total premiums falling due 158,380 129,235

Premiums overdue1 to 30 days 3,113 2,68631 to 60 days 291 -61 to 120 days 374 1121 to 180 days - 9

Total overdue premiums 3,778 2,696

Total premiums receivable 162,158 131,931


41

8. Receivables from insurance operations – Premiums receivable (Continued)

12/31//2017 12/31/2016Changes in premiums receivableOpening balance 131,931 142,845

(+) Premiums written 324,353 305,846 (+/-) Risks in force but not issued (RVNE) 26,306 (17,254) (+) Tax on Financial Transactions (IOF) 9,761 11,176 (+/-) Additional fraction portion 423 359 (-) Receivables (330,616) (311,045) (-) Provision for impairment - 4

Closing balance 162,158 131,931

We should point out that premiums overdue for more than 61 days were not recorded asimpaired, since the amount was mostly received in January 2018 and their receipt is notconsidered a risk, as presented in the premiums receivable impairment study.

According to the flow of receipt of premiums and payment in installments for the year endedDecember 31, 2017, the Insurer has operated with 03 installments, on average.

9. Reinsurance assets – technical reserves

12/31/2017 12/31/2016

Incurred but not reported claims reserve (IBNR) 45,642 10,793Related expenses reserve 1,316 1,004Outstanding claims reserve 59,822 15,179Unearned premium reserve 249,143 195,524Total 355,923 222,500

Total current 236,373 124,179Total noncurrent 119,550 98,321

10. Notes and credits receivable

a) Tax credits

At December 31, 2017, the amount of R$2,932 (R$2,841 at December 31, 2016) refers to:(i) R$2,381 (R$970 at December 31, 2016) referring to PIS and COFINS tax creditscalculated on PSL and IBNR, (ii) R$529 (R$1,156 at December 31, 2016) referring toIRPJ and CLSS tax credits, and (iii) R$22 (R$715 at December 31, 2016) referring tooverpayment of PIS and COFINS.


42

10. Notes and credits receivable (Continued)

a) Tax credits (Continued)

The aforementioned PIS and COFINS tax credits are expected to be realized in the shortterm, especially credits calculated on the PSL and IBNR balance, by means of payment ofthe claim.

b) Judicial deposits

At December 31, 2017, the amount of R$28,443 refers to the proceeding for payment intocourt proposed by the Insurer vis-à-vis the insured, through which the Insurer deposited inthe court the amount of the insurance indemnification calculated in the claim regulationprocess (amount duly grounded by technical report), given the disagreement and refusalof the insured to receive the amount determined. This amount may be withdrawn by theinsured and the proceeding will continue in progress with discussion of the disputedamount.

11. Deferred acquisition costs

12/31/2016 Accrual Amortization 12/31/2017

Surety bond 15,144 4,657 (515) 19,286Rental bonds 61 72 (64) 69General liability 40 49 (7) 82CAR/EAR risks 1,039 636 (102) 1,573Energy 987 220 (703) 504Miscellaneous risks 179 - (179) -Named risks 68 319 (231) 156Loss of profits 49 43 (70) 22Marine hull 614 776 (490) 900Total current 18,181 6,772 (2,361) 22,592

Surety bond 22,188 7,940 (1,989) 28,139Rental bonds 28 3 (17) 14General liability 63 8 (47) 24CAR/EAR risks 1,637 170 (965) 842Energy 99 93 (190) 2Total noncurrent 24,015 8,214 (3,208) 29,021Total current and noncurrent 42,196 14,986 (5,569) 51,613


43

11. Deferred acquisition costs (Continued)

12/31/2015 Accrual Amortization 12/31/2016

Surety bond 13,031 2,825 (712) 15,144Rental bonds 54 41 (34) 61General liability 42 14 (16) 40CAR/EAR risks 893 482 (336) 1,039Energy 377 1,003 (393) 987Miscellaneous risks 372 16 (209) 179Named risks 94 323 (349) 68Loss of profits 4 174 (129) 49Marine hull 548 502 (436) 614Total current 15,415 5,380 (2,614) 18,181

Surety bond 20,450 3,904 (2,166) 22,188Rental bonds 18 17 (7) 28General liability 29 57 (23) 63CAR/EAR risks 901 1,264 (528) 1,637Energy 33 303 (237) 99Total noncurrent 21,431 5,545 (2,961) 24,015Total current and noncurrent 36,846 10,925 (5,575) 42,196

The above-mentioned deferred acquisition costs refer entirely to expenses incurred withcommissions, recorded when policies are issued or on the policy effective date, whichever occursfirst, and allocated to P&L according to the period of effectiveness of the risk covered. Theseexpenses are deferred through the methodology used for deferral of the premium. All deferredcommission expenses were considered in the liability adequacy test.

12. Property and equipmentAnnual

depreciation rate 12/31/2016 Acquisitions Write-offs Depreciation 12/31/2017

Equipment 20% 252 153 (48) (73) 284Facilities 10% 2,104 624 (720) 14 2,022Furniture, machinery andfixtures 10% 782 57 (5) (102) 732Other property and equipment 10% 245 - - - 245Total 3,383 834 (773) (161) 3,283

Annualdepreciation

rate 12/31/2015 Acquisitions Write-offs Depreciation 12/31/2016

Equipment 20% 330 13 - (91) 252Facilities 10% 2,063 299 - (258) 2,104Furniture, machinery andfixtures 10% 694 185 - (97) 782Other property and equipment 10% 262 16 - (33) 245Total 3,349 513 - (479) 3,383


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13. Intangible assets

Annualamortization

rate 12/31/2016 Acquisitions Amortization 12/31/2017

Software license 20% 2,448 1,320 (902) 2,866Total 2,448 1,320 (902) 2,866

Annualamortization

rate 12/31/2015 Acquisitions Amortization 12/31/2016

Software license 20% 2,190 1,065 (807) 2,448Total 2,190 1,065 (807) 2,448

14. Insurance and reinsurance operation debits – Reinsurance operations

12/31/2017 12/31/2016

Reinsurance premiums ceded 131,511 100,976Commission (32,081) (27,993)Other 60,678 552Total current 160,108 73,535

Reinsurance premiums ceded 47,553 40,996Commission (19,732) (16,712)Total noncurrent 27,821 24,284

Total 187,929 97,819


45

15. Technical reserves – insurance and reinsurance

Insurance reserve (-) Reinsurance portion (=) Net reserveInsurance lines 12/31/2017 12/31/2016 12/31/2017 16/31/2017 12/31/2017 12/31/2016

Surety bondUnearned premium reserve 292,326 248,396 (150,038) (124,751) 142,288 123,645Outstanding claims reserve – administrative 5,551 301 (5,268) (180) 283 121Outstanding claims reserve – legal 39,518 8,636 (10,266) (7,136) 29,252 1,500Incurred but not reported claims reserve 38,915 1,968 (35,796) (910) 3,119 1,058Related expenses reserve 1,476 1,151 (1,308) (1,002) 168 149Total 377,786 260,452 (202,676) (133,979) 175,110 126,473

Rental bondsUnearned premium reserve 395 399 (172) (138) 223 261Incurred but not reported claims reserve 35 25 (19) (8) 16 17Total 430 424 (191) (146) 239 278

CAR/EAR risksUnearned premium reserve 23,819 26,505 (20,221) (22,052) 3,598 4,453Outstanding claims reserve – administrative 868 6,755 (862) (6,741) 6 14Outstanding claims reserve – legal 95 36 (83) (25) 12 11Incurred but not reported claims reserve 1,727 1,472 (1,633) (1,198) 94 274Related expenses reserve 10 4 (8) (2) 2 2Total 26,519 34,772 (22,807) (30,018) 3,712 4,754

DPVATOutstanding claims reserve – administrative 1,726 2,481 - - 1,726 2,481Outstanding claims reserve – legal 8,039 10,777 - - 8,039 10,777Incurred but not reported claims reserve 64,496 52,249 - - 64,496 52,249Related expenses reserve 417 506 - - 417 506Total 74,678 66,013 - - 74,678 66,013

EnergyUnearned premium reserve 74,924 48,598 (72,490) (45,421) 2,434 3,177Outstanding claims reserve – administrative 40,393 719 (40,279) (616) 114 103Incurred but not reported claims reserve 8,235 8,792 (7,940) (8,368) 295 424Total 123,552 58,109 (120,709) (54,405) 2,843 3,704

Marine hullUnearned premium reserve 8,243 3,838 (5,817) (2,693) 2,426 1,145Outstanding claims reserve – administrative 3,073 450 (3,063) (443) 10 7Incurred but not reported claims reserve 319 359 (224) (268) 95 91Total 11,635 4,647 (9,104) (3,404) 2,531 1,243

Miscellaneous risksUnearned premium reserve 1 557 - (106) 1 451Outstanding claims reserve – administrative 3 118 (1) (38) 2 80Incurred but not reported claims reserve 14 96 (5) (31) 9 65Total 18 771 (6) (175) 12 596

General liabilityUnearned premium reserve 578 548 (405) (363) 173 185Incurred but not reported claims reserve 33 20 (25) (10) 8 10Total 611 568 (430) (373) 181 195

Total current 376,459 237,698 (236,373) (124,179) 140,086 113,519Total noncurrent 238,770 188,058 (119,550) (98,321) 119,220 89,737Total 615,229 425,756 (355,923) (222,500) 259,306 203,256


46

15. Technical reserves – insurance and reinsurance (Continued)

Changes in technical reserves, not considering the DPVAT insurance line, are as follows

Changes in unearned premium reserves12/31/2017 12/31/2016

Insurance Reinsurance Retained Insurance Reinsurance Retained

At January 1 328,841 (195,524) 133,317 270,693 (164,029) 106,664Written premium in the period 322,011 (237,405) 84,606 271,436 (189,054) 82,382Earned oremium in the period (254,096) 186,838 (67,258) (203,021) 149,789 (53,232)Foreign exchange gains 3,530 (3,052) 478 (10,267) 7,770 (2,497)At end of year 400,286 (249,143) 151,143 328,841 (195,524) 133,317

Changes in claim reserves Insurance Reinsurance Retained Insurance Reinsurance Retained

At January 1 30,902 (26,976) 3,926 140,931 (138,136) 2,795Claims reported 154,998 (144,262) 10,736 (44,268) 21,261 (23,007)Claim expenses 2,129 (1,723) 406 2,527 (1,789) 738Indemnity recovery (1,671) 24,559 22,888 24,319 - 24,319Recovered expenses (36) - (36) (424) - (424)Changes in claims incurred but not reported 36,546 (34,849) 1,697 2,565 (1,553) 1,012Claims paid in the period (85,086) 78,521 (6,565) (81,876) 81,911 35Related expenses paid (2,047) 1,656 (391) (1,551) 989 (562)Recovery of related expenses 36 - 36 424 - 424Foreign exchange difference 1,526 (1,525) 1 (13,454) 12,048 (1,406)Monetary restatement 2,968 (2,181) 787 1,709 (1,707) 2At end of year 140,265 (106,780) 33,485 30,902 (26,976) 3,926

Changes in incurred but not reported claimsreserve Insurance Reinsurance Retained Insurance Reinsurance Retained

At January 1 12,732 (10,793) 1,939 10,167 (9,240) 927Changes 36,546 (34,849) 1,697 2,565 (1,553) 1,012At end of year 49,278 (45,642) 3,636 12,732 (10,793) 1,939

Changes in PDR Insurance Reinsurance Retained Insurance Reinsurance Retained

At January 1 1,155 (1,004) 151 3 (2) 1Changes 331 (312) 19 1,152 (1,002) 150At end of year 1,486 (1,316) 170 1,155 (1,004) 151

Changes in PSL Insurance Reinsurance Retained Insurance Reinsurance Retained

At January 1 17,015 (15,179) 1,836 130,761 (128,894) 1,867Changes 72,486 (44,643) 27,843 (113,746) 113,715 (31)At end of year 89,501 (59,822) 29,679 17,015 (15,179) 1,836

Changes in technical reserves, not considering the DPVAT insurance line, are as follows:

December 31, 2017 December 31, 2016Reconciliation of reserves Insurance Reinsurance Retained Insurance Reinsurance Retained

Outstanding claims reserve 89,501 (59,822) 29,679 17,015 (15,179) 1,836Incurred but not reported claims reserve 49,278 (45,642) 3,636 12,732 (10,793) 1,939Related expenses reserve 1,486 (1,316) 170 1,155 (1,004) 151Total claims reserve 140,265 (106,780) 33,485 30,902 (26,976) 3,926

Unearned premium reserve 400,286 (249,143) 151,143 328,841 (195,524) 133,317

Total 540,551 (355,923) 184,628 359,743 (222,500) 137,243


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16. Progress of claims

This Note presents the progress of claims segregated by insurance lines sold internally by theInsurer and DPVAT. These were segregated because, for DPVAT purposes, information stated isgenerated by Seguradora Líder dos Consórcios do Seguro DPVAT S.A.

Table of progress of outstanding insurance claims, not considering DPVAT is as follows:

Reported year 2012 2013 2014 2015 2016 2017

Claims reportedAt end of report year 1,051 20,905 712 131,006 4,441 116,873After 1 year 1,648 20,702 618 94,695 37,875 -After 2 years 1,831 20,735 612 97,715 - -After 3 years 1,805 20,735 612 - - -After 4 years 1,810 20,735 - - - -After 5 years 1,810 - - - - -Legal monetary restatement 4 - - 1,929 9 767Foreign exchange variation - - - - 1,422 116Total claims reported 1,814 20,735 612 99,644 39,306 117,756

Accumulated deficit 763 (170) (100) (31,362) 34,865 -Accumulated deficit 73% (1%) (14%) (24%) 785% -

Reported year 2012 2013 2014 2015 2016 2017

Payments madeAt end of report year 411 8,518 30 686 2,083 76,050After 1 year 1,264 19,699 208 80,376 2,905 -After 2 years 1,774 20,735 312 88,590 - -After 3 years 1,774 20,735 312 - - -After 4 years 1,774 20,735 - - - -After 5 years 1,774 - - - - -Total payments 1,774 20,735 312 88,590 2,905 76,050

Outstanding claims reserve 639 12,771 1,742 130,761 17,015 89,501

Incurred but not reported claimsreserve 1,072 8,009 5,461 10,167 12,732 49,278

Total liabilities 1,711 20,780 7,203 140,928 29,747 138,779


48

16. Progress of claims (Continued)

The table of progress of recoverable reinsurance claims, not considering DPVAT, is as follows:

Report year 2012 2013 2014 2015 2016 2017

Claims reportedAt end of report year 735 19,445 513 128,832 3,089 83,418After 1 year 1,154 19,494 384 93,942 36,411 -After 2 years 1,282 19,518 378 96,494 - -After 3 years 1,263 19,518 378 - - -After 4 years 1,267 19,518 - - - -After 5 years 1,267 - - - - -Legal monetary restatement 1 - - 602 6 1Foreign exchange variation - - - - 1,280 116Total claims reported 1,268 19,518 378 97,096 37,697 83,535

Accumulated deficit 535 73 (135) (30,065) 34,800 -Accumulated deficit 73% - (26%) (23%) 1,127% -

ReceiptsAt end of report year 288 7,585 23 249 907 69,658After 1 year 885 18,552 95 81,150 1,583 -After 2 years 1,242 19,518 198 89,337 - -After 3 years 1,242 19,518 198 - - -After 4 years 1,242 19,518 - - - -After 5 years 1,242 - - - - -Total receipts 1,242 19,518 198 89,337 1,583 69,658

Outstanding claims reserve 447 12,129 1,472 128,894 15,179 59,822

Incurred but not reported claimsreserve 646 7,039 4,416 9,240 10,793 45,642

Total assets 1,093 19,168 5,888 138,134 25,972 105,464

Below are the amounts referring to claims reported, expenses with claims and reserve for claimsincurred but not reported in the DPVAT line, broken down by type of administrative and legalclaim. These amounts are reported exclusively by Seguradora Líder dos Consórcios do SeguroDPVAT S.A.


49

16. Progress of claims (Continued)

12/31/2017 12/31/2016Progress of administrative claimsWithin 01 year 1,726 2,481Outstanding claims reserve – administrative 1,726 2,481

Progress of legal claimsWithin 1 year 2,897 4,111From 1 to 2 years 1,869 2,173From 2 to 3 years 1,247 1,402From 3 to 4 years 783 846From 4 to 5 years 458 582Over 5 years 785 1,663Outstanding claims reserve - legal 8,039 10,777

Total outstanding claims reserve 9,765 13,258

Incurred but not reported claims reserve 64,496 52,249

17. Equity

a) Capital

As of December 31, 2017, subscribed and paid-in capital is represented by 56,566,347registered common shares, with no par value.

The Special Shareholders’ Meeting held on December 30, 2015 decided to increase capital,through subscription in cash, with issue of 1,634,774 new registered common shares, with nopar value, in the amount of R$2,812, for the issue price of R$1.72 (in reais) per share, basedon the issue unit price. Consequently, the Insurer’s capital increased from R$41,548 toR$44,360, and the number of registered common shares, with no par value, from 42,470,190to 44,104,964. Such capital increase was approved by Administrative Ruling SUSEP/DIRATNo. 1339, of April 15, 2016.

Capital increase was approved at the Special Shareholders´ Meeting of December 28, 2016,through capitalization of credit of interest on equity, of R$4,998, and subscription in cash ofR$14,479, with issue of 9,837,035 new registered common shares, with no par value, in theamount of R$19,477, for the issue price of R$1.98. Consequently, the Insurer’s capitalincreased from R$44,360 to R$63,837, and the number of registered common shares, withno par value, from 44,104,964 to 53,941,999. Such capital increase was approved byAdministrative Ruling SUSEP/ DIORG No. 285, of March 22, 2017.


50

17. Equity (Continued)

a) Capital (Continued)

Capital increase was approved at the Special Shareholders´ Meeting of December 29, 2017,through capitalization of credit of interest on equity, of R$5,984, with issue of 2,624,348 newregistered common shares, with no par value, at the issue price of R$2.28. Consequently,the Insurer’s capital increased from R$63,837 to R$69,821, and the number of registeredcommon shares, with no par value, from 53,941,999 to 56,566,347. The above capitalincrease is under approval by SUSEP.

b) Income reserves

Income reserves comprise the legal reserve set up at 5% of income earned by the Insurer,after absorption of accumulated losses, and the remaining amount is allocated to theretained profits reserve.

c) Mandatory minimum dividends and interest on equity

The Insurer’s articles of incorporation sets a minimum dividend of 25% on net income for theyear, adjusted as provided by article 202 of Law No. 6404/76.

In the years ended December 31, 2017 and 2016, upon approval at the SpecialShareholders' Meeting, and after set-up of the legal reserve, dividends were paid toshareholders as interest on equity, as follows:

12/31/2017 12/31/2016

Net income for the year 27,526 19,932Allocation to legal reserve (1,376) (997)Calculation base 26,150 18,935

Mandatory minimum dividends - 25% 6,538 4,734

Interest on capital paid in replacement of minimum dividends (*) (8,001) (5,880)

Interest on equity in relation to mandatory minimum dividends (1,464) (1,146)

(*) Following Law No. 9249/95, for the years ended December 31, 2017 and 2016, the Insurer paid interest on equity withinthe tax limit, totaling R$8,001 and R$5,880 (gross of withholding income tax), and R$6,801 and R$3,760 (net of withholdingincome tax), respectively, to its shareholders. Interest on equity is recorded as financial expenses and, for financialstatements purposes, as distribution of profits under equity.


51

17. Equity (Continued)

d) Breakdown of adjusted equity (PLA) and capital requirement

12/31/2017 12/31/2016

Equity 138,133 112,200Intangible assets (2,866) (2,448)Increase in surplus between reserves recorded 2,231 924

Adjusted equity (PLA) 137,498 110,676

Base capital – BC (a) 15,000 15,000

Additional capital - underwriting risk (CRsubs) 14,036 12,692Additional capital - operational risk (CRoper) 2,522 1,746Additional capital - credit risk (CRcred) 18,760 8,202Additional capital – market risk (CRMerc) 5,921 2,620Diversification benefit (7,985) (4,365)Risk capital – CR (b) 33,254 20,895

Minimum capital requirement (MCR) - highest of (a) and (b) 33,254 20,895

Adjusted equity 137,498 110,676 (-) Capital requirement (CR) 33,254 20,895Capital sufficiency – R$ 104,244 89,781

Capital sufficiency (% of CR) 313% 430%

CNSP Ruling No. 321, of December 15, 2015, sets forth that the minimum capital to be keptat all times by the entity under supervision in order to operate is the higher of base capitaland risk capital.

18. Income and social contribution taxes

Income and social contribution taxes calculated at the effective official rates as of December 31,2017 and 2016 are reconciled as follows:


52

18. Income and social contribution taxes (Continued)

12/31/2017 12/31/2016Income tax Social

contributiontax

Income tax Socialcontribution

tax

Income before income taxes and profit sharing 48,115 48,115 34,946 34,946Statutory profit sharing (4,738) (4,738) (3,878) (3,878)Interest on equity (8,001) (8,001) (5,880) (5,880)Tax base 35,376 35,376 25,188 25,188

Total IRPJ and CSLL at effective rates (8,843) (7,075) (6,297) (5,038)

Permanent (additions)/exclusions in the tax calculation (49) (57) (54) (43)

Foreign exchange variation 25 20 (353) (282)Market value adjustment 176 141 876 701Other reserves 313 250 22 17Temporary (additions)/exclusions in the tax calculation 514 411 545 436

Tax deductions 264 - 324 -

Income and social contribution tax expense (8,114) (6,721) (5,482) (4,645)

Deferred tax (expenses)/revenue (570) (446) (544) (465)

Total revenue/(expenses) (8,684) (7,167) (6,026) (5,110)

Provisional Executive Order No. 675 (MP 675/15) was published on May 21, 2015, increasing theCSLL rate on net income of the financial and insurance sectors, from 15% to 20% of taxable profit,effective as of September 2015. With publication of Law No. 13169 on October 7, 2015, the ratewas reduced from 20% to 15%, as from 2019.

19. Transactions with related parties

The Insurer engages in transactions with related parties of the Vinci Partners Ltda. Group and ofInternational Finance Corporation – IFC. The major transactions with these entities includemanagement of the investment portfolio, the amounts of which are recorded as financialexpenses, and issuing of insurance policies and reinsurance contracts, the amounts of which arerecorded as written premium, technical reserves, incurred claims and reinsurance results.

In the year ended December 31, 2017, the Insurer records interest on equity payable toshareholders, net of withholding income tax, totaling R$817.


53

19. Transactions with related parties (Continued)

In the year ended December 31, 2017, the Company paid management fees to managementmembers, represented by statutory officers, totaling R$1,417 (R$1,396 at December 31, 2016).The statement of financial position and of profit or loss balances arising from transactions withrelated parties and management are shown below:

Assets Liabilities Revenue / (Expenses)Related parties 12/31/2017 12/31/2016 12/31/2017 12/31/2016 12/31/2017 12/31/2016

Inbrands S.A. - - 3 - 3 112BK Brasil Operação e Assessoria de Restaurante S.A. 2 1 12 - 96 97Companhia de Marcas - 283 341 - (341) 377Unidas S.A. - - - - 4 55Unidas Locadora de Veículos Ltda. - - 284 115 (168) 603CHL CVI Incorporações Ltda. 4 - 7 (7) -Gold Los Angeles Empreend. Imobiliários SPE Ltda. 42 - 198 - (155) -Braquiara Empreendimentos - - 38 37 (445) (398)Vinci Gestora de Recursos Ltda. - - 48 19 (463) (262)Austral Participações S.A. - - 817 - (8,001) (5,880)Austral Resseguradora S.A. 26,968 12,548 52,948 34,802 (11,492) (24,680)Management - - - - (1,417) (1,396)Total 27,016 12,832 54,696 34,973 (22,386) (31,372)

20. Insurance lines

The insurance lines and performance indicators as of December 31, 2017 and 2016 are as follows:

Earned Premium Loss ratio % (a) Acquisition ratio % (b)Insurance lines 12/31/2017 12/31/2016 12/31/2017 12/31/2016 12/31/2017 12/31/2016

Surety bond 118,580 86,298 54.80 1.69 15.96 16.82Rental bonds 645 610 67.84 (0.83) 21.71 20.98CAR/EAR risks 10,110 9,687 27.51 4.53 11.46 10.29Energy 103,259 86,091 37.57 (24.46) 1.08 (0.52)Marine hull 7,445 4,805 35.64 16.83 13.92 11.32Miscellaneous risks 505 2,253 17.90 52.70 10.93 31.79General liability 420 267 2.93 (0.32) 14.82 15.63Named risks 9,308 8,198 5.03 9.05 5.46 7.48Loss of profits 3,824 4,813 (1.46) 3.18 2.51 5.26DPVAT 25,443 36,454 84.44 85.70 1.18 1.41Total premiums earned 279,539 239,476 47.09 6.25 8.37 7.84

(a) Loss ratio = {reported indemnities + claim expenses + salvages and refunds + changes in the Incurred but not Reported Claims Reserve (IBNR)} /(Written premium - changes in the unearned premium reserve).

(b) Acquisition ratio = earned acquisition cost/earned premium.


54

20. Insurance lines (Continued)

Breakdown of direct written premiums before and after ceded reinsurance premiums for the yearsended December 31, 2017 and 2016 is as follows:

Direct written premium netof ceded coinsurance

Ceded reinsurance premium

Insurance (-) reinsurance =net premium

Retention(%) Reinsured (%)

Insurance lines 12/31/2017 12/31/2016 12/31/2017 12/31/2016 12/31/2017 12/31/2016 12/31/2017 12/31/2016 12/31/2017 12/31/2016

Surety bond 152,074 99,851 (83,961) (51,203) 68,113 48,648 44.79 48.84 55.21 51.28Rental bonds 642 667 (250) (217) 392 450 61.00 67.47 39.00 32.53General liability 222 259 (160) (128) 62 131 27.93 50.58 72.07 49.42CAR/EAR risks 5,035 7,088 (3,980) (4,384) 1,055 2,704 20.95 38.15 79.05 61.85Energy 106,513 113,934 (102,808) (108,559) 3,705 5,375 3.48 4.72 96.52 95.28Miscellaneous risks (1) 1,742 - (311) (1) 1,431 100.00 82.15 - 17.85Loss of profits - 2,446 - (2,072) - 374 - 15.29 - 84.71Marine hull 6,172 8,515 (4,040) (6,345) 2,132 2,169 34.54 25.48 65.46 74.52DPVAT 25,537 36,704 - - 25,537 36,704 100.00 100.00 - -Total 296,194 271,205 (195,199) (173,219) 100,995 97,986 34.10 36.13 65.90 63.87

Written premiumcoinsurance accepted

Ceded reinsurance premium

Co-insurance (-) reinsurance= net premium

Retention(%) Reinsured (%)

Insurance lines 12/31/2017 12/31/2016 12/31/2017 12/31/2016 12/31/2017 12/31/2016 12/31/2017 12/31/2016 12/31/2017 12/31/2016

Surety bond 7,290 40,232 (3,124) (17,556) 4,166 22,676 57.15 56.37 42.85 43.66General liability 202 6 (159) (3) 43 3 21.29 50.00 78.71 50.00CAR/EAR risks 1,201 2,619 (1,101) (2,286) 100 333 8.33 12.71 91.67 87.29Energy 429 242 (305) (117) 124 125 28.90 51.65 71.10 48.35Loss of profits 3,507 3,056 (3,272) (2,811) 235 245 6.70 8.02 93.30 91.98Named risks 10,611 7,577 (9,927) (6,560) 684 1,017 6.45 13.42 93.55 86.58Marine hull 1,808 456 (1,553) (354) 255 102 14.10 22.37 85.90 77.63Total 25,048 54,188 (19,441) (29,687) 5,607 24,501 22.39 45.21 77.61 54.79

Breakdown of direct written premiums before and after ceded reinsurance premiums for the yearsended December 31, 2017 and 2016 is as follows:

RVNEpremium

Ceded reinsurance premium of RVNE

Co-insurance (-) reinsurance= net premium

Retention(%)

Reinsured(%)

Insurance lines 12/31/2017 12/31/2016 12/31/2017 12/31/2016 12/31/2017 12/31/2016 12/31/2017 12/31/2016 12/31/2017 12/31/2016

Surety bond 2,516 (67) 9 (849) 2,525 (916) 100.36 1,367.16 (0.36) (1,267.16)Rental bonds 1 1 1 (2) 2 (1) 200.00 100.00 (100.00) 200.00General liability 26 (4) (18) (3) 8 (7) 30.77 200.00 69.23 (100.00)CAR/EAR risks 871 (169) (658) (250) 213 (419) 24.45 247.93 75.55 (147.93)Energy 20,154 (11,054) (20,167) 10,072 (13) (982) (0.06) 8.88 100.06 91.12Miscellaneous risks (51) (174) 16 26 (35) (148) 68.63 86.21 31.37 13.79Loss of profits 161 - (132) - 29 - 18.01 - 81.99 -Named risks (976) 948 844 (821) (132) 127 13.52 13.40 86.48 86.60Marine hull 3,604 (6,735) (2,660) 5,679 944 (1,056) 26.19 15.68 73.81 84.32Total 26,306 (17,254) (22,765) 13,852 3,541 (3,402) 13.46 19.72 86.54 (80.28)

Total 347,548 308,139 (237,405) (189,054) 110,143 119,085 31.69 38.65 68.31 61.35

Reinsurance premiums by class of reinsurers:

12/31/2017 12/31/2016

Local reinsurer (171,966) (97,576)Admitted reinsurer (63,815) (89,845)Ocasional reinsurer (1,624) (1,633)Total (237,405) (189,054)


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21. Share-based payment

The Extraordinary General Meeting held on October 1, 2013 approved the first stock option planof Austral Participações S.A. (“Austral Participações”), the Insurer’s parent company.

The Plan sets forth general conditions for granting by Austral Participações of preferred stockoptions for shares issued by Austral Participações to eligible professionals, managementmembers and employees of Austral Participações and its affiliates and/or subsidiaries for theservices provided. The granting terms and conditions are defined and administered by theManagement Committee, pursuant to the guidelines and conditions established by the StockOption Plan, and the Plan will be settled with Austral Participações shares, if and when theoptions are exercised, upon payment of the strike price by the participant.

The plan management committee may, however, establish different vesting conditions or optionterms for each individual plan or contract, including to extend the terms at issue and/or theirscheduling.

At the meetings held by the stock option plan management committee on October 1 and 2, 2013,the first and second stock option programs were approved, whereby Austral Participaçõesgranted stock options to participants totaling 4,500,000 shares.

At the meeting held by the stock option plan management committee on December 19, 2014, thethird stock option plan was approved, whereby Austral Participações granted stock options toparticipants totaling 4,832,137 shares.

At the meeting held by the stock option plan management committee on April 1, 2016, the fourthstock option plan was approved, whereby Austral Participações granted stock options toparticipants totaling 76,616 shares.

The first program provides for three vesting dates, the last being December 2014, when theparticipants will have the right to buy their options for the services provided, for the period of fouryears as from the last vesting date and as from each of the vesting dates established by the planmanagement committee, subject to the contractual conditions.

The second program provides for four vesting dates, the last being September 2016, when theparticipants will have the right to buy their options for the services provided, for the period of fouryears as from the last vesting date and as from each of the vesting dates established by the planmanagement committee, subject to the contractual conditions.


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21. Share-based payment (Continued)

The third program provides for three to five vesting dates, depending on the participant, the lastbeing September 2018, when the participants will have the right to buy their options for theservices provided, for the period of two years as from the last vesting date and as from each ofthe vesting dates established by the plan management committee, subject to the contractualconditions.

The fourth program provides for three vesting dates, the last being December 2018, when theparticipants will have the right to buy their options for the services provided, for the maximumperiod of eighteen months as from the last vesting date and as from each of the vesting datesestablished by the plan management committee, subject to the contractual conditions.

For the first and second programs, the options fair value was estimated on the granting date,based on the Monte Carlo option model, considering a volatility of approximately 27.5%, in linewith the volatilities of the insurance industry companies listed on stock exchanges at the grantingdate and the fixed interest rate curve on the granting dates, according to the interest rate futuresmarket traded at the São Paulo Securities, Commodities & Futures Exchange (BM&FBovespa).The spot price used was inferred based on assumptions disclosed by Vinci Capital Partners, andsuch assumptions are also audited by independent auditors in the ordinary course of the audit ofFundo Vinci Capital Partners II FIQ FIP, and the strike price of both programs is R$1.1425,adjusted by an inflation index and by dividends and interest on equity per share paid by theInsurer from time to time, as from the date the individual contract is entered into with theparticipant.

Based on those assumptions, the average weighted fair value for each option granted wasR$0.4922.

For the third program, the options fair value is estimated on the granting date, based on theBlack-Scholes model, considering a volatility of approximately 36.5%, in line with the volatilities ofinsurance industry companies listed on stock exchanges at the granting date, and the fixedinterest rate curve determined on the granting dates, according to the interest rate futures markettraded at BM&FBovespa. The spot price used was the price of first issue of shares for IFC, andthe strike price was R$1.1752, adjusted by an inflation index and by dividends and interest onequity per share paid by the Insurer from time to time, as from the date the individual contract isentered into with the participant. Based on those assumptions, the average weighted fair valuefor each option granted was R$0.4529.


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For the fourth program, the options fair value is estimated on the granting date, based on theBlack-Scholes model, considering a volatility of approximately 38.2%, in line with the volatilities ofthe insurance industry companies listed on stock exchanges at the granting date, and the fixedinterest rate curve determined on the granting dates, according to the interest rate futures markettraded at BM&FBovespa. The spot price used was inferred based on information disclosed byFundo Vinci Capital Partners II FIQ FIP, and the strike price was R$1.2171, adjusted by aninflation index and by dividends and interest on equity per share paid by the Insurer from time totime, as from the date the individual contract is entered into with the participant. Based on thoseassumptions, the average weighted fair value for each option granted was R$0.49.

Austral Participações further grants to each participant a put option of its shares acquired throughthe exercise of the options by the participant, as well as Austral Participações has a call option ofsuch shares. The term and price of such options are determined in individual contracts enteredinto between Austral Participações and the participants.

The Extraordinary General Meeting held on March 18, 2016 approved the second stock optionplan of Austral Participações, the Insurer’s parent company.

The second plan sets forth general conditions for granting by Austral Participações of preferredstock options for shares issued by Austral Participações to eligible professionals, managementmembers and employees of Austral Participações and its affiliates and/or subsidiaries for theservices provided. The granting terms and conditions are defined and administered by theManagement Committee, pursuant to the guidelines and conditions established by the StockOption Plan, and the Plan will be settled with Austral Participações shares, if and when theoptions are exercised, upon payment of the strike price by the participant.

The plan management committee may, however, establish different vesting conditions or optionterms for each individual plan or contract, including to extend the terms at issue and/or theirscheduling.

At the meeting held by the management committee of the second stock option plan on April 1,2016, the first stock option program of the second plan was approved, whereby AustralParticipações granted stock options to participants totaling 1,884,307 shares.


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For the first program of the second plan, the options fair value is estimated on the granting date,based on the Black-Scholes model, considering a volatility of approximately 38.2%, in line withthe volatilities of the insurance industry companies listed on stock exchanges at the grantingdate, and the fixed interest rate curve determined on the granting dates, according to the interestrate futures market traded at BM&FBovespa. The spot price used was inferred based oninformation disclosed by Fundo Vinci Capital Partners II FIQ FIP, and the strike price isR$2.8316, adjusted by an inflation index and by dividends and interest on equity per share paidby the Insurer from time to time, as from the date the individual contract is entered into with theparticipant. Based on those assumptions, the average weighted fair value for each option grantedwas R$0,25.

At the meeting held by the management committee of the second stock option plan onSeptember 5, 2016, the second stock option program of the second plan was approved, wherebyAustral Participações granted stock options to participants totaling 75,748 shares.

For the second program, the options fair value is estimated on the granting date, based on theBlack-Scholes model, considering a volatility of approximately 38.2%. The spot price used wasinferred based on information disclosed by Fundo Vinci Capital Partners II FIQ FIP, and the strikeprice is R$2.8316, adjusted by an inflation index and by dividends and interest on equity pershare paid by the Insurer from time to time, as from April 1, 2016. Based on those assumptions,the average weighted fair value for each option granted was R$0.41.

The following table reconciles total outstanding stock options of Austral Participações, at thebeginning and end of the year ended December 31, 2017, and year ended December 31, 2016:

Number ofoptions

Total options outstanding at December 31, 2016 10,924,986Total options exercisable at December 31, 2016 7,626,930

Total options exercised 450,590Total options granted -Total options outstanding at December 31, 2017 10,474,396Total options exercisable at December 31, 2017 8,980,039


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In the event the employment contract of a participant is terminated either voluntarily orinvoluntarily, without cause, any non-exercisable stock options are automatically terminated, withno right to indemnity or compensation, and any exercisable stock options may be exercisedwithin a defined period, as established in each individual contract.

In the event the employment contract of a participant is terminated for cause, all exercisablestock options, as well as those that may still not be exercised, are automatically terminated byoperation of the law, irrespective of prior notice or indemnity.

Outstanding stock options totaling 10,474,396 represent a dilution of up to 4.30% on the totalshares of Austral Participações of 243,614,411.

The effect of the incentive based on stock options offered to employees registered in AustralSeguradora entitled to the options of Austral Participações is recorded in the Insurer´s equity ascapital reserve for the year ended December 31, 2017, totaling R$1,938 (R$1,754 at December31, 2016).

22. Breakdown of statement of profit or loss accounts

a) Premiums

12/31/2017 12/31/2016

Direct written premium 277,090 239,542Co-insurance premiums accepted - insurance companies 25,048 54,188Co-insurance premiums ceded - insurance companies (6,433) (5,041)Written premium - DPVAT 25,537 36,704Premium – risks in force but not issued 26,306 (17,254)Change in technical reserves (68,009) (68,663)Earned premium 279,539 239,476

b) Incurred claims

12/31/2017 12/31/2016

Direct indemnities (154,998) 44,268DPVAT indemnities (14,851) (14,567)Direct expenses (2,165) (2,527)DPVAT expenses (6,539) (6,352)Recovery of claims 1,707 (23,848)Salvages and refunds 81,841 943Claims incurred but not reported – direct (36,546) (2,565)Claims incurred but not reported - DPVAT (95) (10,323)Total (131,646) (14,971)


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22. Breakdown of statement of profit or loss accounts (Continued)

c) Acquisition cost

12/31/2017 12/31/2016

Commissions on written premiums (34,030) (25,399)Recovery of co-insurance commission 1,314 1,028Changes in deferred acquisition cost 9,195 6,129Other acquisition costs (123) (523)Total (23,398) (18,765)

d) Reinsurance income (expenses)

12/31/2017 12/31/2016

Indemnity recovery 144,262 (21,261)Recovery of indemnity expenses 1,723 1,790Recovery of claims incurred but not reported 34,849 1,553Income - profit sharing 8,167 5,142Ceded reinsurance premiums (237,405) (189,054)Transfer of salvages and refunds (75,841) (552)Unearned premium reserve 50,567 39,265Total (73,678) (163,117)

e) Other operating income and expenses

12/31/2017 12/31/2016

Recovery of policy cost 1,176 415Recovery of DPVAT ticket cost 41 65Bank fees (51) (30)DPVAT bank fees (2,181) (2,063)Risk inspection (127) (94)Allowance for doubtful accounts - 2Policy writing expenses (1) (10)Other DPVAT expenses (574) (775)Other expenses (1,344) (646)Total (3,061) (3,136)

f) Administrative expenses

12/31/2017 12/31/2016

Own personnel expenses and social charges (8,746) (8,929)Occupancy and operation expenses (3,373) (3,134)Third-party service expenses (1,717) (1,335)Depreciation and amortization expenses (1,341) (1,248)DPVAT administrative expense (2,501) (1,940)Other (808) (605)Total (18,486) (17,191)


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22. Breakdown of statement of profit or loss accounts (Continued)

g) Tax expenses

12/31/2017 12/31/2016

COFINS (1,353) (4,656)PIS (87) (815)Inspection fee (638) (414)Other (337) (198)Total (2,415) (6,083)

h) Financial income (expenses)

12/31/2017 12/31/2016Income:Securities held for trading - DPVAT 7,160 7,890Securities held for trading 15,838 15,627Securities available for sale 3,007 3,547Insurance operations 17,295 74,947Foreign exchange valuation of cash and cash equivalents 3,109 4,477Other income 1,075 262

Expenses:Securities held for trading (962) (1,497)Securities available for sale (401) (132)Insurance operations (16,513) (70,797)Obligation charges (3) (3)Foreign exchange devaluation of cash and cash equivalents (2,556) (9,846)Finance expenses – DPVAT insurance (7,160) (7,890)Other expenses (565) (21)Total 19,324 16,564

23. Earnings per share – basic and diluted

As required by CPC no 41, the tables below present the reconciliation of income for the year withthe amounts used to calculate basic and diluted earnings per share:

12/31/2017 12/31/2016

Numerator - net income for the year 27,526 19,932Denominator (in thousands of shares) 56,566 53,942Basic earnings per share 0.49 0.37


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23. Earnings per share – basic and diluted (Continued)

12/31/2017 12/31/2016

Numerator - net income for the year 27,526 19,932Denominator considering share options (in thousands of shares) 67,041 64,867Diluted earnings per share 0.41 0.31

Basic earnings per share is calculated by dividing income for the year by the total number ofoutstanding shares in the period.

Diluted earnings per share is calculated by dividing income for the year by the total number ofoutstanding shares in the period, including outstanding stock options.

24. Event after the reporting period

Capital increase resolved at the Extraordinary General Meeting held on December 29, 2017 ofR$5,984, with the issue of 2,624,348 new common shares, with no par value, at the issue price ofR$2.28, was approved by Administrative Ruling SUSEP/DIORG No. 768, of January 29, 2018.


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25. Professionals in charge

Board Members:Alessandro Monteiro Morgado HortaBruno Augusto Sacchi ZarembaAntônio Alberto Gouveia Vieira Filho

Chief Executive Officer:Carlos Frederico da Costa Leite Ferreira

Executive Board:Petrônio Duarte Cançado

Accounting manager:Arthur Teixeira RodriguesCRC RJ 078.781/O-0

Actuary:Claudia Novello RibeiroMIBA No. 2.029

Centro Empresarial PB 370Praia de Botafogo, 3706º ao 10º andar - Botafogo22250-040 - Rio de Janeiro - RJ - BrasilTel: +55 21 3263-7000ey.com.br

Uma empresa-membro da Ernst & Young Global Limited

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Independent actuaries’ opinion

The Shareholders, Board of Directors and OfficersAustral Seguradora S.A.Rio de Janeiro - RJCNPJ: 11.536.561/0001-26

We have audited the reserves, except those relating to Compulsory Vehicle Liability Insurance(DPVAT) consortia, and reinsurance assets recorded in the financial statements, as well as theschedules showing minimum capital, amounts recorded as a reduction of the reserve coveragerequired, solvency and retention limits of Austral Seguradora S.A. as at December 31, 2017, preparedby management in accordance with the actuarial principles informed by the BrazilianInstitute of Actuaries (IBA) and with the rules established by Brazil’s Private Insurance SupervisoryOffice (SUSEP) and by Brazil's National Council for Private Insurance (CNSP).

Management´s responsibility

Management of Austral Seguradora S.A. is responsible for the reserves and reinsurance assetsrecorded in the financial statements, and for the schedules showing minimum capital, amountsrecorded as a reduction of the reserve coverage required, solvency and retention limits prepared inaccordance with the actuarial principles informed by the Brazilian Institute of Actuaries (IBA) and withthe rules established by Brazil’s Private Insurance Supervisory Office (SUSEP) and by Brazil'sNational Council for Private Insurance (CNSP), and for such internal control features as managementdetermines are necessary to enable their preparation that are free from material misstatement,whether due to fraud or error.

Actuarial auditor’s responsibility

Our responsibility is to express an opinion solely on the items informed in paragraph one hereof,based on our actuarial audit procedures conducted in accordance with the general actuarial principlesissued by the Brazilian Institute of Actuaries (IBA) and also based on our past knowledge of andexpertise in adequate actuarial practices.

Those actuarial principles require that actuarial audit be planned and performed in order to obtainreasonable assurance about whether the respective audited items are free from materialmisstatement.

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With special regard to the entity’s solvency, our responsibility for expressing an opinion refers only tothe adequate recognition of reserves and related assets recorded as a reduction of financial coverage,according to the foregoing rules and principles, and to the audited entity’s compliance with capitalrequirements pursuant to the minimum limits stipulated in current standards defined by Brazil’s PrivateInsurance Supervisory Office (SUSEP) and by Brazil's National Council for Private Insurance (CNSP),and does not refer to the quality and valuation of financial coverage of reserves, net of offsettingassets, and capital regulatory requirements.

An actuarial audit involves performing procedures to obtain audit evidence about the amounts ofreserves and reinsurance assets recorded in the financial statements and the schedules showingminimum capital, amounts recorded as a reduction of the reserve coverage required, solvency andretention limits. The procedures selected depend on the actuarial auditor's judgment, including theassessment of the risks of material misstatement, whether due to fraud or error. In making those riskassessments, the actuary considers internal control relevant to design actuarial audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing an opinion on theeffectiveness of the audited entity’s internal control.

We believe that the audit evidence we obtained is sufficient and appropriate to provide a basis for ouractuarial audit opinion.

Opinion

In our opinion, the reserves and reinsurance assets recorded in the financial statements, and theschedules showing minimum capital, amounts recorded as a reduction of reserve coverage required,solvency margin and retention limits of Austral Seguradora S.A. as at December 31, 2017 wereprepared, in all material respects, in accordance with the rules and guidance issued by Brazil’s PrivateInsurance Supervisory Office (SUSEP), by Brazil's National Council for Private Insurance (CNSP) andby the Brazilian Institute of Actuaries (IBA).

Our opinion does not refer to reserves for DPVAT consortiums, as established by applicable standardswhich define the scope of an independent actuarial audit.

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Other matters

In the context of our responsibilities described above, considering the assessment of risks of materialmisstatement in the items within the scope defined in the first paragraph, we also applied selectedprocedures on the databases provided by the Insurer and used in our actuarial audit, tested on asampling basis. We believe that the data selected in our work is capable of providing reasonableassurance to enable those items within the scope defined in the first paragraph to be free frommaterial misstatement. Additionally, also based on selected procedures and on tests applied onsamples, we observed that, within the scope of said samples, there is a reasonable correspondence ofthe data that served as basis for calculation of the items within the scope defined in the first paragraphwith those submitted to SUSEP by means of the respective Statistical Tables, for the year endedDecember 31, 2017, as regards the most relevant aspects.

São Paulo, February 26, 2018

Ricardo PachecoMIBA 2.679EY Serviços Atuariais S.S.CNPJ 03.801.998/0001-11CIBA 57

Documents

Financial Statements Austral Seguradora S.A. · 6º ao 10º andar - Botafogo 22250-040 - Rio de Janeiro - RJ - Brasil Tel: +55 21 3263-7000 ey.com.br Uma empresa-membro da Ernst &