Strategic Report 01 Performance 02 03 04 Discussion of medical insurance business results Income Statement, medical insurance business GEL thousands; unless otherwise noted FY18 FY17 Change, Y-o-Y Net insurance premiums earned 55,112 53,710 2.6% Cost of insurance services (45,427) (48,583) -6.5% Gross profit 9,685 5,127 88.9% Salaries and other employee benefits (4,434) (3,601) 23.1% General and administrative expenses (1,459) (1,636) -10.8% Impairment of receivables (362) (479) -24.4% Other operating income 621 153 NMF EBITDA 4,051 (436) NMF EBITDA margin 7.4% -0.8% Depreciation and amortisation (759) (895) -15.2% Net interest income/(expense) 21 (795) NMF Net gains/(losses) from foreign currencies 215 34 NMF Net non-recurringincome/(expense) – (200) NMF Profit before income tax expense 3,528 (2,292) NMF Income tax benefit/(expense) (579) (310) 86.8% Profit/(Loss) for the period 2,949 (2,602) NMF Our medical insurance business has implemented significant Due to the medical insurance business’ increased client base (reaching initiatives and changes during the last 18 months. Better terms c.230,000 insured in February 2019) and new flagship hospital launches negotiated with healthcare services providers and pharmacies and in Tbilisi, where our medical insurance business has the highest a repriced portfolio have resulted in a solid contribution to the Group’s concentration of its insured clients, more of our medical insurance EBITDA and profit in 2018. customers will be utilising our inpatient services. At the same time, with our polyclinics expansion strategy, we expect the retention rate Revenue, medical insurance business to improve further in the future, on a larger base, providing a significant After changes implemented since 2Q17 to adjust prices or terminate revenue boost for our healthcare services business. Our facilities are loss-making contracts, the business started to attract new clients with increasingly favoured by these customers over competitor facilities due adjusted pricing, that resulted in y-o-y revenue growth. By winning to the quality and convenience of our service, access to one-stop-shop two important tenders at the end of 2018, the business is expected style polyclinics and the ease of claim reimbursement procedures. to continue its profitable growth in 2019 and to further increase its claims retention rate within the Group. EBITDA and profit, medical insurance business Gross profit, medical insurance business (GEL thousands, unless otherwise noted) FY18 FY17 Change, Y-o-Y Operating expenses (5,634) (5,563) 1.3% (GEL thousands, unless otherwise noted) FY18 FY17 Change, Y-o-Y Salaries and other employee Cost of insurance services (45,427) (48,583) -6.5% benefits (4,434) (3,601) 23.1% Net insurance claims incurred (42,584) (45,209) -5.8% General and administrative Agents, brokers and employee expenses (1,459) (1,636) -10.8% commissions (2,843) (3,374) -15.7% Impairment of receivables (362) (479) -24.4% Gross profit 9,685 5,127 88.9% Other operating income 621 153 NMF EBITDA 4,051 (436) NMF Loss ratio 77.3% 84.2% Expense ratio 16.8% 18.3% In 2018 the loss ratio was maintained below our targeted level Combined ratio 94.0% 102.5% (c.80%), down 6.9 ppts y-o-y. Our insurance business expansion has significantly improved claims The increase in salaries and other employee benefits is related retention rates within the Group, as business plays a feeder role in to staff bonuses for delivering business strategic priorities and originating and directing patients to our healthcare facilities, mainly outstanding performance. to polyclinics and to pharmacies. In 2018, our medical insurance claims Optimisation of operating expenses drove general and administrative expense was GEL 42.6 million, of which GEL 16.5 million (38.6% of expenses down y-o-y in 2018. In line with our strategy to create new total) was inpatient, GEL 17.0 million (40.1% of total) was outpatient revenue sources, the medical insurance business began participating and GEL 9.1 million (21.3% of total) accounted for drugs. in the Compulsory Motor Third Party Liability Insurance Programme, Claims retention rates effective in the country from 1 March 2018. The profit from this is shown in other operating income. As a result, the expense ratio YE18 YE17 Change, Y-o-Y was up 150 bps and combined ratio down 8.5 ppts, y-o-y. Total claims retained within the Group 39.4% 34.7% +4.7 ppts Due to efficient allocation of cash resources, our medical insurance Total claims retained business posted net interest income in FY18. in polyclinics 38.7% 34.4% +4.3 ppts Operating highlights: • Our insurance renewal rate was 69.7% in 2018 (76.9% in 2017). 65