Notice regarding the Insurance Supervisory Agency’s supervisory proceedings concerning the KD Group as a financial conglomerate

On 8 June 2012, an article entitled ‘AZN demands that KD Group sell Deželna banka or inject further capital’ was published in the newspaper Dnevnik, referring to the proceedings currently underway at the Insurance Supervision Agency (AZN) concerning the KD Group’s status as a financial conglomerate. KD and KD Group are public companies, and are therefore, in accordance with the rules applicable to companies whose shares are listed on an organised market, obliged to disclose facts about what is otherwise a confidential procedure in order to provide investors with objective information. The statements in the article are inaccurate in places; therefore, KD Group, as the company which, in accordance with the AZN decision, is responsible for preparing calculations and reports for the financial conglomerate under the Financial Conglomerates Act, hereby discloses the relevant facts regarding the course of the AZN supervisory proceedings.
As published on SEOnet and on the websites, on 24 September 2010, KD and KD Group received a decision from the AZN stating that the KD Group constitutes a financial conglomerate under the Financial Conglomerates Act. On 29 June 2011, the AZN issued a decision setting out the method for calculating capital and supplementary capital requirements at the level of the KD financial conglomerate – AS, on the basis of which the first calculation was carried out as at 30 June 2011. On the basis of the report as at 30 June 2011, the AZN carried out a supervisory procedure, in the course of which, on 11 April 2012, it issued a notice to remedy the breach, in which it found that the reported capital at the level of the financial conglomerate was lower than the capital requirements, calculated in accordance with the Rules on the calculation of supplementary capital requirements for regulated entities and on the calculation of adjusted capital requirements for unregulated entities within a financial conglomerate, and that the capital shortfall at the level of the financial conglomerate as at 30 June 2011 amounts to 64.3 million euros. The AZN has therefore ordered the mixed financial holding companies KD and KD Group to remedy the infringement within 12 months of the service of the order, i.e. by 13 April 2013.
The identified capital shortfall at the level of the financial conglomerate stems from the method for calculating capital and supplementary capital requirements at the level of the financial conglomerate, which stipulates that KD and KD Group, as mixed financial holding companies, must, for the purposes of the calculation, deduct all their investments in financial institutions in full from their capital. The total shortfall thus arose in the calculation of the capital of KD and KD Group, whilst all subsidiaries operating within the KD Group are are capital-adequate and fully compliant with the regulations under which they operate.
Adhering to the rule that, at the level of the financial holding company, all investments in financial institutions must be fully funded by capital requires either a strategic restructuring of the KD Group’s funding sources, or a strategic decision for the group to cease operations in one of the two financial sectors and thereby cease to meet the conditions for a financial conglomerate. The KD Group’s Board of Directors has already adopted a resolution to reduce the activities which, under the Financial Conglomerates Act, fall within the banking sector, within the KD Group to a level below the threshold at which the KD Group would no longer meet the criteria for a financial conglomerate. Accordingly, on 9 May 2012, KD Group signed an agreement with Factor Banka for the sale of a 100 per cent stake in KD Banka, and the process of reducing the KD Group’s shareholding in Deželna banka Slovenije is also proceeding at a rapid pace.
The operations and capital adequacy of the individual subsidiaries within the KD Group are not subject to this procedure; the companies are included in the calculation on the basis of their own capital, which in all cases exceeds the prescribed level. The companies are operating normally and in accordance with plans, and neither their operations nor the security of investors and policyholders are in any way at risk, nor would they be at risk even if KD and the KD Group were to fail to rectify the breaches specified in the AZN order by April 2013, as any further measures would, in all likelihood, relate solely to KD and the KD Group.
This notice will also be published on the website www.kd-fd.si under ‘Public Announcements’ from 8 June 2012 onwards.

KD d.d.