arab reinsurance company · shariaa compliant re-takaful window, which will positively impact the...

ARAB REINSURANCE COMPANY

ANNUAL REPORT 2011

- 1 -

Table of Contents

Letter from the Chairman 2-3

Board of Directors 4

Management 5

The Board of Directors’ Report as at 31/12/2011 6-11

Shareholders 12-13

Independent Auditor’s Report 14-15

Statement of Financial Position 16

Statement of Comprehensive Income 17

Statement of Changes in Equity 18

Statement of Cash Flows 19

Notes to the Financial Statements 20-55

- 2 -

LETTER FROM THE CHAIRMAN

Dear Shareholders,

On the occasion of the General Assembly meeting, it gives me pleasure to present to you the

report of the Company’s activities for the financial year ended on December 31, 2011

including its main achievements on all fronts: technical, financial, investment and

administrative.

Initially, it is imperative to mention the political events that took place in some Arab

countries and their adverse repercussions on these countries’ own economies, as well as the

regional ones; which were also further affected by the ongoing global economical and

financial crisis. Thanks to its executive management’s strategy, following the guidelines of

the Board of Directors, we are proud to say that your Company managed to reduce the direct

negative impact of these circumstances to a great extent.

The Company continues to realize sound financial results; driven by its consistent policy of

retaining proper technical, financial and contingency reserves and its sound selection of

secure and profitable investment channels. It is worth mentioning that the reserves are

allocated periodically with high professionalism and accuracy, based on historic statistics and

advanced actuarial studies.

Accordingly, the Company’s most important developments for 2011 are as follows:

1. The Company’s portfolio attained a 7% growth despite the economic slow-down

mentioned above. This success is attributed to the Company's management and its

adoption of a sound underwriting policy that eliminates losing businesses while increases

shares on good ones, including foreign business. The latter is written based on the Board

of Directors’ instructions to increase the Company’s foreign acceptances carefully on a

studied and programmed basis. In addition, the Company started to cede “Takaful”

business under its Takaful window and has supported, under direct supervision of the

Board of Directors, the Arab insurance markets that were facing hardening conditions

applied by the international reinsurance companies. All the above increases our

confidence in the progress of the Company's business and in achieving the best results,

God willing.

It is worth also noting the promotional campaign that was started by the Company for its

new products through specialized workshops and professional lectures presented by

senior experts and managers in Lebanon and abroad. This increases the clients’

confidence in the Company’s potentials, experience, and the development of the quality

of its services.

- 3 -

2. The Company continued achieving sound investment results whereby the annual average

return reached 6.5%. This is considered a great accomplishment in light of the economic

condition prevailing in the world for the past three years, amid low interest rates and the

fluctuations of the exchange rates, bonds and stock market.

Moreover, the shareholders’ decision to increase the Capital gradually till it reaches USD

100 million in the upcoming years, coupled with the Board’s follow-up on the execution

of this increase and coordinating with the executive management on its investment

approach, has enforced the Company’s competitive capabilities and provided it with all

necessary funds to exploit new investment schemes with fair and balanced returns. The

investment portfolio is diversified on all levels, by type and geography, to make sure that

there is a healthy distribution of funds. Perhaps the most prominent of which was the

establishment, with expert parties, of a financial assets management company that

launches specialized funds in Lebanese bonds to be marketed in the region.

3. The Company's executive management continued to renew and update its organizational

structure to include new administrative departments such as the Human Resources

Department, the Risk Management Department, the Research & Development/Actuarial

Studies Department, the Medical & Life Insurance Section, as well as the introduction of

the Re-Takaful window. External and internal expert personnel were employed in these

departments. The management, with the encouragement of the Board, has also developed

a comprehensive career development program that includes all its employees and through

which intensified training, along with professional workshops, were offered using in-

house and external specialized resources.

The management maintained its development of the financial reports and statements,

following the international accounting standards, whereby it underwent a drastic re-

structuring of the Company’s software in order to upkeep the preparation of advanced

financial reports in proper and timely fashion.

4. The Company upheld its B+ Stable Outlook rating which is a positive indicator on the

Company’s position and solvency. We are confident that the efforts exerted by the

executive management on all levels will contribute positively to the upgrading of the

Company’s future rating.

Finally, I am compelled to point out to the full cooperation and harmony that exist

between the Board of Directors and the Executive Management, the work and follow-up

of the Audit Committee, as well as the Internal Audit Department’s performance and its

commitment to implementing the Board’s decisions are two elements that had a hand in

some of the aforementioned achievements. In addition, the launching of the Risk

Management Committee is a primary pillar in strengthening the Company's immunity.

All of these factors constitute essential and fundamental elements to the growth of the

Company's business and the increase of its financial solvency.

In conclusion, I would like to thank our clients for their trust in our Company and their

increased cooperation, as well as our Shareholders for their ongoing support to the

Company's activities.

Khaldoun Barakat

Chairman

- 4 -

Board of Directors

Chairman Sheikh Khaldoun Barakat (Saudi Arabia)

Vice-Chairman Mr. Tanous Feghali Chairman and General Manager

General Insurance Company for the Near East

Al Ittihad Al Watani

(Lebanon)

Member Mr. Khaled El-Hasan Managing Director & CEO

Gulf Insurance Company

(Kuwait)

Member Mr. Suleiman El Hassan Chairman and General Manager

Syrian Insurance Company

(Syria)

Member Mr. Seba Hadj Mohamed Chairman and General Manager

Companie Centrale de Réassurance

(Algeria)

Member Mr. Abdallah R. Ibraheem Chairman and General Manager

Iraq Reinsurance Company

(Iraq)

Member Mr. Mahmoud Suleiman Alkharraz Delegated Member

Libya Insurance Company

(Libya)

Member Mr. Moheyddine Muhamed Ashri Chief Executive

Inward Reinsurance Division

Misr Insurance Company

(Egypt)

Member Mr. Mouhamed Larabi Nali Delegated Member

Société Centrale de Réassurance

(Morocco)

- 5 -

Management

Sheikh Khaldoun Barakat

Chairman

Mr. Tanous Feghali

Vice-Chairman

Mr. Ronald Chidiac

General Manager

Mr. Salim Kojok Assistant Administration General Managers

Mr. Zouhair Daoud

Finance

Mr. Robert Irani

Investment

Miss Basma Barakat Heads of Technical Departments

Mr. Mohammed Hammoud Managers Technical

Mr. Ibrahim Yassin

Internal Auditing

Mrs. Hala Saleh

Human Resources

Mr. Hussein Mallouk

Finance

Mr. Mohammed Naji Ahmad Arab

Manager Reinsurance Pool

- 6 -

REPORT OF THE BOARD OF DIRECTORS for the Financial Year ending on December 31, 2011

Dear Shareholders,

The Board of Directors of Arab Reinsurance Company is pleased to submit to you its Annual

Report for the period ended December 31, 2011; where you can find details on the technical,

financial, investment, and administrative achievements of the Company. You will also find

enclosed the audited financial statements encompassing the balance sheet, the income statement, the

changes in shareholders’ equity, and the cash flow statement, together with a summary of the

significant accounting policies adopted as well as other explanatory notes.

The reports and statements were prepared in accordance with the most recent international financial

reporting standards. This marks the second consecutive year whereby the Company swiftly adopted

some of the latest international financial standards which were needed to be implemented in the

upcoming few years. The adaptation necessitated a rapid strategic development pertaining to our

information technology systems, in coordination with the software Company that developed our

initial in-house reinsurance program, which enabled the company to prepare its transparent

financial statements with accuracy placing us in line with internationally developed companies.

The Company continued to achieve positive results, with a net profit of USD 5.5 million this year.

This was attained in spite of the political unstable situations prevailing in some neighboring Arab

countries which had a direct effect on the regional economy, as well as the worldwide tough

economic state that has affected the growth rates in general.

The diversified investment portfolio of the company, geographically and variety, along with the

wise and conservative investment policy and the array of currencies, has contributed in realizing an

investment return amounting to USD 7.6 million with an average rate of 6.5%.

The Company invested, in collaboration with an expert entity, in the establishment of a financial

assets' management company. This comes, as a first step, through the launching of a specialized

fund in Lebanese bonds to be marketed in the Arab countries.

On another note, the Company’s business portfolio grew by 7%, in spite of the economic and

political situation aforementioned, and which triggers a positive effect on the results as a whole.

This achievement is a reflection of the successful underwriting policy adopted by the Company, and

advised by the Board, two years ago. The said policy stipulates to increase the participation in

profitable Arab business, to expand in some foreign markets, and to intensify marketing efforts

through market visits, product development and other services rendered with high professionalism,

in accordance with market requirements and conditions.

- 7 -

On this occasion, we must commend the Company’s success, under the Board of Directors'

supervision, in meeting the needs of the insurance markets in our region through the initiation of a

shariaa compliant Re-Takaful window, which will positively impact the company’s growth and

hopefully its results. The Board of Directors established a Shariaa compliance Committee and

appointed an Internal Shariaa Auditor. The committee held its first periodic meeting at the end of

last year.

The Company was assigned a B+ (Stable Outlook) rating by A M Best Rating Agency. This is a

positive indicator in light of the severe competition reigning in our markets, as well as the regional

economic state as a whole, which not only affected the business portfolio and final results of Arab

reinsurers, but also the results of international companies. Added to this is the rating agency’s

inability to forgo the current sovereign rating of Lebanon.

The executive management is deploying all efforts to improve the Company’s rating level, fully

supported by the Board of Directors in all aspects. This can be clearly seen by the carefully studied

move to increase the Company’s capital. The last subscription took place at the end of the previous

year and amounted to USD 15 million; thus providing the Company with additional financial

solvency and the needed support to face the severe competition in the insurance markets while

increasing the size of its investment fund in order to achieve better results.

The Company upheld its persistence in developing; diversifying and training its human resources

through the reengineering of the Human Resources Department. Its mission is to develop the job

descriptions and processes while providing the staff with ample training opportunities through

specialized workshops. This enhances the staff’s competence, their technical capabilities and their

job performance while improving the work environment by strengthening human relations and

enriching the performances and loyalty levels.

Finally, we would like to express to our clients and to our shareholders, our sincere gratitude and

our appreciation of their support and cooperation. We would also like to take this opportunity to

pay tribute to the labors and admirable performance of our staff, may God bless all their efforts and

ours. Meanwhile, we are pleased to submit to you our audited financial statements relating to our

Company's results for the year ended December 31, 2011, compared to the audited financial

statements relating to year 2010 results.

Board of Directors

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Main indicators and developments

of the Company’s activities in year 2011

First: Underwriting Activities

A. Gross Written Premiums

The Gross written premiums at the end of the year amounted to USD 57.5 million, compared to

USD 53.7 million in the previous financial year.

70% of these premiums emanated from the Arab region. The following table shows the GWP for

each class of business:

Written Premiums

Currency: US Dollars

Branch 2011 Branch

% 2010

Branch

%

Increase/

(Decrease) %

Fire 21,665,881 37.6 % 22,848,435 42.6 % (5.2) %

Accidents 17,163,463 29.8 % 12,422,229 23.1 % 38.2 %

Engineering 9,905,192 17.2 % 9,078,965 16.9 % 9.1 %

Total Non-Marine 48,734,536 84.6 % 44,349,629 82.6 % 9.9 %

Cargo 5,668,697 9.9 % 6,074,911 11.3 % (6.69) %

Hull 2,758,756 4.8 % 3,163,163 5.9 % (12.79) %

Aviation 9,219 0 % 33,345 0.1 % (72.4) %

Total Marine 8,436,672 14.7 % 9,271,419 17.2 % (9) %

Life 377,863 0.7 % 51,348 0.1 % 653.9 %

Total 57,549,071 100 % 53,672,396 100 % 7.2 %

2011 2010

- 9 -

B. Retained Premiums

The Company’s retention levels differ from one line of business to the other; however, in

most cases its retention is protected by appropriate Excess of Loss covers. Retained

premiums in all classes during the period under consideration amounted to USD 48.2

million, representing 84% of the Gross Written Premiums, compared to USD 43.9 million

in the previous year which represented 82% of the Gross Written Premiums. The increase in

retention level this year is due to the Company’s policy while continuing to re-visit the

adequacy of its excess of loss covers that protects it from large losses as well as catastrophic

events.

C. Commissions & Acquisition Costs

This section includes the original commissions, profit commissions, reinsurance brokerages

and other reinsurance related deductions. The total amount paid during the period under

review amounted to USD 15.1 million, compared to USD 14.4 million in the previous year.

The percentage of acquisition costs this year was equivalent to 26% of GWP, compared to

the same rate in the previous year. This low level is maintained due to the inward's business

results and increase acceptance of non-proportional covers, which are characterized by

lower commissions.

D. Incurred Losses

The total incurred losses during the year under consideration amounted to USD 38 million

compared to USD 43 million in the previous year, representing a minor decrease of 11%,

while the loss ratio reached 68%.

The Company’s net retained loss ratio was 67.7% this year with no change to be mentioned

compared to last year.

E. Net Results for the year

Net results for this year reached 9.5%, compared to 12.6% in the previous year.

F. Combined Loss Ratio

The Combined Loss Ratio for this year reached 100.3% compared to 101.4%, as a result of

the increased administrative and operational expenses; which were instrumental to attain the

desired growth in the Company’s business portfolio and develop the capacities of its staff

on all levels.

- 10 -

Second: Investments

Invested funds during this year amounted on average to USD 116 million, compared to

USD 113 million in the previous year. This development is due mainly to the decisions of

the Board of Directors to raise gradually the Company's capital, which increased from USD

40 million to USD 60 million at the end of year 2010, after that to USD 75 million at the

end of year 2011.

Moreover, the return on investment this year amounted to USD 7.6 million; thus, effectively

to what was budgeted at the beginning of the financial year and which is equivalent to USD

7.5 million, despite the economical difficulties, and the decline in international interest

rates. This was possible due to our rational and conservative investment policy and its

diversification geographically and by type; which also decreased our investment and

financial risks. The above was accomplished while upholding our commitment to our clients

and our policy to prompt claim payments.

It shall be noted that the invested funds include cash at banks, term deposits in banks, and

nonresident financial institutions, in addition to investments in securities and fixed assets.

Third: General & Administrative Expenses

The General and Administrative expenses amounted this year to USD 4.6 million,

representing 7.9% of the gross written premiums, compared to 6.4% in the previous year.

The expenses' rate from the earned and retained premiums is equivalent to 10%, compared

to 7.7% in the previous year. This raise is due to the increase in our operational costs and

development of both our leading and young workforce.

Fourth: Results of the Financial Year

The Board of Directors, in its meeting held on March 17, 2012, decided to distribute the net

income of the financial year ended December 31, 2011, subject to the approval of the

General Assembly of the Company’s Shareholders, as follows:

Currency: US Dollars

Net income for the year 5.496.821

Proposed allotments:

- Transfer to capital reserve at 10% 549.682

- Distribution of dividends at 5% of paid up capital as at December

31, 2011 as a first payment according to Company’s by-laws 3.750.000

Total proposed allotments 4.299.682

Net balance after proposed allotments to be transferred to the retained

earnings accounts 1.197.139

- 11 -

According to Article 60 of the Company’s by-laws, 10% of the annual net income should be

transferred to capital reserve until the total of this reserve becomes equal to the Company’s

capital. This reserve includes the legal reserve required according to Article 165 of the

Lebanese Code of Commerce. This reserve is not available for distribution to Shareholders.

Annual Progress of the Company’s Profits

(Amended)

Board of Directors

- 12 -

Shareholders Kingdom of Saudi Arabia

Sheikh Khaldoun Barakat

Trade Union Insurance Company

Itjar Trading Est.

Lebanon

La Phénicienne Compagnie d'Assurance

Al Ittihad Al Watani

Saudi Arabian Insurance Company

United Commercial Assurance

Arabia Insurance Company

Banque Misr Liban

The Middle East Ins. & Re Co.

Amana Insurance Company

Mr. Tannous Feghali

Egypt

Misr For Insurance Life

Misr Insurance Company

Kuwait

Gulf Insurance Company

Kuwait Insvestment Authority

Al Ahleia Insurance Company

Syria

Syrian Insurance Company

Libya

Libya Insurance Company

Morocco

Société Centrale de Réassurance

La Mutuelle Agricole Marocaine d'Ass.(MAMDA)

- 13 -

Iraq Iraq Reinsurance Company

National Insurance Company

Iraq Insurance Company

Tunisia

Société Tunisienne de Réassurance

Société Tunisienne d'Ass. & de Réass.

Compagnie Méditerranéenne d'Assurances et de

Réassurances

Groupe des Assurances de Tunisie

Astrée Compagnie d'Ass. & de Réass.

Mutuelle Générale d'Assurances

Ministère de Finance - Direction des Ass.

Compagnie d'Ass. & de Réass. Tuniso-Européenne

Algeria Compagnie Centrale de Réassurance

Jordan

Al Manara Insurance

Arab Union Int'l Ins. Co.

The United Insurance Company

Holy Land Insurance Company

Jerusalem Insurance Company

Jordan Insurance Co.

Midde East Insurance Company

Arab Bank

The National Ahlia Ins. Co.

Bahrain

Bahrain National Holding co.

United Arab Emirates

Al Ain Ahlia Insurance Company

Sharjah Insurance Company

Sudan

The National Reinsurance Company

Arab Reinsurance Company S.A.L.

Report and financial statements

for the year ended 31 December 2011

ARAB REINSURANCE COMPANY S.A.L.

Report and financial statements


Page

Independent auditor's report 14-15

Statement of financial position 16

Statement of comprehensive income 17

Statement of changes in equity 18

Statement of cash flows 19

Notes to the financial statements 20-55

-14-

Independent Auditor's Report

to the shareholders of Arab Reinsurance Company S.A.L.

Report on the financial statements

We have audited the accompanying stand-alone financial statements of Arab Reinsurance

Company S.A.L. ("the Company") which comprise the balance sheet as of

31 December 2011, the statements of comprehensive income, changes in equity and cash

flows for the year then ended, and a summary of significant accounting policies and other

explanatory notes.

Management's responsibility for the financial statements

Management is responsible for the preparation of financial statements that give a true and

fair view in accordance with International Financial Reporting Standards and for such

internal control as management determines is necessary to enable the preparation of

financial statements that are free from material misstatements, whether due to fraud or

error.

Auditor's responsibility

Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with International Standards on Auditing. Those

standards require that we comply with ethical requirements and plan and perform the audit

to obtain reasonable assurance about whether the financial statements are free from

material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and

disclosures in the financial statements. The procedures selected depend on the auditor's

judgment, including the assessment of the risks of material misstatement of the financial

statements, whether due to fraud or error. In making those risk assessments, the auditor

considers internal control relevant to the entity's preparation and fair presentation of the

financial statements in order to design audit procedures that are appropriate in the

circumstances, but not for the purpose of expressing an opinion on the effectiveness of the

entity's internal control. An audit also includes evaluating the appropriateness of

accounting policies used and the reasonableness of accounting estimates made by

management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to

provide a basis for our audit opinion.

PricewaterhouseCoopers, P.O Box 11-3155, SNA Building, Tabaris Square, Beirut, Lebanon

Telephone +961 1 200577, Facsimile +961 1 200575, www.pwc.com/middle-east

http://www.pwc.com/middle-east

-15-

Independent Auditor's Report (continued)

to the shareholders of Arab Reinsurance Company S.A.L.

Opinion

In our opinion, the accompanying financial statements present fairly, in all material

respects, the financial position of Arab Reinsurance Company S.A.L. as at 31 December

2011, and of its financial performance and cash flows for the year then ended in accordance

with International Financial Reporting Standards.

Beirut, Lebanon

16 March 2012


-16-

Statement of financial position

As at 31 December 2011

2011 2010

Notes US$ US$

Assets

Property and equipment 5 2,850,930 2,972,456

Investment property 6 573,549 581,566

Intangible assets 7 115,000 -

Deferred acquisition costs 24 7,647,250 7,569,091

Financial assets held to maturity 8 55,331,046 54,433,736

Available for sale financial assets 9 6,364,075 8,353,949

Insurance receivables 10 60,298,427 57,925,202

Reinsurance assets 17 19,863,499 20,958,038

Bank deposits with original maturity

of more than 3 months 11 67,758,250 56,647,545

Cash and cash equivalents 12 1,884,696 2,674,641 ───────── ─────────

Total assets 222,686,722 212,116,224 ═════════ ═════════

Equity and liabilities

Equity

Capital 14 75,000,000 60,000,000

General reserve 4,500,000 4,500,000

Legal reserve 15 10,296,909 9,620,289

Fair value reserve 13 (1,097,300) (185,029)

Retained earnings 10,871,762 12,051,561 ───────── ─────────

Total equity 99,571,371 85,986,821 ───────── ─────────

Liabilities

Insurance contracts 17 105,121,015 104,776,823

Unearned reinsurance commission 22 1,639,115 1,916,867

Retirement benefit obligation 18 201,000 185,049

Accounts payable 19 16,089,980 19,163,664

Income tax provision 28 64,241 87,000 ───────── ─────────

Total liabilities 123,115,351 126,129,403 ───────── ─────────

Total equity and liabilities 222,686,722 212,116,224 ═════════ ═════════

The financial statements on pages 16 to 55 were authorised for issue in accordance with the

board of directors' resolution on 17 March 2012. The board elected the Chairman and the Vice

chairman to sign the financial statements.

The notes on pages 20 to 55 are an integral part of these financial statements.


-17-

Statement of comprehensive income


2011 2010

Notes US$ US$

Insurance premium revenue 20 56,176,653 56,958,055

Insurance premium ceded to reinsurers 20 (10,549,601) (12,136,891)

Net insurance premium revenue 45,627,052 44,821,164

Investment income 21 7,658,380 7,515,741

Reinsurance commission income and profit sharing 22 2,552,559 3,438,468

Other operating income 27 254,713 54,299

Net income 56,092,704 55,829,672

Insurance claims and loss adjustment expenses 23 (38,391,603) (43,056,125)

Insurance claims and loss adjustment expenses

recovered from reinsurers 23 7,492,904 12,683,213

Net insurance claims (30,898,699) (30,372,912)

Expenses for acquisition of insurance contracts 24 (15,033,889) (15,133,461)

Expenses for administration and other expenses 25 (4,572,610) (3,434,222)

Expenses (50,505,198) (48,940,595)

Profit before tax 5,587,506 6,889,077

Income tax 28 (90,685) (122,870)

Profit for the year 5,496,821 6,766,207

Other comprehensive income for the year

Change in fair value reserve of available

for sale financial assets (912,271) (101,216)

Total comprehensive income for the year 4,584,550 6,664,991



-18-

Statement of changes in equity


Share General Legal Fair value Retained

Capital reserve reserve reserve earnings Total

US$ US$ US$ US$ US$ US$

Balance at 31 December 2009 50,000,000 4,500,000 9,154,216 (83,813) 10,751,427 74,321,830 Profit for the year - - - - 6,766,207 6,766,207 Transfer to legal reserve (note 15) - - 466,073 - (466,073) - Increase in capital (note14) 10,000,000 - - - - 10,000,000 Change in fair value reserve for available for sale financial assets - - - (101,216) - (101,216) Dividends relating to 2009 (note 16) - - - - (5,000,000) (5,000,000) ──────── ──────── ──────── ──────── ──────── ──────── Balance at 31 December 2010 60,000,000 4,500,000 9,620,289 (185,029) 12,051,561 85,986,821 Profit for the year - - - - 5,496,821 5,496,821 Transfer to legal reserve (note 15) - - 676,620 - (676,620) - Increase in capital (note14) 15,000,000 - - - - 15,000,000 Change in fair value reserve for available for sale financial assets - - - (912,271) - (912,271) Dividends relating to 2010 (note 16) - - - - (6,000,000) (6,000,000) ──────── ──────── ──────── ──────── ──────── ──────── Balance at 31 December 2011 75,000,000 4,500,000 10,296,909 (1,097,300) 10,871,762 99,571,371 ════════ ════════ ════════ ════════ ════════ ════════



-19-

Statement of cash flows

For the year ended 31 December 2011

2011 2010

Notes US$ US$

Cash flows from operating activities

Net cash used in operating activities 30 (9,652,616) (5,298,015)

Cash flows from investing activities

Purchase of property and equipment 5 (22,329) (10,576)

Purchase of intangible assets 7 (115,000) -

Net cash used in investing activities (137,329) (10,576)

Cash flows from financing activities

Dividends paid (6,000,000) (5,000,000)

Proceeds from increase in capital 15,000,000 10,000,000

Net cash provided from financing activities 9,000,000 5,000,000

Net decrease in cash and cash equivalents (789,945) (308,591)

Cash and cash equivalents at beginning of year 2,674,641 2,983,232

Cash and cash equivalents at end of year 12 1,884,696 2,674,641



-20-

Notes to the financial statements


1 General information

Arab Reinsurance Company S.A.L. ("the Company") is incorporated and licensed by special

presidential Decree Number 2933 on 11 March 1972 as a Lebanese joint stock company (Inter-

Arab Company) to carry all reinsurance and investments activities and was registered in the

Commercial Register of Beirut under number 26233.

2 Summary of significant accounting policies

The principal accounting policies applied in the preparation of these financial statements are set

out below. These policies have been consistently applied to all the years presented, unless

otherwise stated.

2.1 Basis of presentation

The financial statements have been prepared in accordance with International Financial

Reporting Standards (IFRS) as defined by IAS 1. They have been prepared under the historical

cost convention as modified by the revaluation of land and buildings, investment property,

available-for-sale financial assets and financial assets at fair value through profit or loss.

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

critical accounting estimates. It also requires management to exercise its judgment in the

process of applying the Company's accounting policies. The areas involving a higher degree of

judgment or complexity, or areas where assumptions and estimates are significant to the

financial statements are disclosed in note 3.

2.2 Adoption of new and revised IFRS

(a) New and amended standards effective for the financial year beginning

1 January 2011

- IAS 24, 'Related parties disclosures', was amended in June 2009. It amended the

definition of a related party and modified certain related party disclosure requirements

for government - related entities.

- IFRS 7, 'Financial instruments' - (effective 1 January 2011 retrospectively), emphasises

the interaction between quantitative and qualitative disclosures about the nature and

extent of risks associated with financial instruments.

- IAS 1, 'Presentation of financial statements' - (effective 1 January 2011 retrospectively),

clarifies that an entity will present an analysis of other comprehensive income for each

component of equity, either in the statement of changes in equity or in the notes to the

financial statements.

There are no IFRIC interpretations that are effective for the first time for the financial year

beginning on or after 1 January 2011 that would be expected to have a material impact on the

Company.


-21-

2 Summary of significant accounting policies (Continued)

2.2 Adoption of new and revised IFRS (continued)

(b) New standards, amendments and interpretations issued relevant to the Company but

not effective for the financial year beginning 1 January 2011 and not early adopted

- Amendments to IFRS 7, 'Financial instruments: Disclosures' - (effective

1 January 2012), promote transparency in the reporting of transfer transactions and

improves users' understanding of the risk exposures relating to transfers of financial

assets and the effect of those risks on an entity's financial position, particularly those

involving securitisation of financial assets.

- IFRS 9, 'Financial instruments' - (effective 1 January 2015), addresses the classification,

measurement and recognition of financial assets and financial liabilities. IFRS 9 was

issued in November 2009 and October 2010. It replaces the parts of IAS 39 that relate to

the classification and measurement of financial instruments. IFRS 9 requires financial

assets to be classified into two measurement categories: those measured as at fair value

and those measured at amortised cost. The determination is made at initial recognition.

The classification depends on the entity's business model for managing its financial

instruments and the contractual cash flow characteristics of the instrument. For financial

liabilities, the standard retains most of the IAS 39 requirements. The main change is that,

in cases where the fair value option is taken for financial liabilities, the part of a fair

value change due to an entity's own credit risk is recorded in other comprehensive

income rather than the income statement, unless this creates an accounting mismatch.

- IFRS 13, 'Fair value measurement' - (effective 1 January 2013), aims to improve

consistency and reduce complexity by providing a precise definition of fair value and a

single source of fair value measurement and disclosure requirements for use across

IFRSs. The requirements, which are largely aligned between IFRSs, do not extend the

use of fair value accounting but provide guidance on how it should be applied where its

use is already required or permitted by other standards within IFRSs.

- Amendment to IAS 12, 'Income taxes' - (effective 1 January 2012), on deferred tax

currently requires an entity to measure the deferred tax relating to an asset depending on

whether the entity expects to recover the carrying amount of the asset through use or

sale. It can be difficult and subjective to assess whether recovery will be through use or

through sale when the asset is measured using the fair value model in IAS 40,

'Investment property'. This amendment therefore introduces an exception to the existing

principle for the measurement of deferred tax assets or liabilities arising on investment

property measured at fair value. As a result of the amendments, SIC 21, 'Income taxes -

recovery of revalued non-depreciable assets', will no longer apply to investment

properties carried at fair value. The amendments also incorporate into IAS 12 the

remaining guidance previously contained in SIC 21, which is withdrawn.

The Company is yet to assess the full impact of the above amendments on the financial

statements.


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2 Summary of significant accounting policies (continued)

2.3 Foreign currency translation

(a) Functional and presentation currency

Items included in the financial statements are measured using the currency of the primary

economic environment in which the Company operates ("the functional currency"). The

financial statements are presented in US Dollars ("US$"), which is the Company's functional

and presentation currency.

(b) Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange

rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting

from the settlement of such transactions and from the translation at year-end exchange rates of

monetary assets and liabilities denominated in foreign currencies are recognised in the

statement of comprehensive income.

2.4 Property and equipment

All property and equipment is stated at historical cost less depreciation. Historical cost

includes expenditure that is directly attributable to the acquisition of the items.

Depreciation is calculated using the straight-line method to write off the cost or revalued

amount of each asset to their residual values over their estimated useful lives as follows:

Years

Buildings 50

Leasehold improvements 3

Office equipment 5 - 13

Furniture 13

Other equipment 10

Subsequent expenditures are included in the asset's carrying amount or recognised as a

separate asset, as appropriate, only when it is probable that future economic benefits

associated with the item will flow to the Company and the cost of the item can be measured

reliably. All other repairs and maintenance are charged to the statement of comprehensive

income during the financial period in which they are incurred.

An asset's carrying amount is written down immediately to its recoverable amount if the

asset's carrying amount is greater than its estimated recoverable amount. The recoverable

amount is the higher of the asset's fair value less costs to sell and value in use.

Gains and losses on disposals are determined by comparing the proceeds with the carrying

amount. These are included in the statement of comprehensive income. Upon sale of revalued

assets, the related amounts accounted for under fair value reserves will be transferred to

retained earnings.


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2.5 Investment properties

Property held for long-term rental yields that is not occupied by the Company is classified as

investment property.

Investment property comprises land and buildings which are stated at historical cost based on

IAS 40 'Investment property'.

Depreciation on the building is calculated using the straight-line method to allocate cost over

the estimated useful economic lives. The estimated useful economic life is 50 years.

The investment property carrying amount will be written down immediately to its recoverable

amount, if the asset's carrying amount is greater than its estimated recoverable amount.

2.6 Intangible Assets

Costs associated with maintaining computer software programmes are recognised as an expense

as incurred. Development costs that are directly attributable to the design and testing of

identifiable and unique software products controlled by the Group are recognised as intangible

assets when the following criteria are met:

It is technically feasible to complete the software product so that it will be available for use;

Management intends to complete the software product and use or sell it;

There is an ability to use or sell the software product;

It can be demonstrated how the software product will generate probable future economic

benefits;

Adequate technical, financial and other resources to complete the development and to use

or sell the software product are available; and

The expenditure attributable to the software product during its development can be reliably

measured.

Directly attributable costs that are capitalised as part of the software product include the

software development employee costs and an appropriate portion of directly attributable

overhead.

Other development expenditures that do not meet these criteria are recognised as an expense as

incurred. Development costs previously recognised as an expense are not recognised as an asset

in a subsequent period.


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2.7 Financial assets

2.7.1 Classification

The Company classifies its financial assets in the following categories: available for sale

financial assets, held to maturity financial assets and receivables. The classification depends on

the purpose for which the financial assets were acquired. Management determines the

classification of its financial assets at initial recognition and re-evaluates this designation at

every reporting date.

(a) Available-for-sale financial assets

Available-for-sale investments are financial assets that are intended to be held for an indefinite

period of time, which may be sold in response to needs for liquidity or changes in interest rates,

exchange rates or equity prices or that are not classified as loans and receivables, held-to-

maturity investments or financial assets at fair value through profit or loss.

(b) Held to maturity financial assets

Held-to-maturity investments are non-derivative financial assets with fixed or determinable

payments and fixed maturities that the Company's management has the positive intention and

ability to hold to maturity, these do not include:

(i) those that the Company intends to sell immediately or in the short term, which are

classified as held for trading, and those that the Company upon initial recognition

designates as at fair value through profit or loss;

(ii) those that the Company upon initial recognition designates as available for sale; or

(iii) those for which the holder may not recover substantially all of its initial investment, other

than because of credit deterioration.

Interest on held-to-maturity investments is included in the statement of comprehensive income

and reported as 'Interest and similar income'. In the case of impairment, the impairment loss is

reported as a deduction from the carrying value of the investment and recognised in the

statement of comprehensive income as "Net gains (losses) on investment securities".

(c) Loans and Receivables

Receivables are non-derivative financial assets with fixed or determinable payments that are

not quoted in an active market, other than those that the Company intends to sell immediately

or in the short term, which are classified as at fair value through profit or loss.

Receivables are recognised initially at fair value and measured subsequently at amortised cost

using the effective interest rate method, less provision for impairment. A provision for

impairment of receivables is established when there is objective evidence that the Company

will not be able to collect all amounts due according to their original terms. Receivables

arising from insurance contracts are also classified in this category and are reviewed for

impairment as part of the impairment review of receivables.

2.7.2 Recognition and measurement

Regular way purchases and sales of financial assets are recognised on the trade-date – the date

on which the Company commits to purchase or sell the asset. Investments are initially

recognised at fair value plus transaction costs for all financial assets not carried at fair value

through profit or loss.


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2.7 Financial assets (continued)

2.7.2 Recognition and measurement (continued)

Financial assets are derecognised when the rights to receive cash flows from the investments

have expired or have been transferred and the Company has transferred substantially all risks

and rewards of ownership. Available-for-sale financial assets are subsequently carried at fair

value. Receivables are carried at amortised cost using the effective interest rate method.

The unrealized gains and losses resulting from the changes in the fair value of investments

classified as available for sale are recognized in the fair value reserve in shareholders' equity.

When securities available for sale financial assets investments are sold or impaired, the

accumulated fair value adjustments are recognised in the statement of comprehensive income.

Changes in the fair value of monetary securities denominated in a foreign currency and

classified as available for sale are analysed between translation differences resulting from

changes in the amortised cost of the security and other changes in the carrying amount of the

security. The translation differences on monetary securities are recognised in profit or loss;

translation differences on non-monetary securities are recognised in equity. Changes in the fair

value of monetary and non-monetary securities classified as available for sale are recognised in

equity.

Interest on available for sale investments are recognised using the effective interest method is in

the statement of comprehensive income. Dividends on available for sale equity instruments are

recognised in the statement of comprehensive income when the Company's right to receive

payments is established. These revenues are recognised under investment income.

The fair values of quoted investments are based on current bid prices. If the market for a

financial asset is not active, the Company establishes fair value by using valuation techniques.

These include the use of recent arm's length transactions, reference to other instruments that are

substantially the same, discounted cash flow analysis and option pricing models making

maximum use of market inputs and relying as little as possible on entity-specific inputs.


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2.7 Financial assets (continued)

2.7.3 Determination of fair value

For financial instruments traded in active markets, the determination of fair values of financial

assets is based on quoted market prices or dealer price quotations. The quoted market price used

for financial assets held by the Company is the current bid price.

A financial instrument is regarded as quoted in an active market if quoted prices are readily and

regularly available from an exchange, dealer, broker, industry Company, pricing service or

regulatory agency, and those prices represent actual and regularly occurring market transactions

on an arm's length basis. If the above criteria are not met, the market is regarded as being

inactive.

For example a market is inactive when there is a wide bid-offer spread or significant increase in

the bid-offer spread or there are few recent transactions.

For all other financial instruments, fair value is determined using valuation techniques. In these

techniques, fair values are estimated from observable data in respect of similar financial

instruments, using models to estimate the present value of expected future cash flows or other

valuation techniques, using inputs existing at the dates of the statement of financial position.

In cases where the fair value of unlisted equity instruments cannot be determined reliably, the

instruments are carried at cost less any impairment.

The carrying value less impairment provision of accounts receivables and payables are assumed

to approximate their fair values, as they are of short term nature maturing in a period of less than

one year.

2.8 Reclassification of financial assets

Financial assets other than loans and receivables are permitted to be reclassified out of the held-

for-trading category only in rare circumstances arising from a single event that is unusual and

highly unlikely to recur in the near-term. In addition, the Company may choose to reclassify

financial assets that would meet the definition of loans and receivables out of the held-for-

trading or available-for-sale categories if the Company has the intention and ability to hold these

financial assets for the foreseeable future or until maturity at the date of reclassification.

Reclassifications are made at fair value as of the reclassification date. Fair value becomes the

new cost or amortised cost as applicable, and no reversals of fair value gains or losses recorded

before reclassification date are subsequently made. Effective interest rates for financial assets

reclassified to loans and receivables and held-to-maturity categories are determined at the

reclassification date. Further increases in estimates of cash flows adjust effective interest rates

prospectively.


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2.9 Impairment of financial assets

(i) Financial assets carried at fair value

The Company assesses at each balance sheet date whether there is objective evidence that a

financial asset or a group of financial assets is impaired. In the case of equity securities

classified as available for sale, a significant or prolonged decline in the fair value of the security

below its cost is considered in determining whether the securities are impaired. If any such

evidence exists for available for sale financial assets, the cumulative loss - measured as the

difference between the acquisition cost and current fair value, less any impairment loss on that

financial asset previously recognised in profit or loss - is removed from equity and recognised

in the statement of comprehensive income. Impairment losses recognised in the statement of

comprehensive income on equity instruments are not subsequently reversed.

The impairment loss is reversed through the statement of comprehensive income, if in a

subsequent period, the fair value of a debt instrument classified as available for sale increases

and the increase can be objectively related to an event occurring after the impairment loss was

recognised the in statement of comprehensive income.

(ii) Assets carried at amortised cost

The Company assesses at each reporting date whether there is objective evidence that a

financial asset or group of financial assets is impaired. A financial asset or group of financial

assets is impaired and impairment losses are incurred only if there is objective evidence of

impairment as a result of one or more events that have occurred after the initial recognition of

the asset (a 'loss event') and that loss event (or events) has an impact on the estimated future

cash flows of the financial asset or group of financial assets that can be reliably estimated.

The criteria that the Company uses to determine that there is objective evidence of an

impairment loss include:

- significant financial difficulty of the issuer or obligor;

- a breach of contract, such as a default or delinquency in interest or principal payments;

- the lender, for economic or legal reasons relating to the borrower's financial difficulty,

granting to the borrower a concession that the lender would not otherwise consider;

- it becomes probable that the borrower will enter bankruptcy or other financial

reorganisation;

- the disappearance of an active market for that financial asset because of financial

difficulties; or

- observable data indicating that there is a measurable decrease in the estimated future

cash flows from a portfolio of financial assets since the initial recognition of those

assets, although the decrease cannot yet be identified with the individual financial assets

in the portfolio, including:

(i) adverse changes in the payment status of borrowers in the Company; and

(ii) national or local economic conditions that correlate with defaults on the assets in

the Company.


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2.9 Impairment of financial assets (continued)

The Company first assesses whether objective evidence of impairment exists individually for

financial assets that are individually significant. If the Company determines that no objective

evidence of impairment exists for an individually assessed financial asset, whether significant or

not, it includes the asset in a group of financial assets with similar credit risk characteristics and

collectively assesses them for impairment. Assets that are individually assessed for impairment

and for which an impairment loss is or continues to be recognised are not included in

a collective assessment of impairment.

For the purpose of a collective evaluation of impairment, financial assets are grouped on the

basis of similar credit risk characteristics (ie, on the basis of the Company's grading process that

considers asset type, industry, geographical location, past-due status and other relevant factors).

Those characteristics are relevant to the estimation of future cash flows for groups of such assets

by being indicative of the issuer's ability to pay all amounts due under the contractual terms of

the debt instrument being evaluated.

If there is objective evidence that an impairment loss has been incurred, the carrying amount of

the asset is reduced through the use of an allowance account and the amount of the loss is

recognised in the income statement. If in a subsequent period, the amount of the impairment

loss decreases and the decrease can be related objectively to an event occurring after the

impairment was recognised, the previously recognised impairment loss is reversed by adjusting

the allowance account. The amount of the reversal is recognised in statement of comprehensive

income.

(iii) Other non-financial assets

Assets that have an indefinite useful life, for example land, are not subject to amortisation and

are tested annually for impairment. Assets that are subject to amortisation are reviewed for

impairment whenever events or changes in circumstances indicate that the carrying amount may

not be recoverable. An impairment loss is recognised for the amount by which the asset's

carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an

asset's fair value less costs to sell and value in use. For the purpose of assessing impairment,

assets are grouped at the lowest levels for which there are separately identifiable cash flows.


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2.10 Offsetting financial instruments

Financial assets and liabilities are offset and the net amount reported in the balance sheet when

there is a legally enforceable right to offset the recognised amounts and there is an intention to

settle on a net basis or realise the asset and settle the liability simultaneously.

2.11 Dividend distribution

Dividend distribution to the Company's shareholders is recognised as a liability in the

Company's financial statements in the period in which the dividends are declared by the general

assembly of shareholders.

2.12 Retirement benefit obligations

The Company is subscribed to the compulsory defined benefit plan in accordance with the

National Social Security Fund. A defined benefit plan is a pension plan that defines an amount

of pension benefit that an employee will receive on retirement, usually dependent on one or

more factors such as age, years of service and compensation.

The liability recognised in the balance sheet in respect of the defined benefit plan is the present

value of the defined benefit obligation at the balance sheet date less contributions to the fund,

together with adjustments for actuarial gains/losses and past service costs. The defined benefit

obligation is calculated annually by the Company using the projected unit credit method. The

present value of the defined benefit obligation is determined by discounting the estimated future

cash outflows using interest rates of government securities that have terms to maturity

approximating the terms of the related liability.

2.13 Cash and cash equivalents

Cash and cash equivalents consist of deposits held at call with banks, other short-term highly

liquid investments with original maturities of three months or less.

2.14 Share capital

Ordinary shares are classified as equity.

2.15 Current income tax

The income tax charge is calculated at the rate of 15% of assumed profit which represents 5% of

gross premiums written in Lebanon and other operating income on the basis of the local laws.

2.16 Investment income

Investment income mainly comprises interest and dividend income and realised gains and losses

on sale of shares. Investment income is stated net of investment expenses and charges.

Interest income is recognised on accrual basis. Interest includes interest earned on bank deposits

and held to maturity investments. Dividend income is recognised under investment income

when dividends are declared. Realised gains and losses from sale of investments are calculated

as the difference between net proceeds from sale and the carrying value of investments.


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2.17 Insurance contracts

The Company enters into insurance agreements whereby it compensates insurance companies

for losses on one or more contracts issued by these companies. Such insurance agreements

transfer significant insurance risk to the Company.

(a) Recognition and measurement

The Company's insurance contracts cover general insurance risks insured by the Company.

General insurance contracts cover insurance risks written by the ceding companies. They

protect the customers of the ceding companies from damage suffered to their assets as well as

against the risk of causing harm to third parties as a result of their legitimate activities.

General insurance contracts also protect the customers of the ceding companies from the

consequences of events such as illness and disability.

Premiums are recognised as revenue when they are underwritten, and they include an

estimation of underwritten premiums that are not yet received from the ceding companies and

in proportion with the period of coverage. Unearned premiums represent the proportion of

premiums accepted in the year that relate to unexpired terms of policies in force at the

statement of financial position date, calculated on a time apportionment basis.

Claims and loss adjustments expenses are recognised in the statement of comprehensive

income when incurred and based on the estimated claims on the basis of the ultimate cost of

settling the claims, using the ultimate loss ratios of the benefits due to contract holders and the

third parties affected by the contract holders. These expenses include claims and loss

adjustment expenses direct or indirectly related to events occurring within the balance sheet

date even if they were not reported to the Company.

The claims provisions cover future payments obligations from claims in respect of which the

amount of the insurance benefit and / or the time of payment are still uncertain. These are

established for losses from loss events that occurred prior to the statement of financial

position date. The level of the provision is based on information provided by cedants.

Additional provisions are constituted in cases where the provisions indicated by cedants are

considered to be inadequate. The provisions also include claim settlement costs.

Taking into consideration the fact that significant time lags may exist between loss events and

notification of the claims to the Company, incurred but not reported claims ("IBNR") are

established on the basis of the Company's own estimates for claims that have already been

incurred but not yet reported. These are guided by the principle of best estimate using

actuarial methods (e.g. ultimate loss ratio methods). Such estimates are based upon both past

experience and assessments of the future development. The adequacy of the provisions is

regularly reviewed.

The company does not discount liabilities for unpaid claims.

(b) Deferred acquisition costs

Commissions and other acquisition costs that are related to securing new contracts and

renewing existing contracts are capitalised as deferred acquisition costs - ("DAC"). All other

costs are recognised as expenses when incurred. The DAC is subsequently amortised over the

life of the contract. The resulting change to the carrying value of the DAC is charged to the

statement of comprehensive income.


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2.17 Insurance contracts

(c) Reinsurance contracts held

Contracts entered into by the Company with reinsurers under which the Company is

compensated for losses on one or more insurance contracts issued by the Company are

classified as reinsurance contracts held.

The benefits to which the Company is entitled under its reinsurance contracts held are

recognised as reinsurance assets. These assets consist of short-term balances due from

reinsurers (classified within receivables), as well as longer-term receivables (classified as

reinsurance assets) that are dependent on the expected claims and benefits arising under the

related reinsurance contracts. Amounts recoverable from or due to reinsurers are measured

consistently with the amounts associated with the reinsurance contracts and in accordance

with the terms of each reinsurance contract. Reinsurance liabilities are primarily premiums

payable for reinsurance contracts and are recognised as an expense when due.

The Company assesses its reinsurance assets for impairment on a yearly basis. If there is

objective evidence that the reinsurance asset is impaired, the Company reduces the carrying

amount of the reinsurance asset to its recoverable amount and recognises that impairment loss

in the statement of comprehensive income. The Company gathers the objective evidence that

a reinsurance asset is impaired using the same process adopted for financial assets held at

amortised cost. The impairment loss is also calculated following the same method used for

these financial assets. These processes are described in note 2.9.

Reinsurance commissions income received from reinsurers are earned over the same period as

the related ceded premiums.

(d) Receivables and payables related to insurance contracts

Receivables and payables are recognised when due. These include amounts due to and from

insurance companies and brokers. If there is objective evidence that the reinsurance receivable

is impaired, the Company reduces the carrying amount of the reinsurance receivable

accordingly and recognises that impairment loss in the statement of comprehensive income.

The Company gathers the objective evidence that a reinsurance receivable is impaired using

the same process adopted for loans and receivables. The impairment loss is also calculated

under the same method used for these financial assets.

2.18 Comparative figures

Certain comparative figures have been re-classified in order to conform to current year

presentation.


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3 Critical accounting estimates and judgements

The Company makes estimates and assumptions that affect the reported amounts of assets and

liabilities within the financial year. Estimates and judgments are continually evaluated and

based on historical experience and other factors, including expectations of future events that are

believed to be reasonable under the circumstances.

(a) The ultimate liability arising from claims under insurance contracts

The estimation of the ultimate liability arising from claims made under insurance contracts is

one of the Company's critical accounting estimates. There are several sources of uncertainty that

need to be considered in the estimate of the liability that the Company will ultimately pay for

such claims.

(b) Estimated premium revenue

Premiums revenue not reported by cedants at balance sheet date and relating to the current

underwriting year is estimated based on average development factors computed using

triangulation of data received per class of business and type of treaty.

(c) Process used to decide on assumptions

The risks associated with insurance contracts are complex and subject to a number of variables

that complicate quantitative sensitivity analysis.

The Company uses assumptions based on a mixture of internal and market data to measure its

claims liabilities. Internal data is derived mostly from the Company's quarterly claims reports

and screening of the actual insurance contracts carried out at year-end to derive data for the

contracts held. The Company has reviewed the individual contracts and in particular the

industries in which the insured companies operate and the actual exposure years of claims. This

information is used to develop scenarios related to the latency of claims that are used for the

projections of the ultimate estimated liability.

The Company uses ultimate loss ratios by line of business based on history and experience and

multiplies this ratio by the earned premiums in order to estimate the ultimate cost of claims.

4 Management of insurance and financial risk

The Company issues contracts that transfer issuance risks. This section summarises the way the

Company manages this risk.

4.1 Insurance risk

The risk under one insurance contract is the possibility that the insured event occurs and the

uncertainty of the amount of the resulting claim. By the very nature of an insurance contract,

this risk is random and therefore unpredictable.

The principal risk that the Company faces under its insurance contracts is that the actual claims

and benefit payments exceed the carrying amount of the insurance liabilities. This could occur

because the frequency or severity of claims and benefits are greater than estimated. Insured

events are random and the actual number and amount of claims and benefits will vary from year

to year from the level established using statistical techniques.


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4 Management of insurance and financial risk (Continued)

4.1 Insurance risk (continued)

Experience shows that the larger the portfolio of similar insurance contracts, the smaller the

relative variability about the expected outcome will be. In addition, a more diversified portfolio

is less likely to be affected by a change in any subset of the portfolio. The Company has

developed its insurance underwriting strategy to diversify the type of insurance risks accepted

and within each of these categories to achieve a sufficiently large population of risks to reduce

the variability of the expected outcome.

Factors that aggravate insurance risk include lack of risk diversification in terms of type and

amount of risk, geographical location and type of industry covered.

(a) Frequency and severity of claims

The frequency and severity of claims can be affected by several factors. The Company manages

these risks through its underwriting strategy, adequate reinsurance arrangements and proactive

claims handling.

The underwriting strategy attempts to ensure that the underwritten risks are well diversified in

terms of type and amount of risk and industry. Underwriting limits are in place to enforce

appropriate risk selection criteria. For example, the Company has the right not to renew treaties,

it can impose deductibles and it has the right to reject the payment of a fraudulent claim.

The Company is protected by reinsurance arrangements including quota share, surplus excess of

loss treaties as well as catastrophe treaties.

The concentration of insurance risk before and after reinsurance in relation to the type of

general insurance risk accepted is summarised below, with reference to the carrying amount of

the related insurance liabilities (gross and net of reinsurance) arising from general insurance

contracts:

As at 31 December 2011 In US$

Type of risk

Fire Engineering Marine Motor Other Total

Gross 36,446,234 28,089,444 16,142,798 14,275,139 10,167,400 105,121,015

Net 26,894,040 18,047,780 15,180,855 14,275,139 10,167,400 85,257,516

As at 31 December 2010 In US$

Type of risk

Fire Engineering Marine Motor Other Total

Gross 33,660,915 29,144,250 19,435,126 13,035,153 9,501,379 104,776,823

Net 24,801,649 18,672,244 17,808,360 13,035,153 9,501,379 83,818,785


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4 Management of insurance and financial risk (continued)

4.1 Insurance risk (continued)

(b) Sources of uncertainty in the estimation of future claim payments

The estimated cost of claims includes direct expenses to be incurred in settling claims, net of the

expected subrogation value and other recoveries. The Company takes all reasonable steps to

ensure that it has appropriate information regarding its claims exposures. However, given the

uncertainty in establishing claims provisions, it is likely that the final outcome will prove to be

different from the original liability established. The liability for these contracts comprise a

provision for IBNR, a provision for reported claims not yet paid and a provision for unexpired

risks at the balance sheet date.

In calculating the estimated cost of unpaid claims (both reported and not), the Company's

estimation techniques are a combination of loss-ratio-based estimates and an estimate based

upon actual claims experience using predetermined formulae where greater weight is given to

actual claims experience as time passes.

The initial loss-ratio estimate is an important assumption in the estimation technique and is

based on previous years' experience, adjusted for factors such as premium rate changes,

anticipated market experience and historical claims inflation.

The estimation of IBNR is generally subject to a greater degree of uncertainty than the

estimation of the cost of settling claims already notified to the Company, where information

about the claim event is available. IBNR claims may not be apparent to the insured until several

months after the event that gave rise to the claims has happened.

In estimating the liability for the cost of reported claims not yet paid the Company considers

any information available from loss adjusters and information on the cost of settling claims with

similar characteristics in previous periods. Large claims are assessed on a case-by-case basis or

projected separately in order to allow for the possible distortive effect of their development and

incidence on the rest of the portfolio.

Where possible, the Company adopts multiple techniques to estimate the required level of

provisions. This provides a greater understanding of the trends inherent in the experience being

projected. The projections given by the various methodologies also assist in estimating the

range of possible outcomes. The most appropriate estimation technique is selected taking into

account the characteristics of the business class and the extent of the development of each

accident year.


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4.2 Financial risk

The Company is exposed to a range of financial risks through its financial assets, financial

liabilities, reinsurance assets and insurance liabilities. In particular the key financial risk is that

in the long term the proceeds from its financial assets are not sufficient to fund the obligations

arising from its insurance contracts. The most important components of this financial risk are

interest rate risk, equity price risk, foreign currency risk and credit risk.

These risks arise from open positions in interest rate, currency and equity products, all of which

are exposed to general and specific market movements. The risk that the Company primarily

faces due to the nature of its investments and liabilities is equity price risk. The Company

manages these positions to achieve investment returns in excess of its obligations under

insurance contracts. The Company has not changed the processes used to manage its risks from

previous periods.

4.2.1 Market risk

Market risk is comprised of interest rate risk, equity price risk and currency risk.

(i) Interest rate risk

The sensitivity analysis for interest rate risk illustrates how changes in the fair value or future

cash flows of a financial instrument will fluctuate because of changes in market interest rates at

the reporting date. The Company's revenue will be significantly affected by changes in

prevailing interest rates since a portion of its income derives from interest on investments and

bank deposits because interest-bearing assets earn interest at fixed rates.

The table below summarises the effective interest rate at balance sheet date:

Effective interest rate

2011 2010

% %

Held to maturity investments 7.4 7.1

Bank deposits 5.2 5.6

Cash and cash equivalents 0.5 0.5

A change of 5% in interest income from cash and bank deposits would result in a gain or loss

for the year of US$ 144,000 (2010 - US$ 145,000), recognised in the statement of

comprehensive income.


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4.2 Financial risk (continued)

4.2.2 Market risk (continued)

(ii) Equity price risk

The sensitivity analysis for equity risk illustrates how fair value of equity securities will

fluctuate because of changes in market prices, whether those changes are caused by factors

specific to the individual equity issuer, or factors affecting all similar equity securities traded

in the market.

The equity securities described in this note are classified as available for sale financial assets

at fair value.

An increase or decrease in value by 5% (2010-5%) would result in a change of fair value of

available for sale financial assets by US$ 318,214 (2010- US$ 417,697).

(iii) Currency risk

The Company underwrites insurance contracts mainly in US Dollar. The Company

concentrates its investments in assets denominated in the same currency as their related

liabilities; which reduces the foreign currency exchange risk for these operations. The

Company's exposure to foreign currencies arises from assets and liabilities that are

denominated in currencies other than the US$.

In case of an increase or decrease in the price of Turkish lira against US Dollars by 5%

(2010- 5%) with all other variables held constant, the profit for the year would increase or

decrease by US$ 191,000 (2010 - US$ 456,000).

In case of an increase or decrease in the exchange rate of other currencies against the US$ by

5% (2010- 5%) with all other variable held constant, the profit for the year would increase or

decrease by US$ 544,000 (2010- US$ 53,000).

The table below summarises the Company's exposure to foreign currency exchange rate risk

at 31 December 2011 and 2010. The Company's assets and liabilities included in the table are

categorised by currency at their carrying amount.


-37-



4.2.1 Market risk (continued)

(iii) Currency risk (continued)

Indexed Turkish Lira Other Total

US$ in US$ in US$ in US$ in US$


Assets

Property and equipment 2,850,930 - - - 2,850,930

Investment property 573,549 - - - 573,549

Intangible assets 115,000 - - - 115,000

Deferred acquisition costs 1,940,874 1,950,816 929,907 2,825,653 7,647,250

Available for sale

financial assets 6,364,075 - - - 6,364,075

Held to maturity

financial assets 55,212,307 - - 118,739 55,331,046

Insurance receivables 15,943,623 15,209,585 6,921,418 22,223,801 60,298,427

Reinsurance assets 5,041,356 5,067,179 2,415,401 7,339,563 19,863,499

Bank deposits with original

maturity of more

than 3 months 67,224,916 - - 533,334 67,758,250

Cash and cash equivalents 1,729,134 - - 155,562 1,884,696

Total Assets 156,995,764 22,227,580 10,266,726 33,196,652 222,686,722

Liabilities Insurance contracts 26,679,714 26,816,371 12,782,715 38,842,215 105,121,015

Unearned reinsurance

Commission 416,007 418,138 199,316 605,654 1,639,115

Accounts payable 6,613,186 3,732,631 1,108,756 4,635,407 16,089,980

Retirement benefit

obligation - 201,000 - - 201,000

Income tax provision - 64,241 - - 64,241

Total liabilities 33,708,907 31,232,381 14,090,787 44,083,276 123,115,351

Net balance sheet position

at 31 December 2011 123,286,857 (9,004,801) (3,824,061) (10,886,624) 99,571,371


Total assets 141,661,804 30,609,150 12,608,654 27,236,616 212,116,224

Total liabilities 23,939,859 54,282,107 21,738,865 26,168,572 126,129,403

Net balance sheet position

at 31 December 2010 117,721,945 (23,672,957) (9,130,211) 1,068,044 85,986,821


-38-



4.2.2 Credit risk

The Company has exposure to credit risk, which is the risk that a counterparty will be unable

to pay amounts in full when due. Key areas where the Company is exposed to credit risk are:

– reinsurance assets including receivables from reinsurers;

– amounts due from insurance contract holders;

– amounts due from insurance intermediaries;

– bank deposits; and

– financial assets held to maturity

The Company structures the levels of credit risk it accepts by placing limits on its exposure

to a single counterparty, or groups of counterparty. Such risks are subject to a regular review.

Reinsurance is used to manage insurance risk. This does not, however, discharge the

Company's liability as primary insurer. If a reinsurer fails to pay a claim for any reason, the

Company remains liable for the payment to the policyholder. The creditworthiness of

reinsurers is considered by reviewing their financial strength prior to finalisation of any

contract.

The table below summarises assets bearing credit risk:

2011 2010

US$ US$

Insurance receivables (excluding prepayments) 60,231,032 57,862,576

Reinsurance assets 19,863,499 20,958,038

Financial assets held till maturity 55,331,046 54,433,736

Bank deposits 67,758,250 56,647,545

Cash and cash equivalents (excluding cash on hand) 1,883,350 2,673,377

Total assets bearing credit risk 205,067,177 192,575,272

These assets are analysed in the table below using Standard & Poor's rating or equivalent

when not available. The concentration of credit risk is substantially unchanged compared to

the prior year.

2011 2010

US$ US$

AA 3,374,008 2,941,307

A 1,200,217 13,582,711

BBB 16,268,847 15,235,591

Below BBB or not rated 153,772,509 130,229,240

Total 174,615,581 161,988,849

Pipeline receivable 30,451,596 30,586,423

205,067,177 192,575,272


-39-



4.2.3 Liquidity risk

The table below indicates the estimated amount and timing of cash flows arising from liabilities:

Payments due by period

Carrying

Amount 0-1 year 1-2 years 2-3 years 3-4 years 5 years

At 31 December 2011

In US$

Insurance contracts 105,121,015 66,086,638 20,716,736 7,346,708 751,676 10,219,257

Other liabilities 16,355,221 10,305,924 3,210,547 1,138,546 116,490 1,583,714

121,476,236 76,392,562 23,927,283 8,485,254 868,166 11,802,971

At 31 December 2010

In US$

Insurance contracts 104,776,823 56,237,807 17,750,952 10,428,400 7,018,091 13,341,573

Other liabilities 19,435,713 10,472,209 3,277,997 1,925,771 1,296,003 2,463,733

124,212,536 66,710,016 21,028,949 12,354,171 8,314,094 15,805,306


-40-

40


4.3 Fair value hierarchy

At 31 December 2011, available for sale investments consisted of Level 1 financial assets measured

at fair value on a recurring basis. Fair value measurement classified as Level 1 include traded funds

and equity securities.


-41-

5 Property and equipment

Land Leasehold Office Other

& building Improvements Furniture Equipment Equipments Total


1 January 2010

Cost 3,221,419 225,000 404,951 22,240 215,558 4,089,168

Accumulated depreciation (409,683) (68,063) (297,529) (22,240) (181,613) (979,128)

Net book value 2,811,736 156,937 107,422 - 33,945 3,110,040

Year ended 31 December 2010

Net book amount at the beginning of the year 2,811,736 156,937 107,422 - 33,945 3,110,040

Additions - - 675 105 9,796 10,576

Depreciation charge (39,727) (74,250) (22,783) (105) (11,295) (148,160)

Net book amount at the end of the year 2,772,009 82,687 85,314 - 32,446 2,972,456

31 December 2010

Cost 3,221,419 225,000 405,626 22,345 225,354 4,099,744

Accumulated depreciation (449,410) (142,313) (320,312) (22,345) (192,908) (1,127,288)

Net book value 2,772,009 82,687 85,314 - 32,446 2,972,456


-42-

5 Property and equipment (continued)

Land Leasehold Office Other

& building Improvements Furniture Equipment Equipments Total


Year ended 31 December 2011

Net book amount at

the beginning of the year 2,772,009 82,687 85,314 - 32,446 2,972,456

Additions - - 6,203 1,303 14,823 22,329

Depreciation charge (39,725) (74,250) (16,876) (1,303) (11,701) (143,855)

Net book amount at the end of the year 2,732,284 8,437 74,641 - 35,568 2,850,930

31 December 2011

Cost 3,221,419 225,000 411,829 23,648 240,176 4,122,072

Accumulated depreciation (489,135) (216,563) (337,188) (23,648) (204,608) (1,271,142)

Net book value 2,732,284 8,437 74,641 - 35,568 2,850,930


-43-

6 Investment property

2011 2010

US$ US$

Cost 665,676 665,676

Depreciation (92,127) (84,110)

At end of year 573,549 581,566

Investment property comprises leased and vacant commercial properties in the Beirut Central

District. The Company is holding these properties for long term rental income purposes. The

Company’s investment property rental revenue amounted to US$ 165,115

in 2011 (2010 - US$ 105,000).

7 Intangible Assets

Intangible assets represent an advance payment of US$ 115,000 made in respect of the

upgrade of the company's existing system.

8 Financial assets held to maturity

2011 2010

US$ US

Debt securities issued by Lebanese Banks 5,297,247 3,294,398

Debt securities issued by the Lebanese government 29,290,303 36,269,495

Foreign debt securities 19,396,572 13,746,572

53,984,122 53,310,465

Interest earned but not received 1,346,924 1,123,271

55,331,046 54,433,736

Summarised below is the movement of financial assets held to maturity:

2011 2010

US$ US$

At beginning of year 53,310,465 43,495,426

Additions 7,650,000 10,279,905

Maturities (6,997,394) (500,000)

Amortisation 21,051 35,134

At end of year 53,984,122 53,310,465


-44-

9 Available for sale financial assets 2011 2010

US$ US$

Financial assets at fair value - listed 2,141,009 3,926,671

Financial assets at fair value - not listed 4,223,066 4,427,278

6,364,075 8,353,949

Summarised below is the movement of available for sale financial assets: 2011 2010

US$ US$

At beginning of year 8,353,949 13,382,760

Additions 1,022,397 308,165

Disposals (2,100,000) (4,617,136)

Change in fair value (912,271) (719,840)

At end of year 6,364,075 8,353,949

The provision for impairment of available for sale financial assets amounted to

US$ 1,879,400 at 31 December 2011 (31 December 2010 - US$ 1,879,400).

10 Loans and receivables including reinsurance receivables

2011 2010

US$ US$

Pipeline receivables 30,451,596 30,586,423

Due from insurance companies and brokers 8,282,978 5,869,689

Provision for impairment of receivables (1,800,000) (1,800,000)

Deposits with ceding companies 21,552,959 21,555,024

Prepaid expenses 67,395 62,626

Accrued interest 748,675 812,213

Commission from Arab Re Pool 95,237 -

Due from related parties (note 29) 834,055 634,224

Due from employees 65,532 205,003

60,298,427 57,925,202


-45-

10 Loans and receivables including reinsurance receivables (continued)

The carrying amount of loans and receivables approximates their fair values at

31 December 2011 and 2010.

There is no concentration of credit risk with respect to balances due from insurance

companies, as the Company has a large number of dispensed debtors.

As at 31 December 2011 and 2010, receivables with a carrying value of

US$ 1.8 million (2010 – US$ 1.8 million) were impaired and fully provided for. All impaired

receivables were overdue more than one year.

As at 31 December 2011, past due but not impaired due from insurance companies is equal to

US$ 7.3 million (2010 - US$ 4.1 million).

The interest rate received on deposits with ceding companies amounted to 1.5%

(2010- 1.7%).

11 Bank deposits with original maturity of more than 3 months

Bank deposits include deposits that originally mature within 3 months or more as at 31

December 2011.

The effective interest rate on these bank deposits amounted to 5.26% in 2011 (2010 - 5.64%).

12 Cash and cash equivalents

2011 2010

US$ US$

Cash on hand 1,346 1,264

Bank current accounts 1,883,350 2,673,377

1,884,696 2,674,641

13 Fair value reserve

Below is the movement of the fair value reserve of available for sale financial assets:

2011 2010

US$ US$

Balance at beginning of the year – as restated 185,029 1,963,213

Restatement of prior years - (1,879,400)

Balance at beginning of the year 185,029 83,813

Fair value of investments disposed off - (618,624)

Unrealised fair value loss 912,271 719,840

1,097,300 185,029


-46-

14 Share capital

At 31 December 2011, the share capital is comprised of 75,000,000 authorised and fully paid

shares with a par value of US$ 1 each (2010 - 60,000,000 authorised and fully paid shares

with a par value of US$ 1 each).

The extraordinary general assembly held on 16 June 2011 approved the increase of capital of

US$ 15,000,000. The general assembly convened on 17 December 2011 approved the proper

underwriting of this capital increase.

15 Legal reserve

According to Article 60 of the Company's by-laws, 10% of the annual net profit should be

transferred to a capital reserve until the total of this reserve becomes equal to the Company's

capital. This reserve includes the legal reserve required according to Article 165 of the

Lebanese Code of Commerce. This reserve is not available for distribution to shareholders.

16 Dividends paid

On 15 June 2011 (2009 – 20 May 2010) the general assembly of shareholders approved the

distribution of US$ 6 million to shareholders (2010 – US$ 5 million).


-47-

17 Insurance contracts and reinsurance assets

2011 2010

US$ US$

Insurance contracts

Outstanding claims 71,451,394 70,120,412

Unearned premiums provision 25,287,774 25,824,680

Claims incurred but not reported 8,381,847 8,831,731

Total insurance liabilities, gross 105,121,015 104,776,823

Recoverable from reinsurers



Total reinsurers’ share of insurance liabilities 19,863,499 20,958,038

Net



Claims incurred but not reported 8,381,847 8,831,731

Total insurance liabilities, net 85,257,516 83,818,785

17.1 Development claims tables

The development of insurance liabilities provides a measure of the Company's ability to

estimate the ultimate value of claims. The top half of each table below illustrates how the

Company's estimate of total claims outstanding for each underwriting year has changed at

successive year-ends. The bottom half of the tables reconciles the cumulative claims to the

amount appearing in the balance sheet. An underwriting-year basis is considered to be most

appropriate for the business written by the Company.


-48-

17 Insurance contracts and reinsurance assets (continued)

17.1 Development claims tables (continued)

Underwriting year <2006 2006 2007 2008 2009 2010 2011 Total

US$ US$ US$ US$ US$ US$ US$ US$

Estimate of ultimate claims costs:

- at end of accident year - 19,733,441 29,706,512 35,760,403 26,797,229 23,358,204 28,973,702 164,329,491

- one year later - 32,829,145 44,376,075 51,845,003 40,604,780 34,475,888 - 204,130,891

- two years later - 34,595,523 46,920,283 54,421,975 41,074,043 - - 177,011,824

- three years later - 31,970,130 47,736,002 53,601,644 - - - 133,307,776

- four years later - 36,026,194 47,067,471 - - - - 83,093,665

- five years later - 35,361,706 - - - - - 35,361,706

Current estimate of cumulative claims 7,551,847 35,361,706 47,067,471 53,601,644 41,074,043 34,475,888 28,973,702 248,106,301

Current payment to date - (32,336,571) (38,100,619) (43,583,994) (26,187,242) (22,224,889) (5,839,745) (168,273,060)

Liability recognised in the balance

sheet 7,551,847 3,025,135 8,966,852 10,017,650 14,886,801 12,250,999 23,133,957 79,833,241

Total insurance liability at balance

sheet date

79,833,241


-49-

18 Retirement benefit obligation

In accordance with the provisions of IAS 19 and the National Social Security Fund

regulations, management has carried out an exercise to assess the present value of its

retirement benefit obligations as at 31 December 2011 using the projected unit credit method.

Under this method, an assessment has been made of an employee's expected service life with

the Company and the expected basic salary at the date of leaving the service. Management

has assumed average increments in salary of 5% (2010 – 6%). The expected liability at the

date of leaving the service has been discounted to its net present value using a discount rate of

7.9% (2001 - 8%).

The movement in the provision recognised in the balance sheet is as follows:

2011 2010

US$ US$

At beginning of year 185,049 126,977

Provision charged to income statement (note 26) 25,019 58,072

Utilised during the year (9,068) -

At end of year 201,000 185,049

19 Accounts payable

Current accounts with insurance companies,

reinsurers and brokers 5,231,427 8,375,254

NSSF and other taxes payable 133,303 92,208

Deposits with reinsurance companies 9,053,221 9,412,151

Accrued expenses 121,210 160,509

Due to related parties (note 29) 1,550,819 1,123,542

16,089,980 19,163,664


-50-

20 Net insurance premium revenue 2011 2010

US$ US$

Insurance contracts

Insurance premium revenue 57,549,070 53,672,397

Change in unearned premium provision (1,372,417) 3,285,658

Insurance premium revenue 56,176,653 56,958,055

Insurance premium revenue ceded to reinsurers 9,344,481 9,772,417

Change in reinsurance share of unearned premium provision 1,205,120 2,364,474

Insurance premium revenue ceded to reinsurers 10,549,601 12,136,891

Net insurance premium revenue 45,627,052 44,821,164

21 Investment income

2011 2010

US$ US$

Interest on bank deposits 3,099,571 2,959,398

Interest on debt securities 4,316,544 3,875,945

Gain on sale of available for sale financial assets - 327,317

Amortisation of premium - (580)

Dividends from investments 32,614 -

Interest income on deposits with cedants 196,563 348,402

Other income 13,088 5,259

7,658,380 7,515,741

22 Reinsurance commission income and profit sharing

2011 2010

US$ US$

Reinsurance commission income and profit sharing 2,274,807 2,573,140

Unearned reinsurance commissions at beginning of year 1,916,867 2,782,195

Unearned reinsurance commissions at end of year (1,639,115) (1,916,867)

2,552,559 3,438,468


-51-

23 Insurance claims and loss adjustment expense

2011 2010

US$ US$

Insurance contracts

Gross paid claims 37,748,621 40,334,118

Change in the provision for outstanding claims and IBNR 642,982 2,722,007

Insurance claims and loss adjustment expenses 38,391,603 43,056,125

Reinsurance share of paid claims 7,382,323 8,892,710

Change in reinsurers' share

of outstanding claims and IBNR 110,581 3,790,503

Reinsurers' share of incurred claims 7,492,904 12,683,213

Insurance claims, net of reinsurance 30,898,699 30,372,912

24 Expenses for acquisition of insurance contracts

2011 2010

US$ US$

Commissions paid 15,112,048 14,409,597

Deferred acquisition costs at beginning of year 7,569,091 8,292,955

Deferred acquisition costs at end of year (7,647,250) (7,569,091)

Total expenses for the acquisition of insurance contracts 15,033,889 15,133,461


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25 Expenses for administration

2011 2010

US$ US$

Employee benefit expense (note 26) 2,289,003 1,697,826

Depreciation (note 5,6) 151,872 156,175

Utilities 146,016 157,693

Professional fees 383,605 255,187

Maintenance and repairs expenses 57,780 76,165

Rent 89,950 97,565

Other taxes 283,242 173,572

Other administrative expenses 501,730 487,433

Board of directors' attendance fees 292,917 401,363

Board of directors' expenses 208,783 190,406

Exchange loss 634,717 257,168

Total administrative expenses 5,039,615 3,950,553

Less: Arab Re Pool expenses (467,005) (516,331)

4,572,610 3,434,222

26 Employee benefit expense 2011 2010

US$ US$

Salaries and wages 1,939,255 1,383,579

National social security costs 248,011 178,979

End of service indemnity costs (note 18) 25,019 58,072

Other staff costs 76,718 77,196

2,289,003 1,697,826

27 Other operating income

Rent income 165,115 105,683

Commission from Arab Re pool 509,851 464,947

Other income 46,752 -

Arab Re pool expenses (note 25) (467,005) (516,331)

254,713 54,299


-53-

28 Income Tax

The income tax expense is comprised of the following:

2011 2010

US$ US$

Tax on insurance income (see below) 64,241 86,822

Other taxes 26,444 36,048

90,685 122,870

Taxable insurance income is comprised of the following:

Gross premiums written in Lebanon 6,267,602 5,661,982

Commissions received on ceded premiums 344,559 484,027

Other income 1,243,725 1,393,292

7,855,886 7,539,301

Assumed profit at a weighted average

rate of 5.45% (2010 – 7.67%) 428,274 578,813

Income tax rate 15% 15%

Income tax expense 64,241 86,822

Open tax years that are subject to examination and acceptance by the fiscal authorities

comprise the financial years 2009 to 2011.

29 Related parties

The related parties are comprised of the company's shareholders:

The following transactions were carried out with related parties:

2011 2010

US$ US$

(a) Insurance contracts:

Premiums accepted 10,777,583 12,781,601

Premiums ceded (3,889,312) (7,211,893)

Commission expense (2,003,233) (1,566,460) Claims paid (3,653,007) (3,255,615) Commission income on ceded premiums 76,557 31,505

(b) Key management compensation:

Board of directors' attendance fees (note 25) 292,917 401,363


-54-

29 Related parties (continued)

Outstanding balances arising from reinsurance and other activities were as follows:

2011 2010

US$ US$

Due to related parties (note 19) 1,550,819 1,123,542 Due from related parties (note 10) 834,055 634,224

30 Cash from operating activities 2011 2010

US$ US$

Cash flow from operating activities Note

Profit before tax 5,587,506 6,889,077

Adjustments for:

Depreciation 5, 6 151,872 156,177

Amortisation (21,051) (35,134)

Gain from sale of available for

sale financial assets - (326,737)

Purchase of available for sale financial assets 9 (1,022,398) (308,165)

Purchase of financial assets held to maturity 8 (7,650,000) (10,279,905)

Increase in bank deposits with original maturity

of more than 3 months (11,110,705) (3,694,398)

Interest received 6,586,617 6,752,635

Income from sale of available for sale financial assets - 5,562,497

Disposal of available for sale financial assets 2,100,000 -

Matured financial assets 6,997,394 500,000

Interest income (6,782,547) (7,124,830)

Net increase (decrease) in insurance contracts 344,192 (563,651)

Decrease (increase) in reinsurance assets 1,094,539 (1,426,029)

(Increase) decrease in deferred acquisition cost (78,159) 723,864

Increase in insurance receivable (2,436,763) (78,932)

Increase in retirement benefit obligation 15,952 58,072

Decrease in accounts payable (3,073,684) (1,141,358)

Decrease in unearned reinsurance commission (277,752) (865,328)

Net cash used in operations (9,574,987) (5,202,145)

Income tax paid (77,629) (95,870)

Net cash used in operating activities (9,652,616) (5,298,015)


-55-

31 Expenses by function 2011

US$

Insurance premium revenue 56,176,653

Insurance premium ceded to reinsurers (10,549,601)

Net insurance premium revenue 45,627,052

Investment income from technical operations 3,532,643

Reinsurance commission income and profit sharing 2,552,559

Net income from technical operations 51,712,254

Insurance claims and loss adjustment expenses (38,391,603)

Insurance claims and loss adjustment expenses

recovered from reinsurers 7,492,904

Net insurance claims (30,898,699)

Expenses for acquisition of insurance contracts (15,033,889)

Expenses for administration and other expenses

allocated to technical operations (3,852,523)

Total expenses from technical operations (49,785,111)

Net Income from technical operations 1,927,143

Investment income from non technical operations 4,125,737

Other operating income 254,713

Net income from non technical operations 4,380,450

Expenses for administration and other expenses

allocated to non technical operations (720,087)

Net Income from non technical operations 3,660,363

Income tax (90,685)

Profit for the year 5,496,821

Other comprehensive income for the year

Change in fair value reserve of available

for sale financial assets (912,271)

Total comprehensive income for the year 4,584,550

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