gulf general cooperative insurance company (a saudi … · goodwill payments are governed by rules...

GULF GENERAL COOPERATIVE INSURANCE COMPANY

(A SAUDI JOINT STOCK COMPANY)

FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS’ REPORT

FOR THE YEAR ENDED 31 DECEMBER 2017



FINANCIAL STATEMENTS

31 DECEMBER 2017

CONTENTS PAGE NO.

Independent Auditors’ Report 1 – 6

Statement of Financial Position 7 – 8

Statement of Insurance Operations and Accumulated Surplus 9

Statement of Shareholders’ Operations 10

Statement of Shareholders’ Comprehensive Income 11

Statement of Changes in Shareholders’ Equity 12

Statement of Insurance Operations’ Cash Flows 13

Statement of Shareholders’ Cash Flows 14

Notes to the Financial Statements 15 – 55



NOTES TO THE FINANCIAL STATEMENTS At 31 December 2017

15

1. ORGANISATION AND PRINCIPAL ACTIVITIES

a. Organization and principal activities

Gulf General Cooperative Insurance Company ("GGCI" or the "Company") is a Saudi Joint Stock Company

incorporated in the Kingdom of Saudi Arabia as per the Ministry of Commerce and Industry's Resolution number

12/Q dated 17 Muharram 1431 H (corresponding to 3 January 2010) and registered under Commercial Registration

number 4030196620 dated 9 Safar 1431 H (corresponding to 25 January 2010). The registered office address of

the Company at Al Gheity Plaza, Second Floor, Ameer Al Shoura'a Street, Jeddah, Kingdom of Saudi Arabia.

The Company also has the following branches, which are operating under separate certificate of registrations:

Branch Commercial

Registration No.

Date

Riyadh 1010316823 29 Shawwal 1432 H (corresponding to 27 September 2011)

Al Khobar 2051046836 19 Dhul Qadah 1432 H (corresponding to 17 October 2011)

The Company is licensed to conduct insurance business in the Kingdom of Saudi Arabia under cooperative principles

in accordance with Royal Decree No. M/85 dated 5 Dhul Hijja 1429 H (corresponding to 3 December 2008) pursuant

to Council of Ministers' Resolution No. 365 dated 3 Dhul Hijja 1429 H (corresponding to 1 December 2008). The

Company obtained a license to conduct insurance operations in the Kingdom of Saudi Arabia from the Saudi Arabian

Monetary Authority ("SAMA") on 20 Rabi-al-Awwal 1431 H (corresponding to 6 March 2010). The Company was

listed on the Saudi Arabian Stock Exchange (Tadawul) on 24 Safar 1431 H (corresponding to 8 February 2010).

The objectives of the Company are to engage in providing insurance and related services, which include reinsurance,

in accordance with its by-laws, and applicable regulations in the Kingdom of Saudi Arabia. The share capital of the

Company is Saudi Riyals 200 million divided into 20 million shares of Saudi Riyals 10 each. Further, in compliance

with Article 58 of the Implementing Regulations of the Saudi Arabian Monetary Authority ("SAMA"), the Company

has deposited 10% of its share capital, amounting to Saudi Riyals 20 million in a bank designated by SAMA. The

statutory deposit is maintained with a reputed bank and can be withdrawn only with the consent of SAMA. The

Company cannot withdraw this deposit without SAMA’s approval and commission accruing on this deposit is payable

to SAMA.

b. Portfolio transfer

On 19 May 2012, the Company entered into an agreement with Saudi General Insurance Company E.C. (SGI) and

Gulf Cooperation Insurance Company Ltd. E.C. (GCI) (the "Sellers") pursuant to which it acquired the sellers'

insurance operations in the Kingdom of Saudi Arabia, effective 1 January 2009, at a goodwill amount of SR 36.26

million, as approved by SAMA, along with related insurance assets and liabilities of an equivalent amount. The

goodwill payments are governed by rules and regulations issued by SAMA in this regard and also subject to SAMA

approval.

In December 2013, consequent to SAMA approval, a sum of SR 18.13 million payable to the Sellers for goodwill was

adjusted against amount receivable from them. Also, SAMA approved further payment of SR 5.37 million to the Sellers

relating to 2012 profits, which was transferred to amount due to related parties, as at 31 December 2013, and settled in

2014. Further, during the year ended 31 December 2014, consequent to SAMA's approval, dated 28 Shawal 1435 H

(corresponding to 24 August 2014), a payment of SR 2.96 million was made to the Sellers in respect of goodwill, out

of 2013 profits. During the year ended 31 December 2015, consequent to SAMA's approval, dated 3 Rajab 1436 H

(corresponding to 22 April 2015), a final payment of SR 9.804 million was made to the Sellers in respect of goodwill,

out of 2014 profits.

The recoverable amount of goodwill is determined based on value in use using discounted cash flow analysis. These

calculations use cash flow projections based on financial budgets approved by management covering a five year period.

The discount rates used are pre-zakat reflect specific risks relating to the Insurance industry. The results of impairment

test at 31 December 2017 and 31 December 2016 indicated no impairment charge.



NOTES TO THE FINANCIAL STATEMENTS (continued) At 31 December 2017

16

2. BASIS OF PREPARATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a. Basis of measurement

These financial statements have been prepared under going concern basis and historical cost convention except for

the measurement of investments held at fair value through income statement and investments – available-for-sale at

their fair values.

The Company presents its statement of financial position broadly in order of liquidity. Except for available-for-sale

investment and statutory deposit, all other financial assets and liabilities are expected to be recovered and settled

respectively, within twelve months after the reporting date.

b. Statement of compliance

The financial statements of the Company has been prepared in accordance with International Financial Reporting

Standards (IFRS) as modified by SAMA for the accounting of zakat and income tax’, which requires, adoption of all

IFRSs as issued by the International Accounting Standards Board (“IASB”) except for the application of International

Accounting Standard (IAS) 12 - “Income Taxes” and IFRIC 21 - “Levies” so far as these relate to zakat and income

tax. As per the SAMA Circular no. 381000074519 dated April 11, 2017 and subsequent amendments through certain

clarifications relating to the accounting for zakat and income tax (“SAMA Circular”), the Zakat and Income tax are

to be accrued on a quarterly basis through shareholders equity under retained earnings.

Applying the above framework, the financial statements of the Company as at and for the year ended 31 December

2017 have been prepared in in accordance with International Financial Reporting Standards (IFRS) as modified by

SAMA for the accounting of Zakat and tax. This change in framework has resulted in a change in the Company’s

accounting policy for Zakat and tax.

To comply with the SAMA circular No. 381000074519 the Company amended its accounting policy relating to Zakat

and tax and has started to charge Zakat and tax to retained earnings in the shareholders’ equity. Previously, Zakat and

tax were charged to the statement of shareholders’ Operations. The Company has accounted for the change in the

accounting policy relating to Zakat and tax retrospectively and has restated its previously reported amounts of net

loss and Zakat charge for the period presented in the statement of shareholders’ operations to the statement of changes

in shareholders’ equity with no impact on accumulated losses for any of the years presented.

The accounting policies used in the preparation of the financial statements are consistent with those followed in the

preparation of the Company’s annual financial statements for the year ended 31 December 2016, except for the change

in the accounting policy in relation to accounting for Zakat and tax as described above.

As required by the Saudi Arabian insurance regulations, the Company maintains separate accounts for insurance

operations and shareholders’ operations and presents the financial statements accordingly. The physical custody and

title of all assets related to the insurance operations and shareholders’ operations are held by the Company. Revenues

and expenses clearly attributable to either activity are recorded in the respective accounts. The basis of allocation of

expenses from joint operations is determined by the management and the Board of Directors.

In accordance with the by-laws of the Company, the surplus arising from the insurance operations is distributed as

follows:

Transfer to shareholders’ operations 90%

Transfer to policyholders’ operations 10%

────

100%

════

In case of deficit arising from the insurance operations, the entire deficit is allocated and transferred to shareholders’

operations.

In accordance with Article 70 of SAMA implementing regulations, the Company proposes to distribute, subject to

the approval of SAMA, its annual net policyholders’ surplus directly to policyholders at a time, and according to

criteria, as set by its Board of Directors.




17

2. BASIS OF PREPARATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(continued)

c. Functional and presentation currency

The financial statements are presented in Saudi Riyals (“SR”), being the functional currency of the Company, and

have been rounded off to the nearest thousand.

d. Summary of significant accounting policies

The following significant accounting policies adopted in the preparation of these financial statements are consistent

with those followed in the preparation of the Company’s financial statements for the year ended 31 December 2016

except for the new and amended standards and interpretations adopted which are effective for annual period beginning

on or after 1 January 2017 and as modified by SAMA for the accounting of Zakat and tax as described in note 2(b).

The new standards, amendments to standards and interpretation which are effective for annual periods beginning after

1 January 2017 as mentioned in note 2(f) have not had a significant effect on the financial statements of the Company.

The significant accounting policies used in preparing these financial statements are set out below:

Insurance contracts

Insurance contracts are those contracts when the Company (the insurer) has accepted significant insurance risk from

another party (the policyholders) by agreeing to compensate the policyholders if a specified uncertain future event

(the insured event) adversely affects the policyholders. As a general guideline, the Company determines whether it

has significant insurance risk, by assessing whether an insured event could cause the Company to pay significant

additional benefits. Insurance contracts can also transfer financial risk.

Once a contract has been classified as an insurance contract, it remains an insurance contract for the remainder of its

lifetime, even if the insurance risk reduces significantly during this period, unless all rights and obligations are

extinguished or expire.

Insurance contracts are principally divided into medical, motor, property, engineering, marine, and accident and

liability and are principally short term insurance contracts.

Medical insurance is designed to compensate holders for expenses incurred in treatment of a disease, illness or injury.

Medical insurance is primarily offered to corporate customers with a large population to be covered under the policy.

Motor insurance is designed to compensate contract holders for damages suffered to their vehicles or liability to third

parties arising through accidents. Contract holders could also receive compensation for fire or theft of their vehicles.

In Saudi Arabia, it is compulsory for all vehicles to have minimum third party cover. The Company also issues

comprehensive motor policies. Various extensions cover natural perils, personal accident benefits and dealer repairs.

Property insurance contracts mainly compensate the Company’s customers for damage suffered to their properties.

Customers could also receive compensation for the loss of earnings through loss of profit and business interruption.

For property insurance contracts the main risks are fire, natural perils, business interruption and burglary.

Engineering insurance covers two principal types (a) “Contractors all risk” insurance offering cover during erection

or construction of buildings or civil engineering works such as houses, shops, blocks of flats, factory buildings, roads,

buildings, bridges, sewage works and reservoirs. (b) “Erection all risk” insurance offering cover during the erection

or installation of plant and machinery such as power stations, oil refineries, chemical works, cement works, metallic

structures or any factory with plant and machinery. The Engineering line of business also includes machinery

breakdown insurance and business interruption following machinery breakdown and includes electronic equipment,

boiler and deterioration of stocks insurance.

Marine insurance is designed to compensate policyholders for damage and liability arising through loss or damage to

marine craft/hull and accidents at sea resulting in total or partial loss of cargoes. For marine insurance, the main risks

are loss or damage to marine craft/hull and cargoes.

General accident insurance includes money, fidelity guarantee, personal accident, jeweller block, jewellery all risks

and travel insurance. Liability insurance includes general third-party liability, product liability, workmen’s

compensation/employer’s liability and professional indemnity cover protecting the insured’s legal liability arising out

of acts of negligence during their business operations.




18

2 BASIS OF PREPARATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(continued)

d. Summary of significant accounting policies (continued)

Cash and cash equivalents

Cash and cash equivalents consist of cash and bank balances and investment in Murabaha deposits that have original

maturity periods not exceeding three months from the date of acquisition.

Investment in Murabaha deposits

Investment in Murabaha deposits, with original maturity of more than three months, are initially recognized in the

statement of financial position at fair value and are subsequently measured at amortised cost using the effective yield

method, less any impairment in value.

Premium receivables Premium receivables are recognised when due and measured on initial recognition at the fair value of the

considerations received or receivable. The carrying value of premium receivables is reviewed for impairment

whenever events or circumstances indicate that the carrying amount may not be recoverable. Any impairment loss is

recorded in the statement of insurance operations. Premium receivables are derecognised when the derecognition

criteria for financial assets have been met.

Any difference between the provisions at the end of financial reporting period and settlements and provisions in the

following period is included in the general and administration expenses for that period.

Deferred acquisition costs

These direct costs incurred during the financial period arising from the writing or renewing of insurance contracts are

deferred to the extent that these costs are recoverable out of future premiums.

Subsequent to initial recognition, these costs are amortised on a straight-line basis based on the term of expected

future premiums except for marine cargo where the deferred portion is computed as 25% of the total cost incurred.

Amortisation is recorded in the statement of insurance operations and accumulated surplus.

An impairment review is performed at each financial reporting date or more frequently when an indication of

impairment arises. When the recoverable amounts are less than the carrying value, an impairment loss is recognised

in the statement of insurance operations. Deferred policy acquisition cost is also considered in the liability adequacy

test for each financial reporting period.

Prepayments

Prepayments represent expenses not yet incurred but already paid in cash. Prepayments are initially recorded as assets

and measured at the amount of cash paid. Subsequently, these are charged to statements of insurance operations and

accumulated surplus and shareholders’ operations as they are consumed or expire with the passage of time.

Furniture, fittings and equipment

Furniture, fittings and equipment are stated at cost less accumulated depreciation and any impairment in value.

Depreciation is calculated on a straight line basis over the estimated useful lives of the assets. The estimated useful

lives of the assets for the calculation of depreciation are as follows:

Leasehold improvements 8 years

Furniture and fittings 10 years

Computer and office equipment 4 years

Motor vehicles 4 years

The carrying values of furniture, fittings and equipment are reviewed for impairment when events or changes in

circumstances indicate that the carrying value may not be recoverable. If any such indication exists and where the

carrying values exceed the estimated recoverable amount, the assets are written down to their recoverable amount,

being the higher of their fair value less costs to sell and their value in use. Expenditure incurred to replace a component

of an item of furniture, fittings and equipment that is accounted for separately is capitalised and the carrying amount

of the component that is replaced is written off. Other subsequent expenditure is capitalised only when it increases

future economic benefits of the related item of furniture, fittings and equipment. All other expenditure is recognised

in the statement of insurance operations and accumulated surplus as the expense is incurred.




19


(continued)


Investments

All investments, are initially recognised at cost, being the fair value of consideration given including acquisition

charges associated with the investment. Financial assets are initially recognised at fair values plus, in the case of all

financial assets not carried at fair value through income statement, transaction costs that are directly attributable to

their acquisition.

Fair values of investments are based on quoted prices for marketable securities, or estimated fair values. The fair

value of commission bearing items is estimated based on discounted cash flows using commission for items with

similar terms and risk characteristics.

Investments held at fair value through income statement

Investments are classified as fair value through income statement, if the fair value of the investment can be reliably

measured and the classification as investments held at fair value through income statement is as per the documented

strategy of the Company. Investments classified as investments held at fair value through income statement are

initially recognised at cost, being the fair value of the consideration given. Subsequently, such investments are re-

measured at fair value, with all changes in fair value being recorded in the statement of shareholders’ operations.

Held to maturity investments

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

maturity dates that the Company has the positive intent and ability to hold to maturity and are classified as held to

maturity investments.

Held to maturity investments are recorded at cost, adjusted by the amount of amortisation of premium or accretion of

discount using the effective commission method.

Any permanent decline in value of investments is adjusted for and reported in the statement of shareholders’

operations as impairment charges.

Available-for-sale investments

Available-for-sale financial assets are non-derivative financial assets that are either designated in this category or not

classified in any of the other categories. Such investments are initially recognized at cost and subsequently measured

at fair value. Cumulative changes in fair value of investments are shown as a separate component in the statement of

financial position and shareholders' comprehensive income. Realized gains or losses on sale of these investments are

reported in the related statement of shareholders' operations. Dividends are recognised in the statement of

shareholders’ operations when the right to receive dividend is established. Foreign currency gain/loss on available-

for-sale investments are recognized in the statement of comprehensive income. Any permanent decline in value of

investments is adjusted for and reported in the statement of shareholders' operations as impairment charges. Fair

values of investments are based on quoted prices for marketable securities. The fair value of commission-bearing

items is estimated based on discounted cash flows using commission for items with similar terms and risk

characteristics. For unquoted equity investments, fair value is determined by reference to the market value of a similar

investment or is based on the expected discounted cash flows.

Financial instruments – initial recognition and subsequent measurement

Financial instruments comprise financial assets and financial liabilities.

Financial assets consist of cash and cash equivalents, Murabaha deposits, premiums receivable, due from

shareholders’ operations, due from insurance operation, reinsurance share of outstanding claim, due from reinsurer,

statutory deposit, investments and other receivables. Financial liabilities consist of outstanding claims, due to

reinsurance and broker, due to shareholders’ operation, to insurance operations, reinsurance balances payable, due to

policyholders, policyholders’ share of surplus from insurance operations, amounts due to related parties and certain

other liabilities.

Date of recognition

Regular way sale and purchase of financial instruments is recognised on the trade date, i.e., the date that the Company

becomes a party to the contractual provisions of the instrument. Regular way purchases or sales are purchases or sales

of financial instruments that require settlement of instrument within the time frame generally established by regulation

or convention in the market place.




20


(continued)


Financial instruments – initial recognition and subsequent measurement (continued)

Measurement of financial instruments

All financial instruments are measured initially at their fair value plus, in the case of financial assets and financial

liabilities not at fair value through statement of income, any directly attributable incremental costs of acquisition or

issue. The classification of financial instruments at initial recognition depends on the purpose for which the financial

instruments were acquired and their characteristics. Subsequent to initial measurement, financial instruments are

carried at amortised cost except for investments held at fair value through income statement which are carried at fair

value.

Liability adequacy test

At each reporting date the Company assesses whether its recognised insurance liabilities are adequate using current

estimates of future cash flows under its insurance contracts. If that assessment shows that the carrying amount of its

insurance liabilities is inadequate in the light of estimated future cash flows, the entire deficiency is immediately

recognised in the statement of insurance operations and accumulated surplus, and a provision for premium deficiency

is created.

Accounts payable and accruals

Liabilities are recognised for amounts to be paid in the future for goods or services received, whether billed by the

supplier or not.

Provisions

Provisions are recognised when the Company has an obligation (legal or constructive) arising from a past event, and

the costs to settle the obligation are both probable and can be reliably measured.

Employees’ end of service benefits

Employee benefit obligations as required by Saudi Arabia Labour Law, are required to be provided based on the

employees’ length of service.

The carrying value of defined benefit plan is determined using “Projected Unit Credit Method” by an independent

qualified actuary. This involves making various assumptions which may differ from actual developments in the future.

These include the determination of the discount rate, future salary increases, etc. Due to the complexity of the

valuation, the underlying assumptions and their long-term nature, the defined benefit obligation is highly sensitive to

changes in these assumptions. All assumptions are reviewed at each reporting date.

In determining the appropriate discount rate, management considers the yield of bonds in the Kingdom of Saudi

Arabia with extrapolated maturities corresponding to the expected duration of the defined benefit obligation. Future

salary increases are based on expected future inflation rates and expected future salary increase rate of the company.

Zakat

In accordance with the regulations of the General Authority of Zakat and Tax (“GAZT”), the Company is subject to

zakat attributable to the Saudi shareholders. In accordance with IFRS as modified by SAMA for the accounting of

zakat and tax, provisions for zakat is charged to the shareholders equity. Additional amounts payable, if any, at the

finalization of final assessments are accounted for when such amounts are determined.

The Company withholds taxes on certain transactions with non-resident parties in the Kingdom of Saudi Arabia as

required under Saudi Arabian Income Tax Law.




21


(continued)


Goodwill

Goodwill is initially measured at excess of the fair value of the consideration paid over the fair value of the identifiable

assets and liabilities acquired. Following initial recognition, goodwill is measured at cost less any accumulated

impairment losses. Goodwill is reviewed for impairment, annually or more frequently if events or changes in

circumstances indicate that the carrying value may be impaired. Impairment for goodwill is determined by assessing

the recoverable amount of the cash generating unit (or a group of cash generating units) to which the goodwill is

related. When the recoverable amount of the cash-generating unit (or a group of cash generating units) is less than the

carrying amount of the cash generating unit (or a group of cash generating units) to which goodwill has been allocated,

an impairment loss is recognised in statement of shareholders’ operations. Impairment losses relating to goodwill

cannot be reversed in future periods.

Impairment of financial assets

The Company assesses at each reporting date, whether there is any objective evidence that a financial asset or a group

of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and 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 (an incurred loss event) and that loss event (or events) has an impact on the estimated future cash flows of

the financial asset or the group of financial assets that can be reliably estimated. If such evidence exists, any impairment

loss is recognised in the statement of insurance operations and accumulated surplus or the statement of shareholders’

operations.

Evidence of impairment may include indications that the debtors or a group of debtors is experiencing a significant

financial difficulty, default or delinquency in repayments, the probability that they will enter bankruptcy or other

financial reorganisation and observable data indicating that there is a measurable decrease in the estimated future cash

flows, such as changes in arrears or economic conditions that correlate with defaults. Impairment is determined as

follows:

(a) for assets carried at cost, impairment is the difference between carrying value and the present value of future cash

flows discounted at the current market rate of return for a similar financial asset; and

(b) for assets carried at amortised cost, impairment is the difference between the carrying amount and the present

value of future cash flows discounted at the original effective commission rate.

Impairment of non-financial assets

The Company assesses at each reporting date whether there is an indication that an asset may be impaired. If any

indication exists, or when annual impairment testing for an asset is required, the Company estimates the asset’s

recoverable amount. An asset’s recoverable amount is the higher of an asset’s or cash-generating unit’s (CGU) fair value

less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash

inflows that are largely independent of those from other assets or groups of assets. When the carrying amount of an asset

or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount.

In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount

rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining

fair value less costs to sell, recent market transactions are taken into account, if available. If no such transactions can be

identified, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, quoted

share prices for publicly traded subsidiaries or other available fair value indicators.

The Company bases its impairment calculation on detailed budgets and forecast calculations, which are prepared

separately for each of the Company’s CGUs to which the individual assets are allocated. These budgets and forecast

calculations generally cover a period of three to five years. For longer periods, a long-term growth rate is calculated and

applied to project future cash flows after the fifth year.

Impairment losses of continuing operations are recognised in the statement of insurance operations and accumulated

surplus and statement of shareholders’ operations in expense categories consistent with the function of the impaired

asset, except for a property, if any, previously revalued and the revaluation was taken to other comprehensive income.

In this case, the impairment is also recognised in other comprehensive income up to the amount of any previous

revaluation.




22


(continued)


Impairment of non-financial assets (continued)

For assets excluding goodwill, an assessment is made at each reporting date whether there is any indication that

previously recognised impairment losses may no longer exist or may have decreased. If such indication exists, the

Company estimates the asset’s recoverable amount. A previously recognised impairment loss is reversed only if there

has been a change in the assumptions used to determine the asset’s recoverable amount since the last impairment loss

was recognised. The reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount,

nor exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been

recognised for the asset in prior years. Such reversal is recognised in the statement of insurance operations and

accumulated surplus and statement of shareholders’ operations unless the asset is carried at a revalued amount, in which

case, the reversal is treated as a revaluation increase.

Impairment losses related to goodwill cannot be reversed in future periods.

Derecognition of financial instrument Financial asset

A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is

derecognised when:

• The rights to receive cash flows from the asset have expired.

• The Company has transferred its rights to receive cash flows from the asset or has assumed an obligation to

pay the received cash flows in full without material delay to a third party under a ‘pass-through’ arrangement;

and either (a) the Company has transferred substantially all the risks and rewards of the asset, or (b) the

Company has neither transferred nor retained substantially all the risks and rewards of the asset, but has

transferred control of the asset.

When the Company has transferred its rights to receive cash flows from an asset or has entered into a pass-through

arrangement, it evaluates if and to what extent it has retained the risks and rewards of ownership. When it has neither

transferred nor retained substantially all of the risks and rewards of the asset, nor transferred control of the asset, the

asset is recognised to the extent of the Company’s continuing involvement in the asset. In that case, the Company

also recognises an associated liability. The transferred asset and the associated liability are measured on a basis that

reflects the rights and obligations that the Company has retained. Continuing involvement that takes the form of a

guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the

maximum amount of consideration that the Company could be required to repay.

Financial liabilities

A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires.

Revenue recognition

Premiums and commissions earned

These include net premiums and commission earned on insurance contracts. The portion of premiums and commissions

that will be earned in the future is reported as unearned premiums and commissions, respectively, and is deferred on a

basis consistent with the term of the related policy coverage, except for marine cargo. The unearned portion for marine

cargo represents 25% of the total premiums written during the current financial period. The change in the provision for

unearned premiums is taken to the statement of insurance operations and accumulated surplus in order that revenue is

recognised over the period of risk.

Dividend income

Dividend income is recognised when the right to receive payment is established.

Commission income

Commission income is recognised as the commission accrues using the effective commission rate method, under

which the rate used exactly discounts, estimated future cash receipts through the expected life of the financial asset

to the net carrying amount of the financial asset.




23


(continued)


Reinsurance premiums

Reinsurance premiums ceded are recognised as an expense when payable. Reinsurance premiums are charged to

income over the terms of the policies to which they relate on a pro-rata basis.

Reinsurance contracts held

In common with other insurance companies, in order to minimise financial exposure arising from large claims, the

Company, in the normal course of business, enters into contracts with other parties for reinsurance purposes. Such

reinsurance arrangements provide for greater diversification of business, allow management to control exposure to

potential losses arising from large risks, and provide additional capacity for growth. All of the reinsurance is affected

under treaty, facultative and excess-of-loss reinsurance contracts.

Claims receivable from reinsurers are estimated in a manner consistent with the claim liability and in accordance with

the reinsurance contract. These amounts are shown as “reinsurers’ share of outstanding claims” in the statement of

financial position until the claim is agreed and paid by the Company. Once the claim is paid the amount due from

the reinsurers in connection with the paid claim is transferred to amounts due from / to reinsurers.

At each reporting date, the Company assesses whether there is any indication that a reinsurance asset may be impaired.

Where an indicator of impairment exists, the Company makes a formal estimate of recoverable amount. Where the

carrying amount of a reinsurance asset exceeds its recoverable amount the asset is considered impaired and is written

down to its recoverable amount.

Claims

Claims consist of amounts payable to contract holders and third parties and related loss adjustment expenses, net of

salvage and other recoveries and are charged to statement of insurance operations and accumulated surplus as

incurred.

Gross outstanding claims comprise gross estimated cost of claims incurred but not settled at the reporting date,

whether reported or not. Provisions for reported claims not paid as of the financial reporting date are made on the

basis of individual case estimates. In addition, a provision based on management’s judgment and the Company’s prior

experience is maintained for the cost of settling claims incurred but not reported as of financial reporting date. The

ultimate liability may be in excess of or less than the amount provided.

Any difference between the provisions at the reporting date and settlements and provisions in the following year is

included in the statement of insurance operations and accumulated operations for that year. The Company does not

discount its liabilities for unpaid claims as substantially all claims are expected to be paid within one year of the

financial reporting date.

Operating leases

Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as

operating leases. Operating lease payments are recognised as an expense in the statement of insurance operations and

accumulated surplus on a straight-line basis over the lease term.

Expenses

Due to the nature of the operations of the Company, all expenses incurred are classified as general and administrative

expenses and are presented as such.

Foreign currencies

The accounting records of the Company are maintained in Saudi Riyals. Transactions in foreign currencies are

recorded in Saudi Riyals at the approximate rate of exchange ruling at the date of the transaction. Monetary assets

and liabilities denominated in foreign currencies are retranslated at the rate of exchange ruling at the reporting date.

All differences are taken to the statement of insurance operations and accumulated surplus or the statement of

shareholders’ operations.

Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the

exchange rates as at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign

currency are translated using the exchange rates at the date when the fair value is determined.




24


(continued)


Fair value of financial instruments

The fair value of financial assets that are actively traded in organised financial markets is determined by reference to

quoted market bid prices for assets and offer prices for liabilities, at the close of business on the financial reporting

date. If quoted market prices are not available, reference is made to broker or dealer price quotations.

Where the fair value of financial assets recorded on the statement of financial position cannot be derived from active

markets, they are determined using a variety of valuation techniques that include the use of mathematical models.

The inputs to these models are derived from observable market data where possible, but if this is not available,

judgment is required to establish fair values.

Offsetting

Financial assets and financial liabilities are offset and the net amount reported in the statement of financial position

only when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a

net basis, or to realise the assets and settle the liabilities simultaneously. Income and expenses are not offset in the

statement of insurance operations and accumulated surplus or in the statement of shareholders’ operations unless

required or permitted by any accounting standard or interpretation, as specifically disclosed in the accounting policies

of the Company. No offsetting has been made in these financial statements.

Segment reporting

An operating segment is a component of the Company that is engaged in business activities from which it earns

revenues and incur expenses and about which discrete financial information is available that is evaluated regularly by

the chief operating decision maker in deciding how to allocate resources and in assessing performance. For

management purposes, the Company is organised into business units based on products and services and has following

reportable operating segments:

Medical provides healthcare cover to policyholders.

Motor provides coverage against losses and liability related to motor vehicles, excluding transport insurance.

Property provides coverage against losses related to fire, natural perils, business interruption and burglary.

Engineering provides coverage during erection or construction of civil engineering works and installation of plant

and machinery.

Marine provides coverage against damages and liabilities arising through loss/damage to marine cargo/hull.

Accident insurance provides coverage against money, fidelity guarantee, personal accident, jeweller block,

jewellery all risks and travel insurance and liability insurance provides coverage against the insured’s legal

liability arising out of acts of negligence during their business operations.

Segment performance is evaluated based on profit or loss which, in certain respects, is measured differently from

profit or loss in the financial statements.

If any transaction were to occur, transfer prices between business segments are set on an arm's length basis in a manner

similar to transactions with third parties. Segment income, expense and results will then include those transfers

between business segments which will then be eliminated at the level of the financial statements of the Company.




25


(continued)

e. Use of estimates and judgments

Estimation uncertainty

The preparation of the Company’s financial statements requires management to make judgements, estimates and

assumptions that affect the reported amount of revenues, expenses, assets and liabilities, and the accompanying

disclosures. Uncertainty about these assumptions and estimates could result in outcomes that require a material

adjustment to the carrying amount of assets or liabilities affected in future periods.

Provision for outstanding claims

Considerable judgment by management is required in the estimation of amounts due to policyholders arising from

claims made under insurance contracts. In particular, estimates have to be made both for the expected ultimate cost of

claims reported at the reporting date and for the expected ultimate cost of claims incurred but not yet reported (IBNR)

at the reporting date. The primary technique adopted by management in estimating the cost of notified and IBNR claims,

is that of using past claim settlement trends to predict future claims settlement trends. The liability is calculated at the

reporting date using a range of standard actuarial claim projection techniques, based on empirical data and current

assumptions that may include a margin for adverse deviation. At each reporting date, prior year claims estimates are

reassessed for adequacy and changes are made to the provision. These provisions are not discounted for the time value

of money.

Such estimates are necessarily based on significant assumptions about several factors involving varying, and possible

significant, degrees of judgment and uncertainty and actual results may differ from management’s estimates resulting

in future changes in estimated liabilities. Claims requiring court or arbitration decisions are estimated individually.

Independent loss adjusters normally estimate property claims. Management reviews its provisions for claims incurred

on a monthly basis, and claims incurred but not reported on a quarterly basis. The provision for outstanding claims, as

at 31 December, is also verified by an independent actuary.

Allowance for impairment of premiums receivable

A provision for impairment of premiums receivable is established when there is objective evidence that the Company

will not be able to collect all amounts due according to the original terms of the receivable. Significant financial

difficulties of the debtor and default or delinquency in payments are considered indicators that the premiums receivable

is impaired.

Reinsurance

The Company is exposed to disputes with, and possibility of defaults by, its reinsurers. The Company monitors on a

quarterly basis the evolution of disputes with and the strength of its reinsurers.

Deferred acquisition costs

Certain acquisition costs related to the sale of new policies are recorded as deferred acquisition costs and are amortized

in the statement of insurance operations and accumulated surplus over the related period of policy coverage. If the

assumptions relating to future profitability of these policies are not realised, the amortization of these costs could be

accelerated and this may also require additional impairment write-offs in the statement of insurance operations and

accumulated surplus.

Useful lives of furniture, fittings and equipment

The Company's management determines the estimated useful lives of its furniture, fittings and equipment for calculating

depreciation. These estimates are determined after considering the expected usage of the assets or physical wear and

tear. Management reviews the residual value and useful lives annually and future depreciation charge would be adjusted

where the management believes the useful lives differ from previous estimates.

Goodwill

Goodwill represents the amount paid by the Company in excess of the net fair value of the identifiable assets, liabilities

acquired from SGI and GCI. Goodwill is subsequently recognized at cost net of any accumulated impairment losses.

The carrying value of goodwill is reviewed annually to determine whether any objective indicator of impairment exists,

unless an event or change in circumstances occurs during the year indicating an impairment of the carrying value which

requires a valuation of goodwill during the year.

The impairment is determined by reviewing the recoverable amount of cash generating unit, the acquisition of which

has given rise to goodwill. The recoverable amount of the operations has been determined based on value in use. The

key assumptions used are the discount rate and estimated future cash flows from the business. Where the recoverable

amount is less than its carrying value, an impairment loss is recognized in the statement of shareholders’ operations.

These calculations require the use of estimates (also see note 1 (b)).




26


(continued)

e. Use of estimates and judgments (continued)

Estimation uncertainty (continued)

Premium deficiency reserve

Estimation of premium deficiency reserve is highly sensitive to a number of assumptions as to the future events and

conditions. It is based on an expected loss ratio for the unexpired portion of the risks for written policies. To arrive at

the estimate of the expected loss ratio, the Company’s actuarial team, and also the independent actuary, consider the

claims and premiums relationship which is expected to apply on month to month basis, and ascertain, at the end of

the financial period, whether a premium deficiency reserve is required.

Fair value of financial instruments

The fair value for financial instruments traded in active markets at the reporting date is based on their quoted market

price. Where the fair value of financial assets and financial liabilities recorded on the statement of financial position

cannot be derived from active markets, they are determined using a variety of valuation techniques that include the

use of mathematical models. The inputs to these models are derived from observable market data where possible, but

if this is not available, judgment is required to establish fair values.

Going concern

The Company’s management has made an assessment of its ability to continue as a going concern and is satisfied that

it has the resources to continue in business for the foreseeable future. Furthermore, management is not aware of any

material uncertainties that may cast significant doubt upon the Company’s ability to continue as a going concern.

Therefore, the financial statements continue to be prepared on the going concern basis.

Employees end of service benefits

The employees’ end of service benefits obligation is determined by an independent actuary using the projected unit

credit method as recommended in IAS 19 “Employee benefits”. The present value of the defined benefit obligation

is determined by discounting the estimated cash outflows using interest rates of sovereign debt instruments that are

denominated in Saudi Riyals and have maturity periods approximating that of the gratuity liability.

The present value of the defined benefit obligation depends on several factors that are determined by the actuary using

assumptions about discount rate, expected future salary increases, mortality rates and staff turnover. These estimates

are subject to significant uncertainty due to their long term nature and are reviewed at each reporting date.

f. New IFRS, International Financial Reporting and amendments thereof, adopted by the Company

The Company has adopted the following amendments and revisions to existing accounting standards, which were

issued by the International Accounting Standards Board (IASB) at the reporting date:

Standard Description

IAS 7 Amendments to IAS 7 Statement of Cash flows: Disclosure Initiative

IAS 12 Amendments to IAS 12 Income Taxes: Recognition of Deferred Tax Assets for

Unrecognised Losses

IFRS 12 Annual Improvements 2016 to IFRS 2014- 2016 cycle

The adoption of the relevant new and amended standards and interpretations applicable to the Company did not have

any significant impact on these financial statements.




27


(continued)

g. New IFRS and amendments issued but not yet effective

Standards issued but not yet effective up to the date of issuance of the Company’s financial statements are listed

below. The listing is of standards and interpretations issued, which the Company reasonably expects to be applicable

at a future date. The Company intends to adopt these standards when they become effective.

Standard/

Interpretation

Description

Effective from periods

beginning on or after

the following date

IFRS 9 Financial Instruments (note below) 1 January 2018

IFRS 15 Revenue from Contracts with Customers 1 January 2018

IFRS 2 Amendments to IFRS 2 Classification and Measurement of

share-based Payment transactions.

1 January 2018

IAS 40 Amendments to IAS 40 Transfers of investment property 1 January 2018

IFRIC 22 Foreign Currency Transactions and Advance consideration 1 January 2018

IFRS 1 and IAS 28 Annual Improvements 2016 to IFRS 2014- 2016 cycle. 1 January 2018

IFRS 16 Leases 1 January 2019

IFRIC 23 Uncertainty over Income Tax Treatments 1 January 2019

IFRS 17 Insurance Contracts (note below) 1 January 2021

IFRS 17 also introduces a temporary exemption for the implementation of IFRS 9 for reporting entities whose

activities predominantly relate to insurance. The Company currently assessing the implications and application date

and expects that it will be eligible for this temporary exemption. The Company assessed the implications and decided

to defer the implementation of IFRS 9 until a later date which will not be later than 1 January 2021.




28

3. CASH AND CASH EQUIVALENTS

2017 2016

SR’000 SR’000

Insurance operations

Cash in hand 32 1

Cash at banks (see note (a) below) 9,246 8,932

Investment in Murabaha deposits (see note 4 and (b) below) 100,000 15,000

────── ──────

109,278 23,933

══════ ══════

Shareholders’ operations

────── ──────

Cash at banks 1,490 4,986

══════ ══════

a) At 31 December 2017, bank balances amounting to SR 0.5 million (31 December 2016: SR 0.5 million), are

held in the name of related parties of the Company, on behalf of the Company.

b) The investment in Murabaha deposits are held with commercial banks in the Kingdom of Saudi Arabia. These

investments in Murabaha deposits are denominated in Saudi Riyals and have an original maturity not exceeding

three months.

4. INVESTMENT IN MURABAHA DEPOSITS

Investment in Murabaha deposits comprise the following:

2017 2016

SR’000 SR’000


Investment in Murabaha deposits 100,000 115,000

Less: investment in Murabaha deposits with maturity less than

three months (see note 3)

(100,000)

(15,000)

────── ──────

- 100,000

══════ ══════



══════ ══════

Murabaha deposits represent deposits with local banks have an original maturity of more than three months from date

of acquisition.




29

5. PREMIUMS RECEIVABLE, NET

2017 2016

SR’000 SR’000

Gross premiums receivable 62,348 81,446

Allowance for impairment of premium receivables (20,371) (19,123)

────── ──────

Premiums receivable, net 41,977 62,323

══════ ══════

Movement in the allowance for impairment of premiums receivable during the year was as follows:

2017 2016

SR’000 SR’000

Balance at beginning of the year 19,123 17,168

Addition during the year (note 18) 1,248 1,955

────── ──────

Balance at end of the year 20,371 19,123

══════ ══════

The aging analysis of unimpaired premium receivables arising from insurance contracts is as follows:

Neither past due

nor impaired Past due but not impaired

Up to three

months

Above three and

up to six months

Above six

and up to

twelve

months

Above twelve

months Total

SR’000 SR’000 SR’000 SR’000 SR’000

At 31 December 2017 21,191 7,459 10,767 2,560 41,977

At 31 December 2016 32,305 12,676 16,010 1,332 62,323

Unimpaired premium receivables are estimated, on the basis of past experience, to be fully recoverable. It is not the

practice of the Company to obtain collateral over premium receivables and the vast majority are, therefore, unsecured.

In respect of premium receivables, the five largest customer balances accounted for approximately 19% of this balance

as at 31 December 2017 (31 December 2016: 17%). Premium receivable comprise a large number of customers and are

mainly within the Kingdom of Saudi Arabia.

6. NET PREMIUMS EARNED

2017 2016

SR’000 SR’000

Gross written premiums during the year 185,627 255,152

Gross unearned premiums at beginning of the year 77,823 110,388

────── ────────

263,450 365,540

Gross unearned premiums at end of the year (61,393) (77,823)

────── ────────

Gross premiums earned 202,057 287,717

────── ────────

Premiums ceded during the year (97,390) (122,690)

Reinsurers’ share of unearned premiums at beginning of the year (34,709) (54,777)

────── ────────

(132,099) (177,467)

Reinsurers’ share of unearned premiums at end of the year 29,925 34,709

────── ────────

Insurance premiums ceded to reinsurers (102,174) (142,758)

────── ────────

Net premiums earned 99,883 144,959

══════ ════════




30

7. NET CLAIMS INCURRED

2017 2016

SR’000 SR’000

Gross claims paid 134,292 191,677

Gross outstanding claims at end of the year 110,648 128,295

────── ────────

244,940 319,972

Gross outstanding claims at beginning of the year (128,295) (198,445)

────── ────────

Gross claims incurred 116,645 121,527

────── ────────

Reinsurance recoveries 63,662 92,355

Reinsurers’ share of outstanding claims at end of the year 65,920 60,511

────── ────────

129,582 152,866

Reinsurers’ share of outstanding claims at beginning of the year (60,511) (116,321)

────── ────────

Reinsurers’ share of claims 69,071 36,545

────── ────────

Net claims incurred 47,574 84,982

══════ ════════

Gross outstanding claims at 31 December comprised of the following:

2017 2016

SR’000 SR’000

Outstanding claims 58,975 62,051

Incurred but not reported claims 51,673 66,244

────── ────────

110,648 128,295

══════ ════════

Reinsurers’ shares of outstanding claims at 31 December comprised of the following:

2017 2016

SR’000 SR’000

Reinsurers’ share of outstanding claims 44,423 38,785

Reinsurers’ share of incurred but not reported claims 21,497 21,726

────── ────────

65,920 60,511

══════ ════════

Substantially all of the amounts due from reinsurers are expected to be received within twelve months of the reporting

date. Reinsurers share of outstanding claims are calculated in proportion to the related risk distribution pattern.




31

7. NET CLAIMS INCURRED (continued)

Claims Triangulation Analysis by Accident Year

The Company maintains adequate reserves in respect of its insurance business in order to protect against adverse

future claims experience and developments. As claims develop and the ultimate cost of claims becomes more certain,

adverse claims experiences will be eliminated which results in the release of reserves from earlier accident years. In

order to maintain adequate reserves, the Company transfers much of this release to the current accident year reserves

when the development of claims is less mature and there is much greater uncertainty attached to the ultimate cost of

claims. Claims triangulation analysis by accident years spanning a number of financial years as at 31 December 2017

is as follows:

2017

Amount in SR’ 000

Accident Year

2012 and

prior

2013 2014

2015 2016 2017 Total

At the end of

accident year

223,108

289,353

258,404

264,640

162,181

185,257

One year later 240,994 265,455 244,725 258,031 168,293 --

Two years later 233,109 264,850 231,260 271,933 -- --

Three years later 231,816 262,055 286,176 -- -- --

Four year later 230,971 347,310 -- -- -- --

Five years later 352,507 -- -- -- -- --

────── ───── ──── ───── ──── ──── ─────

Ultimate paid claims

(estimated)

352,507

347,310

286,176

271,933

168,293

185,257

1,611,476

Cumulative paid

claims

(352,171)

(346,303)

(286,575)

(270,859)

(158,020)

(86,900)

(1,500,828)

────── ───── ──── ───── ──── ──── ─────

Outstanding claims

and IBNR

336

1,007

(400)

1,075

10,273

98,357

110,648

═══════ ══════ ══════ ══════ ═════ ═════ ══════

2016

Amount in SR’ 000

Accident Year

2011 and

prior 2012 2013 2014

2015

2016 Total

At the end of

accident year 304,147 223,108 289,353

258,404

264,640

158,514

One year later 261,900 240,994 265,455 244,725 258,031 --

Two years later 270,400 233,109 264,850 231,260 -- --

Three years later 266,298 231,816 262,055 -- -- --

Four years later 265,725 230,971 -- -- -- --

Five years later 227,356 -- -- -- -- --

─────── ─────── ─────── ─────── ───── ───── ────────

Ultimate paid claims

(estimated) 227,356 230,971 262,055 231,260

258,031

158,514 1,368,187

Cumulative paid

claims (222,817) (228,116) (259,572) (224,702)

(208,407)

(96,278) (1,239,892)

─────── ─────── ─────── ─────── ───── ───── ────────

Outstanding claims

and IBNR 4,539 2,855 2,483 6,558

49,624

62,236 128,295

═══════ ═══════ ═══════ ═══════ ═════ ═════ ════════




32

8. DEFERRED POLICY ACQUISITION COSTS

2017 2016

SR’000 SR’000


Commission paid during the year 12,629 22,056

Commission during the year (14,382) (23,429)

────── ──────


══════ ══════

9. PROVISION FOR PREMIUM DEFICIENCY RESERVE

2017 2016

SR’000 SR’000


Provision / (reversal) during the year 3,642 (2,819)

────── ──────


══════ ══════

10. DEFERRED COMMISSION INCOME

2017 2016

SR’000 SR’000


Commission received during the year 17,832 24,435

Commission earned during the year (18,952) (26,786)

────── ──────


══════ ══════




33

11. FURNITURE, FITTINGS AND EQUIPMENT

Leasehold

improvements

Furniture

and

fittings

Computer and

office

equipment

Motor

vehicles Total

SR’000 SR’000 SR’000 SR’000 SR’000 Cost:

At 1 January 2016 3,613 2,088 6,554 240 12,495

Additions 6 10 725 -- 741

────── ────── ────── ────── ──────

At 1 January 2017 3,619 2,098 7,279 240 13,236

Additions 27 61 4,245 -- 4,333

────── ────── ────── ────── ──────

At 31 December 2017 3,646 2,159 11,524 240 17,569

────── ────── ────── ────── ──────

Accumulated

Depreciation:

At 1 January 2016 2,945 1,437 6,121 196 10,699

Charge for the year (note

18)

240

210

370

17

837

────── ────── ────── ────── ──────

At 1 January 2017 3,185 1,647 6,491 213 11,536

Charge for the year (note

18)

163

143

710 16

1,032

────── ────── ────── ────── ──────

At 31 December 2017 3,348 1,790 7,201 229 12,568

────── ────── ────── ────── ──────

Net book value:

At 31 December 2016 434 451 788 27 1,700

══════ ══════ ══════ ══════ ══════ At 31 December 2017 298 369 4,323 11 5,001

══════ ══════ ══════ ══════ ══════

12. PREPAYMENTS AND OTHER ASSETS

2017 2016

SR’000 SR’000


Prepayments 3,997 4,937

Other receivables 8,786 15,331

Allowance for impairment of salvage recoveries (1,771) -

────── ──────

11,012 20,268

══════ ══════


Advances 1,443 905

Other receivables 3,916 1,141

────── ──────

5,359 2,046

══════ ══════




34

13. INVESTMENTS

Notes 2017 2016

SR’000 SR’000

Investments held at fair value through income statement 13.1 33,592 33,015

══════ ══════ Available-for-sale investment 13.2 1,923 1,923

══════ ══════

13.1 Investments held at fair value through income statement

Movement in investments classified as fair value through income statement is as follows:

2017 2016

SR’000 SR’000


Purchases during the year - 3,328

Disposals during the year - (6,253)

Realized gain / (loss) during the year 1,312 (68)

Unrealized (loss) / gain during the year (735) 1,462

──────── ────────


════════ ════════

The investments held at fair value through income statement of Shareholders’ Operations comprise of portfolio

amounting to SR 33.59 million (31 December 2016: SR 33 million) which is invested in mutual funds and equity

shares in the Kingdom of Saudi Arabia. These investments are denominated in Saudi Arabian Riyal and US Dollars.

All investments held at fair value through income statement are quoted. The portfolio is invested in securities and

mutual funds issued by corporates and financial institutions in the Kingdom of Saudi Arabia.

13.2 Available-for-sale investment

The Company holds 3.85% of the equity in Najm for Insurance Services Company ("Najm"), a non-listed Saudi

limited liability Company. The investment is classified as available-for-sale investment and is stated at cost.

14. STATUTORY DEPOSIT

2017 2016

SR’000 SR’000

Statutory deposit 20,000 20,000

══════ ══════

In compliance with Article 58 of the Implementing Regulations of the Saudi Arabian Monetary Authority (“SAMA”),

the Company has deposited 10% of its share capital, amounting to Saudi Riyals 20 million in a bank designated by

SAMA. The statutory deposit is maintained with a reputed bank and the Company cannot withdraw this deposit

without SAMA’s approval and commission accruing on this deposit is payable to SAMA.

In accordance with the instruction received from the SAMA vide their circular dated 1 March, 2016, the Company

has disclosed the commission due on the statutory deposit as at 31 December, 2017 and 2016 as an asset and a liability

in these financial statements.




35

15. EMPLOYEES’ END OF SERVICE BENEFITS

Changes in the present value of defined employees’ end of service benefits obligations are as follows:

2017 2016

SR’000 SR’000


Net movements during the year 860 4,517

Payments during the year (715) (484)

──────── ────────


════════ ════════

The principal assumptions used for the purpose of valuing the employees’ end of service benefits obligations were as

follows:

2017

Discount rate 4.60%

Expected rate of salary increment 3.58%

Staff turnover rate 11.11%

Expected retirement age 60 years

16. SHARE CAPITAL

The share capital of the Company is SR 200 million divided into 20 million shares of SR 10 each (2016: 20 million

shares of SR 10 each) and subscribed by the following:

2017 2016

Percentage of

holding

Amount

SR ‘000

Percentage of

holding

Amount

SR ‘000

Founding shareholders 37.9% 75,800 37.9% 75,800

General public 62.1% 124,200 62.1% 124,200

────── ────── ────── ──────

100% 200,000 100% 200,000

══════ ══════ ══════ ══════

17. STATUTORY RESERVE

As required by the Saudi Arabian Insurance Regulations, 20% of the net shareholders’ income (after deducting losses

brought forward) shall be set aside as a statutory reserve until this reserve amounts to 100% of paid up share capital.

Accordingly, during the year, the Company has transferred SR 0.5 million (2016: Nil) to the statutory reserve.




36

18. GENERAL AND ADMINISTRATION EXPENSES

2017 2016

SR’000 SR’000


Employee costs 28,939 33,506

Regulatory fees 1,032 1,427

Marketing expenses 261 209

Depreciation (note 11) 1,032 837

Professional fees 3,220 2,820

Rent 1,685 1,958

Allowance for impairment of premium receivables (note 5) 1,248 1,955

Allowance for impairment of reinsurance receivables 113 780

Others 7,892 8,288

────── ──────

45,422 51,780

══════ ══════


Legal and professional fees 279 998

Board of Directors’ remuneration and related expenses (note 24) 1,830 1,670

Others 300 390

────── ──────

2,409 3,058

══════ ══════

19. INVESTMENT INCOME

2017 2016

SR’000 SR’000


Interest income 1,885 3,318

────── ──────

1,885 3,318

══════ ══════


Interest income 2,775 2,369

Gain on investments – net 577 1,394

Dividend income 538 564

────── ──────

3,890 4,327

══════ ══════




37

20. OTHER INCOME

Note 2017 2016

SR’000 SR’000

Share of surplus from Al Manafeth 20.1 3,769 3,913

Income on road assistance services 1,482 2,558

Policy administrative fees 201 136

Reversal of impairment of reinsurance receivables 2,331 --

────── ──────

7,783 6,607

══════ ══════

20.1. This represents the Company's share in the surplus arising from the Al Manafeth Third Party Liability

Insurance Fund (the Fund). The Company with twenty four other insurance companies operating in the Kingdom of

Saudi Arabia, have entered into an agreement with ‘The Company for Cooperative Insurance’ (CCI) effective from

January 1, 2015 for three years, for participating in the insurance of foreign vehicles entering Saudi Arabia through

all its borders except from the Kingdom of Bahrain. As per the agreement CCI will receive 4.25% of Fund’s gross

written premiums to cover the related indirect expense along with 15% management fee of the net results of the

Fund’s portfolio. The remaining results after the aforesaid distribution is due to be shared equally by the CCI and

above mentioned twenty five insurance companies including the Company.

21. ZAKAT

Charge for the year

2017 2016

SR’000 SR’000

Current year provision 5,337 5,414

══════ ══════

The provision at 31 December is based on the following:

2017 2016

SR’000 SR’000

Equity 201,642 176,279

Opening provision and adjustments 32,492 53,436

Net book value of long term assets (43,124) (46,506)

────── ──────

191,010 183,209

Adjusted income for the year 22,465 33,351

────── ──────

Zakat base 213,475 216,560

══════ ══════

The differences between the financial and the results subject to Zakat are mainly due to certain adjustments in

accordance with the relevant Zakat regulations.

The movement in the Zakat provision for the year is as follows:

2017 2016

SR’000 SR’000


Charge for the year 5,337 5,414

Paid during the year (4,825) (2,385)

────── ──────


══════ ══════




38

21. ZAKAT (continued)

Status of assessments

(a) The Company has filed its Zakat returns for its first period from 3 January 2010 to 31 December 2011 and a

revised return for the period from 3 January 2010 to 31 December 2011 with the General Authority of Zakat

and Tax ("GAZT") and obtained unrestricted Zakat certificates.

(b) The Company has filed its Zakat returns for the years 2012 and 2013 and obtained unrestricted Zakat

certificates. The GAZT issued final Zakat assessment for the period/years from December 31, 2011 to 2013

claimed additional Zakat liability and withholding tax difference of 6.2 Mn and SR 11 Mn, respectively and

delay fine charges. The Company settled Zakat differences of SR 0.2 Mn and withholding tax of SR 0.017

Mn in addition to delay fine charges and objected against the remaining GAZT items.

The GAZT issued a revised assessment claiming additional Zakat and withholding tax differences of SR 5.9

Mn and SR 11 Mn in addition to delay fine charges of SR. 9.5 Mn. The Company objected against the revised

assessment in Preliminary Objection Committee (POC). The company received the revised assessment from

POC, in which, the Zakat liability was reduced to SR 2.9 while other assessments remained the same.

Subsequent to year-end, the Company has filed an appeal against the POC's decision in Higher Appeals

Committee, providing a bank guarantee of SR 12.5 Mn and settled the withholding tax difference of SR 11

Mn.

The management is confident of a favourable outcome of the appeals under review by the GAZT. However,

the Company has recorded SR. 11 Mn as prior year adjustment in statement in changes of shareholders’

equity for withholding tax differences and accrued for the same.

(c) The Company has filed its Zakat return for the years 2014 to 2016 and obtained the necessary Zakat

certificates. The Company’s returns are still under study by the GAZT.




39

22. RELATED PARTY TRANSACTIONS

Related parties represent major shareholders, key management personnel of the Company, and Companies where they

are principal owners and other entities significantly influenced by them. Pricing policies and terms of these

transactions are approved by the Company’s management.

The following are the details of related party transactions during the years ended 31 December 2017 and 31 December

2016: 2017 2016 Related party Relationship Nature of transactions SR’000 SR’000

Insurance operations Gulf Cooperation

Insurance Company Ltd. E.C.

Shareholder

General and administrative expenses directly paid on behalf of the Company and recharged to the Company -- 38

Rolaco Group

Related to Shareholders

Premiums underwritten

934 1,225 Claims paid (375) (88) Dabbagh Group

Related to Shareholders

Premiums underwritten

9,796 9,012 Claims paid (3,219) (1,753) Farouk, Maamoun Tamer

& Company Shareholder

Premiums underwritten 13,956 11,833

Claims paid (2,828) (1,402) Key management Personnel

Short-term benefits

(3,013) (2,644) Long-term benefits (40) (129) Shareholders’ operations Board of Directors

Board of Directors’ remuneration 393 1,360




40

22. RELATED PARTY TRANSACTIONS (continued)

The following are the details of related party balances as at 31 December 2017 and 31 December 2016:

2017 2016

Related party Relationship SR’000 SR’000 Insurance operations Due from related parties Gulf Cooperation Insurance Company Ltd. E.C. Shareholder 1,088 1,088

Rolaco Group Related to Shareholders 27 83

Dabbagh Group Related to Shareholders 1,866 1,615

Al Fadal Group Shareholder -- 588

Farouk, Maamoun Tamer & Company Shareholder 3,808 457

Due to related parties

Saudi General Insurance Company Ltd. E.C. Shareholder 309 309

Rolaco Group Related to Shareholders 1 70

Dabbagh Group Related to Shareholders 569 1,439

Farouk, Maamoun Tamer & Company Shareholder 1,551 2,075

Key management personnel 259 425


Board of Directors remuneration and related expenses 1,800 2,747

The above balances are included in prepayments and other assets, accrued expenses and other liabilities,

premiums receivable, net and due to policyholders. Furthermore, due to related parties in respect of goodwill

settled in prior periods is disclosed in the statement of financial position (see note 1(b)). Also note 3(a) refers to bank

balances that were held in the name of related parties of the Company, on behalf of the Company.

Outstanding balances at the financial reporting date are unsecured and special commission rate free. Settlement will

take place in cash. No provision for impairment of related party balances was made at the financial reporting date.

This assessment is undertaken at the financial reporting date through examining the financial position of the related

party and the market in which the related party operates.

23. SEGMENT INFORMATION

Consistent with the Company’s internal reporting process, operating segments have been approved by management in

respect of the Company’s activities, assets and liabilities.

All of the insurance operations of the Company are carried out in the Kingdom of Saudi Arabia. For management

purposes, the operations are monitored in six major lines of business.

Operating segments do not include shareholders' operations of the Company.

Segment assets do not include cash and cash equivalents, investment in Murabaha deposits, premiums receivable-

net, due from reinsurers, prepayments and other assets, due from shareholders’ operations and furniture, fittings and

office equipment.

Segment liabilities and surplus do not include due to reinsurers and brokers, due to policyholders, due to shareholders'

operations, accrued expenses and other liabilities and accumulated surplus.




41

23. SEGMENT INFORMATION (continued) Consistent with the Company's internal reporting process, operating segments have been approved by the management

in respect of the Company's activities, assets and liabilities as stated below:

Medical

Motor

Property

Engineering

Marine Accident

and liability Total SR '000 SR '000 SR '000 SR '000 SR '000 SR '000 SR '000 For the year ended 31 December 2017

Gross written premiums 24,141 71,276 37,126 11,627 19,771 21,686 185,627

Less: Reinsurance contracts premiums ceded (13,823) (14,660) (36,057) (10,500) (13,581) (8,769) (97,390)

─────── ─────── ─────── ─────── ─────── ─────── ─────── Net written premiums 10,318 56,616 1,069 1,127 6,190 12,917 88,237

Movement in net unearned premiums 71 10,562 269 19 (248) 973 11,646

─────── ─────── ─────── ─────── ─────── ─────── ─────── Net premiums earned 10,389 67,178 1,338 1,146 5,942 13,890 99,883

Commission earned on ceded reinsurance -- 1,475 7,053 2,659 4,506 3,259 18,952

─────── ─────── ─────── ─────── ─────── ─────── ─────── 10,389 68,653 8,391 3,805 10,448 17,149 118,835 ────── ────── ─────── ─────── ─────── ─────── ─────── Gross claims paid 19,360 67,435 27,573 7,790 7,666 4,468 134,292 Less: Reinsurers' share of claims (13,441) (12,666) (22,074) (7,357) (5,572) (2,552) (63,662)

────── ────── ─────── ─────── ─────── ─────── ─────── Net claims paid 5,919 54,769 5,499 433 2,094 1,916 70,630 Changes in net outstanding claims (1,643) (10,851) (7,734) (1,766) (1,086) 24 (23,056)

────── ────── ─────── ─────── ─────── ─────── ─────── Net claims incurred 4,276 43,918 (2,235) (1,333) 1,008 1,940 47,574 Policy acquisition costs 386 6,252 3,165 1,282 1,398 1,899 14,382

Provision / (reversal) for premium deficiency reserve 323 (1,157) 2,968 1,508 -- -- 3,642

Other technical reserves -- (1,628) 44 55 36 52 (1,441)

────── ────── ─────── ─────── ─────── ─────── ───────

4,985 47,385 3,942 1,512 2,442 3,891 64,157 ────── ────── ─────── ─────── ─────── ─────── ─────── Net underwriting result 5,404 21,268 4,449 2,293 8,006 13,258 54,678

Investment income 245 724 377 118 220 201 1,885 Other income -- 7,511 17 4 77 174 7,783 General and administration expenses (6,097) (18,955) (8,292) (2,656) (4,454) (4,968) (45,422)

────── ────── ─────── ─────── ─────── ─────── ───────

(Deficit) / surplus from insurance operations (448) 10,548 (3,449) (241) 3,849 8,665 18,924

Shareholders' share of surplus from insurance operations (17,032)

─────── Policyholders' share of surplus from insurance operations 1,892

══════




42

23. SEGMENT INFORMATION (continued)

Medical

Motor

Property

Engineering

Marine

Accident and

liability Total SR '000 SR '000 SR '000 SR '000 SR '000 SR '000 SR '000 For the year ended 31 December 2016

Gross written premiums 31,490 122,753 42,327 15,816 22,470 20,296 255,152

Less: Reinsurance contracts premiums ceded (16,919) (25,273) (40,317) (14,297) (15,578) (10,306) (122,690)

────── ─────── ─────── ─────── ────── ─────── ─────── Net written premiums 14,571 97,480 2,010 1,519 6,892 9,990 132,462

Movement in net unearned premiums 6,090 5,456 (349) 1,096 545 (341) 12,497

────── ─────── ─────── ─────── ────── ─────── ─────── Net premiums earned 20,661 102,936 1,661 2,615 7,437 9,649 144,959

Commission earned on ceded reinsurance -- 2,242 9,023 4,828 7,088 3,605 26,786

────── ─────── ─────── ─────── ────── ─────── ─────── 20,661 105,178 10,684 7,443 14,525 13,254 171,745 ────── ─────── ─────── ─────── ────── ─────── ───────

Gross claims paid 37,164 92,815 33,646 13,891 10,172 3,989 191,677 Less: Reinsurers' share of claims (26,380) (14,215) (28,730) (12,680) (8,030) (2,320) (92,355)

────── ─────── ─────── ─────── ────── ─────── ───────

Net claims paid 10,784 78,600 4,916 1,211 2,142 1,669 99,322 Changes in net outstanding claims (1,057) (9,637) (910) (912) (2,104) 280 (14,340)

────── ─────── ─────── ─────── ────── ─────── ───────

Net claims incurred 9,727 68,963 4,006 299 38 1,949 84,982 Policy acquisition costs 711 11,585 4,085 1,903 2,917 2,228 23,429

Reversal for premium deficiency -- (2,819) -- -- -- -- (2,819)

Other technical reserves -- (148) -- (1,820) -- -- (1,968)

────── ─────── ─────── ─────── ────── ─────── ───────

10,438 77,581 8,091 382 2,955 4,177 103,624

────── ─────── ─────── ─────── ────── ─────── ─────── Net underwriting result 10,223 27,597 2,593 7,061 11,570 9,077 68,121

Investment income 410 1,596 550 206 292 264 3,318

Other income -- 6,529 20 4 33 21 6,607 General and administration expenses (6,390) (24,911) (8,590) (3,210) (4,560) (4,119) (51,780)

────── ─────── ─────── ─────── ────── ─────── ─────── Surplus / (deficit) from insurance operations 4,243 10,811 (5,427) 4,061 7,335 5,243 26,266

Shareholders' share of surplus from insurance operations (23,639)

─────── Policyholders' share of surplus from insurance operations

2,627 ══════




43


Medical

Motor

Property

Engineering

Marine

Accident

& liability Total

SR '000 SR '000 SR '000 SR '000 SR '000 SR '000 SR '000

As at 31 December 2017

Insurance operations’

assets

Reinsurers' share of

unearned premiums 5,139 3,607 10,836 4,094 3,364 2,885 29,925


outstanding claims 4,788 4,429 40,505 8,078 3,207 4,913 65,920

Deferred policy

acquisition costs 302 1,668 1,128 453 571 748 4,870

───── ───── ────── ─────── ───── ─────── ───────

10,229 9,704 52,469 12,625 7,142 8,546 100,715

Unallocated assets 188,072

───────

Total insurance

operations' assets 288,787

═══════

Insurance operations'

liabilities and surplus

Unearned premiums 9,368 24,406 12,028 4,570 4,950 6,071 61,393

Outstanding claims 6,301 29,073 53,521 9,101 4,406 8,246 110,648

Provision for premium

deficiency reserve 323 -- 2,969 1,507 -- -- 4,799

Other technical reserves -- 559 281 1,299 36 52 2,227

Deferred commission

income -- 370 2,268 922 1,262 925 5,747

───── ───── ─────── ─────── ───── ─────── ───────

15,992 54,408 71,067 17,399 10,654 15,294 184,814

Unallocated liabilities

and accumulated

surplus 103,973

──────

Total insurance

operations' liabilities

and surplus 288,787

══════




44


Medical

Motor

Property

Engineering

Marine

Accident

& liability Total

SR '000 SR '000 SR '000 SR '000 SR '000 SR '000 SR '000

As at 31 December 2016

Insurance operations’

assets


unearned premiums 4,638 7,186 12,055 5,268 1,925 3,637 34,709


outstanding claims 9,078 9,161 20,155 6,832 6,389 8,896 60,511

Deferred policy

acquisition costs 217 3,057 1,273 584 581 911 6,623

───── ───── ────── ─────── ───── ─────── ───────

13,933 19,404 33,483 12,684 8,895 13,444 101,843

Unallocated assets 222,189

───────

Total insurance

operations' assets 324,032

═══════

Insurance operations'

liabilities and surplus

Unearned premiums 8,937 38,547 13,518 5,762 3,263 7,796 77,823

Outstanding claims 12,235 44,656 40,904 9,620 12,207 8,673 128,295

Provision for premium

deficiency reserve -- 1,157 -- -- -- -- 1,157

Other technical reserves -- 3,179 238 251 -- -- 3,668

Deferred commission

income -- 743 2,527 1,210 1,303 1,084 6,867

───── ───── ─────── ─────── ───── ─────── ───────

21,172 88,282 57,187 16,843 16,773 17,553 217,810

Unallocated liabilities

and accumulated surplus 106,222

──────

Total insurance

operations' liabilities and

surplus 324,032

══════

24. BOARD OF DIRECTORS’ REMUNERATION AND RELATED EXPENSES

2017 2016

SR’000 SR’000

Board of Directors’ remuneration 1,463 1,360

Board attendance fees 367 257

Other sub-committees expenses - 53

────── ──────

Total (see note 18) 1,830 1,670

══════ ══════

a) Board of Directors’ remuneration is accrued in accordance with the by-laws of the Company.

b) Board attendance fees represent allowances for attending board meetings and sub-committee meetings.

c) Other sub-committee expenses include fees of non-board members for attending committee meetings and other

related sub-committee expenses.




45

25. RISK MANAGEMENT

Risk is inherent in the Company’s activities but is managed through a process of ongoing identification, measurement

and monitoring, subject to risk limits and other controls. This process of risk management is critical to the Company’s

continuing profitability and each individual within the Company is accountable for the risk exposures relating to his

or her responsibilities. The Company’s policy is to monitor business risks through its strategic planning process.

Risk management structure

Board of Directors

The Board of Directors are responsible for the overall risk management approach and for approving the risk

management strategies and principles.

Audit Committee

The Audit Committee is appointed by the Board of Directors. The Audit Committee assists the Board in carrying out

its responsibilities with respect to assessing the quality and integrity of financial reporting and risk management, the

audit thereof and the soundness of the internal controls of the Company.

Senior management

Senior management is responsible for the day to day operations towards achieving the strategic goals within the

Company’s pre-defined risk appetite.

Internal Audit

All key operational, financial and risk management processes are audited by Internal Audit. Internal Audit examines

the adequacy of the relevant policies and procedures, the Company’s compliance with internal policies and regulatory

guidelines. Internal Audit discusses the results of all assessments with management and reports its findings and

recommendations to the Audit Committee.

The risks faced by the Company and the way these risks are mitigated by management are summarised below.

Insurance risk

The risk under an insurance policy is the risk that an insured event will occur including the uncertainty of the amount

and timing of any resulting claim. The principal risk the Company faces under such policies is that the actual claims

and benefit payments exceed the carrying amount of insurance liabilities. This is influenced by the frequency of

claims, severity of claims and the possibility that actual benefits paid are greater than originally estimated claims.

Insurance risk is monitored regularly by the Company to make sure the levels are with the projected frequency bands.

The Company mainly underwrites medical, motor, property, engineering, marine and accident and liability risks.

The variability of risks is improved by diversification of risk of loss to a large portfolio of insurance policies as a

more diversified portfolio is less likely to be affected across the board by change in any subset of the portfolio, as

well as unexpected outcomes. The variability of risks is also improved by careful selection and implementation of

underwriting strategy and guidelines as well as the use of reinsurance arrangements.

A significant portion of the reinsurance business ceded is placed on a quota share basis with retention limits varying

by product lines. Amounts recoverable from reinsurers are estimated in a manner consistent with the assumptions

used for ascertaining the underlying policy benefits and are presented in the balance sheet as due from reinsurers.

Although the Company has reinsurance arrangements, it is not relieved of its direct obligations to its policyholders

and thus a credit exposure exists with respect to reinsurance ceded, to the extent that any reinsurer is unable to meet

its obligations assumed under such reinsurance arrangements.

Geographical concentration of risks

The Company's insurance risk exposure relating to contract holders is concentrated in Saudi Arabia.




46

25. RISK MANAGEMENT (continued)

Insurance risk (continued)

Frequency and amount of claims

The frequency and amounts of claims can be affected by several factors. The Company underwrites medical, motor,

property, engineering, marine and accident and liability risks. These are regarded as short-term insurance contracts

as claims are normally advised and settled within one year of the insured event taking place. This helps to mitigate

insurance risk.

Concentration of risks

The Company monitors concentration of insurance risks primarily by class of business. The major concentration lies

in motor and medical. Since the Company operates in Saudi Arabia only, hence, all the insurance risks relate to

policies written in Saudi Arabia.

Independent actuarial review of claims and claims reserves

In further mitigation of the insurance risk, the Company utilises an independent actuary who performs periodical

reviews of the Company’s claims modelling and claims projections as well as verifying that the annual closing claims

reserves are adequate.

Key assumptions

The principal assumption underlying the estimated including the premium deficiency reserve is the Company’s

estimated ultimate loss ratio. The estimated ultimate loss ratio was determined using actuarial methods, as far as

applicable, and was also reviewed by the independent actuary.

Process used to decide on assumptions

The process used to determine the assumptions for calculating the outstanding claim reserve is intended to result in

neutral reasonable estimates of the most likely or expected outcome. The nature of the business makes it very difficult

to predict with certainty the likely outcome of any particular claim and the ultimate cost of notified claims. Case

estimates are reviewed regularly and are updated as and when new information is available.

The estimation of incurred but not reported (IBNR) is generally subject to a greater degree of uncertainty than the

estimation of the cost of settling claims already notified to the Company, in which case information about the claim

event is available. The estimation process takes into account the past claims reporting pattern and details of

reinsurance programs.

The premium liabilities have been determined such that the total premium liability provisions (unearned premium

reserve and premium deficiency reserve, if applicable and required as per the result of the liability adequacy test)

would be sufficient to service the future expected claims and expenses likely to occur on the unexpired policies as of

balance sheet date. The expected future liability is determined using estimates and assumptions based on the

experience during the expired period of the contracts and expectations of future events that are believed to be

reasonable. The details of estimation of the outstanding claims and premium deficiency reserves are given under note

2(h).

Sensitivities

The analysis below is performed for reasonably possible movements in key assumptions such as the ultimate loss

ratio with all other assumptions held constant showing the impact on net liabilities and net income.

Change in

assumptions

Increase /

(decrease) in

net liabilities

SR ‘000’

Decrease /

(increase) in

insurance

operations and

accumulated

(deficit) /

surplus

SR ‘000’

Ultimate loss ratio – Insurance Operations

2017 ± 5% ± 4,994 ± 4,994

2016 ± 5% ± 7,339 ± 7,339




47


Reinsurance risk

Similar to other insurance companies, in order to minimize financial exposure arising from large claims, the Company,

in the normal course of business, enters into agreements with other parties for reinsurance purposes.

To minimize its exposure to significant losses from reinsurer insolvencies, the Company evaluates the financial

condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities

or economic characteristics of the reinsurers.

Reinsurers are selected using the following parameters and guidelines set by the Company’s management. The criteria

may be summarized as follows:

a) Minimum acceptable credit rating by recognized rating agencies (e.g. S&P) that is not lower than BBB.

b) Reputation of particular reinsurance companies.

c) Existing or past business relationship with the reinsurer.

The exception to this rule is in respect of local companies which do not carry any such credit rating. This, however,

is limited to those companies registered and approved by the Local Insurance Regulators. Furthermore, the financial

strength and managerial and technical expertise as well as historical performance, wherever applicable, are thoroughly

reviewed by the Company and matched against a list of requirements pre-set by the Company’s management before

approving them for exchange of reinsurance business.

As mentioned previously, reinsurance ceded contracts do not relieve the Company from its obligations to

policyholders and as a result the Company remains liable for the portion of outstanding claims reinsured to the extent

that the reinsurer fails to meet the obligations under the reinsurance agreement.

The credit risk exposure in respect of reinsurer’s share of outstanding claims is SR 65.9 million (31 December 2016:

SR 60.5 million) and in respect of due from reinsurers is SR 20.8 million (31 December 2016: SR 13.96 million).

Regulatory framework risk

Regulators are primarily interested in protecting the rights of the policyholders and monitor them closely to ensure

that the Company is satisfactorily managing affairs for their benefit. At the same time, the regulators are also interested

in ensuring that the Company maintains an appropriate solvency position to meet unforeseen liabilities.

The operations of the Company are also subject to regulatory requirements within the jurisdiction within which it

operates. Such regulations not only prescribe approval and monitoring of activities, but also impose certain restrictive

provisions (e.g. capital adequacy) to minimise the risk of default and insolvency on the part of the insurance

companies to meet unforeseen liabilities as these arise.

Capital regulatory requirements and capital adequacy ratio

Capital requirements are set and regulated by SAMA. These requirements are put in place to ensure sufficient

solvency margins. Further objectives are set by the Company to maintain healthy capital ratios in order to support its

business objectives and maximise shareholders’ value.

The Company manages its capital to ensure that it is able to continue as going concern and comply with the SAMA’s

capital requirements while maximizing the return to stakeholders through the optimization of the debt and equity

balance. The capital structure of the Company consists of equity attributable to equity holders comprising of paid up

capital, statutory reserve and retained earnings.

The Company assesses shortfalls between reported and required capital levels on a regular basis. Adjustments to

current capital levels are made in light of changes in market conditions and risk characteristics of the Company’s

activities.

The following information summarizes the minimum regulatory capital of the Company:

2017 2016

SR’000 SR’000

Available capital 146,879 127,951

Minimum regulatory capital (100,000) (100,000)

────── ──────

Surplus capital 46,879 27,951

══════ ══════




48


Financial risk

The Company’s principal financial instruments are receivables arising from insurance contracts, due from reinsurers,

cash and cash equivalents, investment in Murabaha deposits, statutory deposit, outstanding claims, due to reinsurers

and brokers, due to policyholders and certain other assets and liabilities.

The Company does not enter into derivative transactions.

The main risks arising from the Company’s financial instruments are market risk, commission rate risk, foreign

currency risk, credit risk and liquidity risk. The board reviews and agrees policies for managing each of these risks

and they are summarised below.

Market risk

Market risk is the risk that the value of a financial instrument will fluctuate as a result of changes in market prices,

whether those changes are caused either by factors specific to the individual security, the issuer of the security, or

factors affecting all securities traded in the market.

The Company is exposed to market risk with respect to its investments. Market risk is managed by investing in reputed

funds which maintain investments in diversified portfolios and by continuous monitoring of developments in equity

markets. In addition, the key factors that affect stock market movements are monitored, including analysis of the

operational and financial performance of investees.

A 5% change in the fair value of the Company’s investments held at fair value through income statement , with all

other variables held constant, would impact the shareholders’ operations by SR 1.68 million (2016: SR 1.65 million).

Commission rate risk

Commission rate risk arises from the possibility that changes in commission rates will affect future profitability or

the fair values of financial instruments. The Company is exposed to commission rate risk on its deposits.

The Company places deposits which are realisable within three months and up to five years respectively, with the

exception of restricted deposits which are required to be maintained in accordance with regulations in Saudi Arabia

on which the Company does not earn any commission. Management limits commission rate risk of other financial

instruments by monitoring changes in commission rates in the currencies in which its financial instruments are

denominated.

Details of maturities of the major classes of commission bearing securities as at 31 December are as follows:


2017

SR ’000

Less than

3 months

3 months to

5 years

No fixed

maturity Total

Investment in Murabaha deposits (notes 3

and 4) 100,000 -- -- 100,000

════════ ════════ ════════ ════════


2016

SR ’000

Less than

3 months

3 months to

5 years

No fixed

maturity Total


and 4) 15,000 100,000 -- 115,000

════════ ════════ ════════ ════════




49


Financial risk (continued)


2017

SR ’000

Less than

3 months

3 months to

5 years

No fixed

maturity Total


and 4) -- 83,000 -- 83,000

════════ ════════ ════════ ════════


2016

SR ’000

Less than

3 months

3 months to

5 years

No fixed

maturity Total


and 4) -- 83,000 -- 83,000

════════ ════════ ════════ ════════

The maturities of deposits have been determined on the basis of the remaining period, at the reporting date, to the

contractual maturity date. All investment in Murabaha deposits are denominated in Saudi Riyals.

The Company had no deposits in currencies other than Saudi Riyals.

The following table demonstrates the sensitivity of statement of insurance operations and accumulated surplus and

shareholders’ operations to possible changes in commission rates, with all other variables held constant:

2017 2016

SR’000 SR’000


Increase in commission rates by 100 basis points 1,000 1,150

Decrease in commission rates by 100 basis points (1,000) (1,150)


Increase in commission rates by 100 basis points 830 830

Decrease in commission rates by 100 basis points (830) (830)

Currency risk

Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange

rates.

Management believes that there is minimal risk of losses due to exchange rate fluctuations as the insurance operations

and shareholders’ operations primarily deal in Saudi Riyals and US Dollars. The Saudi Riyal is pegged to the US

Dollar.




50



Credit risk

Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other

party to incur a financial loss.

All of the Company’s underwriting activities are carried out within Saudi Arabia.

For all classes of financial assets held by the Company, other than those relating to reinsurance contracts as described

in reinsurance risk above, the maximum credit risk exposure to the Company is the carrying value as disclosed in the

financial statements at the statement of financial position date.

The Company seeks to limit its credit risk with respect to customers by following its credit control policy and

monitoring outstanding receivables on an on-going basis in order to reduce the Company’s exposure to bad debts.

Management estimates specific impairment provision on a case by case basis. In addition to specific provisions, the

Company also makes an additional portfolio provision, estimated on a collective basis, based on the ageing profile of

the overdue premium receivables. The Company seeks to limit its credit risk with respect to other counterparties by

placing deposits with reputable banks.

Reinsurance is placed with counterparties that have a good credit rating and concentration of risk is avoided by

following policy guidelines in respect of counterparties’ limits that are set each year by the board of directors and are

subject to regular reviews. At each reporting date, management performs an assessment of creditworthiness of

reinsurers and updates the reinsurance purchase strategy, ascertaining suitable allowances for impairment.

The table below shows the maximum exposure to credit risk for the components of the statement of financial position:

2017 2016

SR’000 SR’000

Insurance’ operations

Cash and cash equivalents 109,278 23,933

Investment in Murabaha deposits - 100,000

Premium receivables, net 41,977 62,323

Due from reinsurers 20,804 13,965

Other receivables (note 12) 8,786 15,331

Reinsurance share of outstanding claims 65,920 60,511

──────── ────────

246,765 276,063

════════ ════════


Cash and cash equivalents 1,490 4,986


Investments held at fair value through income statement 33,592 33,015

Available-for-sale investment 1,923 1,923

Other receivables (note 12) 3,916 1,141

Due from insurance operations 32,382 30,129

──────── ────────

156,303 154,194

════════ ════════




51



Credit risk (continued)

The table below provides information regarding the credit risk exposure of the Company by classifying assets

according to the Company’s credit rating of counterparties. Investment grade is considered to be the highest possible

rating. Assets falling outside the range of investment grade are classified as non-investment grade (satisfactory) or

past due but not impaired.

Insurance operations’ financial assets

Non-investment grade

Investment

grade

Satisfactory

Past due but

not impaired

Total

SR’ 000 SR’ 000 SR’ 000 SR’ 000

Cash and cash equivalents (note 3) 109,278 -- -- 109,278

Investment in Murabaha deposits -- -- -- --

Premium receivables, net -- 21,191 20,786 41,977

Due from reinsurers -- 19,740 1,064 20,804

Other receivables (note 12) -- 8,786 -- 8,786

Reinsurance share of outstanding claims -- 65,920 -- 65,920

──────── ──────── ──────── ────────

As at 31 December 2017 109,278 115,637 21,850 246,765

════════ ════════ ════════ ════════


Investment in Murabaha deposits 100,000 -- -- 100,000

Premium receivables, net -- 32,305 30,018 62,323

Due from reinsurers -- 11,415 2,550 13,965


Reinsurance share of outstanding claims -- 60,511 -- 60,511

──────── ──────── ──────── ────────

As at 31 December 2016 123,932 119,562 32,568 276,062

════════ ════════ ════════ ════════

Shareholders’ operations’ financial assets

Non-investment grade

Investment

grade

Satisfactory

Past due but

not impaired

Total



Investments held at fair value through income

statement

--

33,592

--

33,592

Available for sale investment -- 1,923 -- 1,923


Due from insurance operations -- 32,382 -- 32,382

──────── ──────── ──────── ────────

As at 31 December 2017 84,490 71,813 -- 156,303

════════ ════════ ════════ ════════




statement

--

33,015

--

33,015

Available for sale investment -- 1,923 -- 1,923


Due from insurance operations -- 30,129 -- 30,129

──────── ──────── ──────── ────────

As at 31 December 2016 87,986 66,208 -- 154,194

════════ ════════ ════════ ════════




52



Liquidity risk

Liquidity risk is the risk that the Company will not be able to meet its commitments associated with financial liabilities

when they fall due. Liquidity requirements are monitored on a monthly basis and management ensures that sufficient

liquid funds are available to meet any commitments as they arise.

Maturity profiles

The table below summarises the maturity profile of the financial assets and financial liabilities of the Company based

on remaining contractual obligations. For insurance contract liabilities maturity profiles are determined based on the

estimated timing of net cash outflows from the recognised insurance liabilities. The amount disclosed are the

contractual undiscounted cash flows which equal their carrying balances as the impact of discounting is not

significant. Unearned premiums, Provision for premium deficiency, deferred commission income, due to insurance

operations and due to shareholders’ operations have been excluded from the analysis as it is not contractual obligation.

The table below summarises the maturity profile of the financial liabilities of the Company based on remaining

expected undiscounted contractual obligations:

2017

Up to

one year

More than

one year Total

SR’000 SR’000 SR’000

INSURANCE OPERATIONS' FINANCIAL LIABILITIES

Outstanding claims 98,357 12,291 110,648

Due to reinsurers and brokers 26,320 -- 26,320

Due to policyholders 9,550 -- 9,550

Accrued expenses and other liabilities 17,665 -- 17,665

Accumulated surplus from insurance operations 10,190 -- 10,190

────────── ───────── ──────────

162,082 12,291 174,373

────────── ───────── ──────────

SHAREHOLDERS’ FINANCIAL LIABILITIES


Accrued Zakat 13,032 -- 13,032

Accrued return on statutory deposit -- 913 913

────────── ───────── ──────────

15,086 913 15,999

────────── ───────── ──────────

TOTAL FINANCIAL LIABILITIES 177,168 13,204 190,372

══════════ ═════════ ══════════

2016

Up to

one year

More than

one year Total

SR’000 SR’000 SR’000

INSURANCE OPERATIONS' FINANCIAL LIABILITIES

Outstanding claims 93,657 34,638 128,295

Due to reinsurers and brokers 37,504 -- 37,504

Due to policyholders 9,525 -- 9,525


Accumulated surplus from insurance operations 8,394 -- 8,394

────────── ───────── ──────────

162,029 34,638 196,667

────────── ───────── ──────────

SHAREHOLDERS’ FINANCIAL LIABILITIES


Accrued Zakat 12,520 -- 12,520

Accrued return on statutory deposit -- 249 249

────────── ───────── ──────────

15,586 249 15,835

────────── ───────── ──────────

TOTAL FINANCIAL LIABILITIES 177,615 34,887 212,502

══════════ ═════════ ══════════




53


Frequency and severity of claims

The frequency and severity of claims can be affected by several factors like political violence, environmental and

economical, atmospheric disturbances, natural disasters, concentration of risks, civil riots etc. The Company does not

have any single insurance contract or small number of related contracts that cover low frequency, high-severity risks

such as earthquakes or insurance contract covering risk of single incidents that may expose the Company to multiple

insurance risks.

The Company monitors concentration of insurance risks primarily by class of business. The table below sets out the

concentration of outstanding claims and unearned premiums (in percentage) by class of business at the date of

financial positions.

2017

Gross

unearned

premiums

Net unearned

premiums

Gross

outstanding

claims

Net outstanding

claims

SR’000 SR’000 SR’000 SR’000

Medical 15% 13% 6% 3%

Motor 40% 66% 26% 55%

Property 20% 4% 48% 29%

Engineering 7% 2% 8% 2%

Marine 8% 5% 5% 4%

Accident & Liability 10% 10% 7% 7%

───────── ───────── ───────── ──────────

100% 100% 100% 100%

───────── ───────── ───────── ──────────

2016

Gross

unearned

premiums

Net unearned

premiums

Gross

outstanding

claims

Net outstanding

claims

SR’000 SR’000 SR’000 SR’000

Medical 11% 10% 10% 5%

Motor 50% 73% 35% 52%

Property 17% 3% 32% 31%

Engineering 7% 1% 6% 3%

Marine 5% 3% 10% 9%

Accident & Liability 10% 10% 7% 0%

───────── ───────── ───────── ──────────

100% 100% 100% 100%

───────── ───────── ───────── ──────────

26. EARNINGS PER SHARE

The basic earnings per share have been calculated by dividing the net profit for the period by the weighted

average number of ordinary shares of 20 million (2016: 20 million) issued and outstanding at the year end.

Diluted earnings per share is not applicable to the Company.

27. CONTINGENCIES

As at 31 December 2017, the Company’s bankers have issued guarantees on behalf of the Company, amounting

to SR 0.6 million (2016: 0.6 million), in respect of the Company’s insurance operations.




54

28. FAIR VALUE OF FINANCIAL INSTRUMENTS

a) Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly

transaction between market participants at the measurement date. The fair value measurement is based on the

presumption that the transaction to sell the asset or transfer the liability takes place either:

• In the principal market for the asset or liability, or

• In the absence of a principal market, in the most advantageous market for the asset or liability

The principal or the most advantageous market must be accessible to by the Company.

The Company’s financial assets include cash and cash equivalents, investments in Murabaha deposits,

premiums receivable, due from reinsurers, other receivables, investments, due from insurance operations,

statutory deposit, accrued return on statutory deposits and certain other assets and its financial liabilities

consist of outstanding claims, due to reinsurers and brokers, due to policy holders, due to shareholders’

operations and certain other liabilities. The fair values of financial instruments are not materially different

from their carrying values. At 31 December 2017, there were no financial instruments held by the Company

that were measured at fair value, apart from the investments which are carried at fair value.

b) The Company uses the following hierarchy for determining and disclosing the fair value of financial

instruments:

Level 1: quoted prices in active markets for the same instrument (i.e., without modification or repackaging);

Level 2: quoted prices in active markets for similar assets and liabilities or other valuation techniques for

which all significant inputs are based on observable market data; and

Level 3: valuation techniques for which any significant input is not based on observable market data.

2017 Level 1 Level 2 Level 3 Total

SR’000 SR’000 SR’000 SR’000


statement 33,592 -- -- 33,592

──────── ─────── ────── ───────

Total 33,592 -- -- 33,592

──────── ─────── ────── ───────

As at 31 December 2017, all investments are fair valued except for available-for-sale investment which is

stated at cost (see note 13(b) above).

2016 Level 1 Level 2 Level 3 Total

SR’000 SR’000 SR’000 SR’000


statement

33,015

--

--

33,015

──────── ─────── ────── ───────

Total 33,015 -- -- 33,015

──────── ─────── ────── ───────

There were no transfers between levels during the years ended 31 December 2017 and 31 December 2016.

Also, there were no changes in the valuation techniques during the period from the previous periods.

29. COMPARATIVE FIGURES

The comparative figures for the previous year have been reclassified, where necessary, in order to conform to

the current year’s presentation. Such reclassifications do not affect the previously reported net profits, net assets

or equity.




55

30. APPROVAL OF THE FINANCIAL STATEMENTS

These financial statements were approved and authorized for issue by the Board of Directors on 22 March

2018 (corresponding to 5 Rajab 1439H).

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