Custodian of the Two Holy Mosques King Abdulla Bin Abdulaziz Al-Saud Kingdom of Saudi Arabia

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1 Custodian of the Two Holy Mosques King Abdulla Bin Abdulaziz Al-Saud Kingdom of Saudi Arabia His Royal Highness Prince Sultan Bin Abdulaziz Al-Saud The Crown Prince & First Deputy Prime Minister His Royal Highness Prince Nayef Bin Abdulaziz Al-Saud The Second Deputy Prime Minister & Minister of Interior

2 Head Office PO Box 2302, Riyadh Tel: Fax:

3 Content Chairman s Statement 4-5 Independent Auditors Report 6-7 Statement of Financial Position 8-9 Statement of Insurance Operations and Accumulated Surplus 10 Statement of Shareholders Operations 11 Statement of Shareholders Comprehensive Operations 12 Statement of Changes in Shareholders Equity 13 Statement of Insurance Operations Cash Flows 14 Statement of Shareholders Cash Flows 15 Notes to the Financial Statements 16 48

4 Executive President s Statement MEDGULF is a successful, innovative insurance company that s growing in size and importance. 4

5 Dear All, 2010 was another year of tremendous success for us. We achieved a new record premium volume (up more than 40% over 2009) and also a record net result (up 58% over 2009), which we will reinvest to finance our quest for market leadership. This tremendous success is the result of our hard work, and i want to personally thank you for your contribution. I am proud of what we achieved and so should you. Finally, we extend our appreciation and gratitude to the Custodian of the Two Holy Mosques, King Abdulla Bin Abdulaziz Al-Saud, the King of the Kingdom of Saudi Arabia, His Royal Highness Prince Sultan Bin Abdulaziz Al-Saud and His Royal Highness Prince Nayef Bin Abdulaziz Al- Saud. We thank their respective governments and regulatory authorities for their guidance and support during Last, but not least, we thank our loyal shareholders and customers for their support and ongoing partnership with MEDGULF. Lutfi Fadel El Zein Executive President 5

6 6 Independent Auditors Report

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8 Statement of Financial Position As At 31 December 2010 (Amounts in SR) Notes INSURANCE OPERATIONS ASSETS Cash and cash equivalents 8 433,332, ,132,586 Time deposits 9 49,237,817 37,862,675 Investments 16 (a) 36,883,950 - Premiums and reinsurance balances receivable ,440, ,356,466 Reinsurers share of unearned premiums ,729, ,019,042 Reinsurers share of outstanding claims ,432, ,109,743 Deferred policy acquisition costs 13 39,221,425 26,096,002 Prepayments and other assets 14 14,344,256 16,907,753 Due from related parties ,199, ,706,670 Property and equipment, net 15 27,495,687 20,274,712 TOTAL INSURANCE OPERATIONS ASSETS 2,553,317,659 1,753,465,649 SHAREHOLDERS ASSETS Cash and cash equivalents 8 300,758, ,268,055 Time deposits 9 63,884,282 60,058,888 Investments 16 (b) 148,455, ,028,193 Prepayments and other assets 14 2,494,534 3,278,815 Due from insurance operations 255,045, ,739,128 Goodwill 7 480,000, ,000,000 Statutory deposit 17 80,000,000 80,000,000 Land 30,000,000 30,000,000 TOTAL SHAREHOLDERS ASSETS 1,360,637,729 1,207,373,079 TOTAL ASSETS 3,913,955,388 2,960,838,728 8

9 (Amounts in SR) Notes INSURANCE OPERATIONS LIABILITIES AND SURPLUS Accounts and commission payable 117,517,343 73,402,787 Reinsurance balances payable 119,235,838 79,029,502 Accrued expenses and other liabilities 18 78,001,227 56,689,303 Due to shareholders operations 255,045, ,739,128 Unearned reinsurance commission 20 56,757,313 33,665,524 Gross unearned premiums 11 1,258,795, ,351,695 Gross outstanding claims ,475, ,301,084 Surplus distribution payable 39,595,460 15,332,142 Other reserves 12,500,000 9,954,484 TOTAL INSURANCE OPERATIONS LIABILITIES 2,553,923,397 1,753,465,649 INSURANCE OPERATIONS SURPLUS Change in fair values of available for sale investments 16 (a) (605,738) - TOTAL INSURANCE OPERATIONS LIABILITIES AND SURPLUS 2,553,317,659 1,753,465,649 SHAREHOLDERS LIABILITIES AND EQUITY SHAREHOLDERS LIABILITIES Accrued expenses and other liabilities ,500 3,577,313 Provision for zakat and income tax 23 37,307,212 24,655,160 Due to a shareholder ,749, ,673,490 TOTAL SHAREHOLDERS LIABILITIES 292,024, ,905,963 SHAREHOLDERS EQUITY Share capital ,000, ,000,000 Change in fair values of available for sale investments 16 (b) 8,749,430 9,323,875 Statutory reserve 63,972,748 23,228,648 Retained earnings 195,890,992 92,914,593 TOTAL SHAREHOLDERS> EQUITY 1,068,613, ,467,116 TOTAL SHAREHOLDERS LIABILITIES AND EQUITY 1,360,637,729 1,207,373,079 TOTAL LIABILITIES, INSURANCE OPERATIONS SURPLUS, AND SHAREHOLDERS EQUITY 3,913,955,388 2,960,838,728 9

10 Statement of Insurance Operations & Accumulated Surplus As At 31 December 2010 (Amounts in SR) Notes Gross premiums written 11 2,622,549,160 1,849,482,433 Less: Reinsurance premiums ceded 11 (640,843,433) (339,854,155) Excess of loss premiums (46,806,796) (38,673,501) NET PREMIUMS WRITTEN 1,934,898,931 1,470,954,777 Change in unearned premiums 11 (140,733,811) (171,029,978) Change in other reserves (2,545,516) - NET PREMIUMS EARNED 1,791,619,604 1,299,924,799 Gross claims paid and other expenses 12 (1,429,984,204) (741,122,683) Reinsurers share of gross claims paid ,465,692 95,084,846 Movement in outstanding claims 12 (4,851,529) (294,191,341) NET CLAIMS INCURRED 12 (1,288,370,041) (940,229,178) Policy acquisition costs 13 (115,548,528) (92,243,884) Reinsurance commission income 20 54,426,472 36,887,051 NET UNDERWRITING RESULT 442,127, ,338,788 General and administrative expenses 21 (223,466,650) (168,607,044) Commission income from available for sale investments 164,063 - Other income 22 23,808,259 17,589,679 INSURANCE OPERATIONS SURPLUS 242,633, ,321,423 Shareholders appropriation from insurance operations surplus 3 (218,369,861) (137,989,281) Insurance operations surplus after shareholders appropriation 24,263,318 15,332,142 Surplus distribution 3 (24,263,318) (15,332,142) ACCUMULATED SURPLUS AT THE END OF THE YEAR

11 Statement of Shareholders Operations For the Year Ended 31 December 2010 (Amounts in SR) Notes INCOME Shareholders appropriation from insurance operations surplus 3 218,369, ,989,281 Special commission income 12,135,830 11,960,597 Realised gains on sale of available for sale investments 3,429,497 1,697,381 Dividend income on available for sale investments 1,335, , ,271, ,105,195 EXPENSES General and administrative 21 (2,890,183) (3,255,397) Impairment losses on available for sale investments 16 (b) - (2,335,384) NET INCOME FOR THE YEAR 232,380, ,514,414 BASIC AND DILUTED EARNINGS PER SHARE

12 Statement of Shareholders Comprehensive Operations For the Year Ended 31 December 2010 (Amounts in SR) Note NET INCOME FOR THE YEAR 232,380, ,514,414 OTHER COMPREHENSIVE INCOME (EXPENSES): Zakat and income tax 23 (28,660,444) (19,999,999) Change in fair values of available for sale investments (574,445) 11,018,361 TOTAL COMPREHENSIVE INCOME FOR THE YEAR 203,146, ,532,776 12

13 Statement of Changes in Shareholders Equity For the Year Ended 31 December 2010 (Amounts in SR) Share capital Change in fair values of available for sale investments Statutory reserve (Accumulated losses)/reained earnings Total Balance at 1 January ,000,000 (1,694,486) - (10,371,174) 787,934,340 Net income for the year ,514, ,514,414 Change in fair values of available for sale investments - 11,018, ,018,361 Zakat and income tax (Note 23) (19,999,999) (19,999,999) Transfer to statutory reserve ,228,648 (23,228,648) - Balance at 31 December ,000,000 9,323,875 23,228,648 92,914, ,467,116 Balance at 1 January ,000,000 9,323,875 23,228,648 92,914, ,467,116 Net income for the year ,380, ,380,943 Change in fair values of available for sale investments - (574,445) - - (574,445) Zakat and income tax (Note 23) (28,660,444) (28,660,444) Transfer to statutory reserve ,744,100 (40,744,100) - Dividends paid (Note 31) (60,000,000) (60,000,000) Balance at 31 December ,000,000 8,749,430 63,972, ,890,992 1,068,613,170 13

14 Statement of Insurance Operations Cash Flows For the Year Ended 31 December 2010 (Amounts in SR) Notes CASH FLOWS FROM OPERATING ACTIVITIES Insurance operations surplus after shareholders appropriation 24,263,318 15,332,142 Adjustments to reconcile insurance operations surplus after shareholders appropriation to net cash from operating activities: Depreciation 15 6,585,333 4,964,647 Provision for doubtful debts 20,000,000 6,000,000 Commission income from available for sale investments (164,063) - Gain from sale of property and equipment (78,796) (92,326) 50,605,792 26,204,463 Change in operating assets and liabilities: Premiums and reinsurance balances receivable (167,084,203) (828,356,466) Reinsurers share of unearned premiums (223,710,176) (214,019,042) Reinsurers share of outstanding claims (138,322,455) (179,109,743) Deferred policy acquisition costs (13,125,423) (26,096,002) Prepayments and other assets 2,563,497 (16,907,753) Due from related parties 81,507,132 (309,706,670) Gross unearned premiums 364,443, ,351,695 Unearned reinsurance commission 23,091,789 33,665,524 Accounts and commission payable 44,114,556 73,402,787 Reinsurance balances payable 40,206,336 79,029,502 Accrued expenses and other liabilities 21,311,924 56,689,303 Due to shareholders operations 137,306, ,739,128 Gross outstanding claims 143,173, ,301,084 Other reserves 2,545,516 9,954,484 Net cash from operating activities 368,628, ,142,294 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of available for sale investments (37,489,688) - Purchase / acquisition of property and equipment 15 (14,176,916) (25,333,783) Proceeds from sale of property and equipment 449, ,750 Time deposits, net (11,375,142) (37,862,675) Commission income from available for sale investments 164,063 - Net cash used in investing activities (62,428,279) (63,009,708) NET CHANGE IN CASH AND CASH EQUIVALENTS 306,200, ,132,586 CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR 127,132,586 - CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR 8 433,332, ,132,586 Non-cash transaction: Change in fair values of available for sale investments (605,738) - 14

15 Statement of Shareholders Cash Flows For the Year Ended 31 December 2010 (Amounts in SR) Notes OPERATING ACTIVITIES Net income for the year 232,380, ,514,414 Adjustments for: Amortization of discount on held to maturity investments (189,503) (2,526,708) Commission income on available for sale investments (3,124,601) (2,261,666) Dividend income on available for sale investments (1,335,938) (457,936) Impairment losses on available for sale investments 16 (b) - 2,335,384 Realised gains on sale of available for sale investments (3,429,497) (1,697,381) 224,301, ,906,107 Changes in operating assets and liabilities: Prepayments and other assets 784, ,151 Due from insurance operations (137,306,338) (117,739,128) Goodwill 7 - (480,000,000) Accrued expenses and other liabilities (2,609,813) 374,421 Due to a shareholder 76, ,673,490 Zakat and income tax paid 23 (c) (16,008,392) (10,708,055) Net cash from (used in) operating activities 69,237,499 (212,046,014) INVESTING ACTIVITIES Time deposits, net (3,825,394) (60,058,888) Purchase of available for sale investments - (93,026,175) Proceeds from maturities of held to maturity investments 100,000,000 - Proceeds from sale of available for sale investments 15,617,589 52,978,969 Commission income from available for sale investments 3,124,601 2,261,666 Dividend income on available for sale investments 1,335, ,936 Net cash from (used in) investing activities 116,252,734 (97,386,492) FINANCING ACTIVITIES Dividends paid 31 (60,000,000) - Net cash used in financing activities (60,000,000) - NET CHANGE IN CASH AND CASH EQUIVALENTS 125,490,233 (309,432,506) CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR 175,268, ,700,561 CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR 8 300,758, ,268,055 Non-cash transaction: Change in fair values of available for sale investments (574,445) 11,018,361 15

16 Notes to the Financial Statements 31 December ORGANIZATION AND PRINCIPAL ACTIVITIES The Mediterranean and Gulf Cooperative Insurance and Reinsurance Company (the Company ) is a Saudi Joint Stock Company registered in the Kingdom of Saudi Arabia under Commercial Registration No dated 8 Rabi Thani 1428H (corresponding to 26 April 2007). The registered office address of the Company is P.O. Box 2302, Riyadh 11451, Kingdom of Saudi Arabia. The objectives of the Company are to transact cooperative insurance and reinsurance business and related activities in the Kingdom of Saudi Arabia. Its principal lines of business include all classes of general insurance. The Company was listed on the Saudi Arabian Stock Exchange (Tadawul) on 16 April BASIS OF PREPARATION Basis of measurement The financial statements have been prepared on a historic cost basis except for the measurement at fair value of available for sale investments. Statement of compliance The financial statements of the Company have been prepared by the management in accordance with International Financial Reporting Standards (IFRS). As required by Saudi Arabian insurance regulations, the Company maintains separate accounts for Insurance Operations and Shareholders Operations. The physical custody 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 other revenue and expenses from joint operations is as determined by the management and Board of Directors. Functional and presentational currency The functional and presentational currency of the Company is Saudi Riyals. 3. SURPLUS DISTRIBUTION The Company is required to distribute 10% of the net surplus from insurance operations to policyholders and the remaining 90% to be allocated to the shareholders of the Company in accordance with the Insurance Law and Implementation Regulations issued by the Saudi Arabian Monetary Agency ( SAMA ). The insurance operations surplus of the Company for the year ended 31 December 2010, amounted to SR 242 million. Accordingly, 90% of SR 242 million, amounting to SR 218 million has been transferred to the shareholders operations for the year, leaving a surplus payable to policyholders of SR 24 million as at 31 December The Company is in the process of distributing this surplus to policyholders. 16

17 4. CHANGES IN ACCOUNTING POLICIES AND NEW STANDARDS AND AMENDMENTS ISSUED BUT NOT YET EFFECTIVE a) Changes in accounting policies The accounting policies adopted in the preparation of the financial statements are consistent with those of the previous financial year except as follows: Improvements to IFRSs 2009 various standards Adoption of these revised standards did not have any material effect on the financial performance or position of the Company. b) New amendments and standards issued but not yet effective The following amendments and standards have been issued by the International Accounting Standards Board (IASB) but are not yet mandatory for these financial statements. The Company has chosen not to early adopt the amendments and the newly issued standards: Improvements to IFRSs 2010 various standards (effective date 1 January 2011) Amendments to IAS 32 Financial Instruments - Presentation: Classification of Rights Issues (effective date 1 February 2010) IAS 24 Related Party Disclosures (revised 2009) (effective date 1 January 2011) IFRS 9 Financial Instruments (effective date 1 January 2013) The application of the above new amendments and standards is not expected to have a material impact on the financial statements as and when they become effective. However, the application of these standards will result in amendments to the presentation and measurement of the financial statements. 5. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following is a summary of significant accounting policies followed in preparation of these financial statements: Cash and cash equivalents Cash and cash equivalents comprise of cash in hand and at banks and time deposits with an original maturity of less than three months at the date of acquisition. 17

18 Notes to the Financial Statements 31 December 2010 Goodwill Goodwill represents the fair value of the consideration paid in excess of the fair value of net assets or liabilities acquired. Goodwill is tested for impairment by management at least once at the end of each financial year. 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. Impairment losses relating to goodwill cannot be reversed in future periods. Property and equipment Property and equipment are initially recorded at cost less accumulated depreciation and any impairment in value. Depreciation is charged to the statement of insurance operations and accumulated surplus on a straight line basis at the following depreciation rates: Rates Leasehold improvements 15% - 25% Office equipment, furniture and fixtures 10% - 15% Computers 25% Motor vehicles 25% Investments All investments are initially recognised at fair value, being the fair value of the consideration given, including acquisition charges associated with the investment. Premiums and discounts are amortized on a systematic basis to their maturity. For investments that are traded in organized financial markets, fair value is determined by reference to exchange quoted market bid prices at the close of business on the balance sheet date without any deduction for transaction costs. (a) Available for sale investments Investments which are classified as «available for sale» are subsequently measured at fair value. Available for sale investments are those investments that are not held to maturity nor held for trading. For an available for sale investment where the fair value has not been hedged, any unrealized gain or loss arising from a change in its fair value is recognised directly under insurance operations surplus and / or shareholders> comprehensive operations until the investment is derecognized or impaired at which time the cumulative gain or loss previously recognised under the insurance operations surplus and / or shareholders comprehensive operations is included in the statement of insurance operations and accumulated surplus and / or shareholders operations for the year. Available for sale investments whose fair value cannot be reliably measured are carried at amortised cost less impairment provision. 18

19 (b) Investments in held to maturity securities Investments which have fixed or determinable payments that the Company has the positive intention and ability to hold to maturity are subsequently measured at amortized cost, less provision for impairment in value. Amortized cost is calculated by taking into account any discount or premium on acquisition. Any gain or loss on such investments is recognised in the statement of shareholders> operations when the investment is derecognized or impaired. Statutory reserve In accordance with its bylaws, the Company shall allocate 20% of its net income each year to the statutory reserve until it has built up a reserve equal to the share capital. Impairment and uncollectibility of financial assets An assessment is made at each statement of financial position date to determine whether there is objective evidence that a financial asset or group of financial assets may be impaired. If such evidence exists, any impairment loss is recognized in the statement of shareholders operations. Impairment is determined as follows: For assets carried at fair value, impairment is the difference between the cost and fair value, less any impairment loss previously recognized in the statement of shareholders operations For assets carried at cost, impairment is the difference between the cost and the present value of future cash flows discounted at the current market rate of return for a similar financial asset. For assets carried at amortized cost, impairment is determined based on future cash flows that are discounted at the original effective special commission rate. Accrued expenses and other liabilities Liabilities are recognised for amounts to be paid in the future for goods or services received, whether billed by the supplier or not. Zakat and income tax Zakat and income tax are provided for in accordance with the Saudi Arabian Zakat and Tax Regulations and are charged to the statement of shareholders comprehensive operations. Land Land is stated at cost less any impairment and is not depreciated. Special commission income Special commission income from time deposits is recognized on an effective yield basis. Dividend income Dividend income is recognised when the right to receive dividend is established. 19

20 Notes to the Financial Statements 31 December 2010 Provisions Provisions are recognised when the Company has an obligation (legal or constructive) arising from past events, and the costs to settle the obligation are both probable and may be measured reliably. Provisions are not recognised for future operating losses. Trade date accounting All regular way purchases and sales of financial assets are recognized / derecognized on the trade date (i.e. the date that the Company commits to purchase or sell the assets). Regular way purchases or sales of financial assets are transactions that require settlement of assets within the time frame generally established by regulation or convention in the market place. Employees end of service benefits Provision is made for amounts payable under the Saudi Arabian labour law applicable to employees> accumulated periods of service at the statement of financial position date. Foreign currencies Transactions in foreign currencies are recorded in Saudi Riyals at the exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated to Saudi Riyals at the rate of exchange ruling at the statement of financial position date. All differences are taken to the statements of insurance operations and accumulated surplus and shareholders operations. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate as at the date of the initial transaction and are not subsequently restated. Foreign exchange gains or loss on available for sale investments are recognised in under insurance operations surplus in the statement of insurance operations and under other comprehensive income under the statement of shareholders comprehensive operations. Offsetting financial assets and liabilities Financial assets and 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 liability simultaneously. Income and expense are not offset in the statement of shareholders operations unless required or permitted by any accounting standard or interpretation. Premiums earned and commission income Premiums are taken into income over the terms of the policies to which they relate on a pro-rata basis. Unearned premiums represent the portion of premiums written relating to the unexpired period of coverage. The underwriting results represents premiums earned and fee and commission income less claims paid, other underwriting expenses and anticipated claims payable in respect of the year, net of amounts subject to reinsurance, less provision for any anticipated future losses on continuing policies. 20

21 Commission receivable on reinsurance contracts are deferred and amortised on a straight-line basis over the term of the reinsurance contracts. Retained premiums and commission income, which relate to unexpired risks beyond the end of the financial period, are reported as unearned and deferred based on the following methods: 25% of premiums for marine cargo business Actual number of days for other lines of business Premiums receivable Premiums receivable are recognized when due and are measured on initial recognition at the fair value of the considerations received or receivable. The carrying value of premiums receivable is reviewed for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable, with the impairment loss recorded in the statement of insurance operations and accumulated surplus. Premiums receivable are derecognized when the derecognition criteria for financial assets have been met. 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 the gross estimated cost of claims incurred but not settled at the date of statement of financial position, whether reported or not. Provisions for reported claims not paid as at the date of statement of financial position 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 at date of statement of financial position. The ultimate liability may be in excess of or less than the amount provided. Any difference between the provisions at the date of statement of financial position and settlements and provisions in the following year is included in the underwriting account 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 statement of financial position date. Liability adequacy test At each statement of financial position 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 (less related deferred policy acquisition costs) is inadequate in the light of estimated future cash flows, the entire deficiency is immediately recognised in the statement of insurance operation and accumulated surplus and an unexpired risk provision is created. 21

22 Notes to the Financial Statements 31 December 2010 Deferred policy acquisition costs Commissions and other costs directly related to the acquisition and renewal of insurance contracts are deferred and amortized over the terms of the insurance contacts to which they relate, similar to premiums earned. All other acquisition costs are recognised as an expense when incurred. Amortization is recorded in the statement of insurance operations and accumulated surplus. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for by changing the amortization period and are treated as a change in accounting estimate. An impairment review is performed at each reporting date or more frequently when an indication of impairment arises. 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. Deferred policy acquisition costs are also considered in the liability adequacy test for each reporting period. Reinsurance The Company cedes insurance risk in the normal course of business for all of its businesses. Reinsurance assets represent balances due from reinsurance companies. Recoverable amounts are estimated in a manner consistent with the outstanding claims provision and are in accordance with the reinsurance contract. An impairment review is performed at each reporting date or more frequently when an indication of impairment arises during the reporting year. Impairment occurs when objective evidence exists that the Company may not recover outstanding amounts under the terms of the contract and when the impact on the amounts that the Company will receive from the reinsurer can be measured reliably. The impairment loss is recorded in the statement of insurance operations and accumulated surplus. Ceded reinsurance arrangements do not relieve the Company from its obligations to policyholders. Premiums and claims on assumed reinsurance are recognised as income and expenses in the same manner as they would be if the reinsurance were considered direct business, taking into account the product classification of the reinsured business. Reinsurance liabilities represent balances due to reinsurance companies. Amounts payable are estimated in a manner consistent with the associated reinsurance contract. Premiums and claims are presented on a gross basis for both ceded and assumed reinsurance. 22

23 Reinsurance assets or liabilities are derecognised when the contractual rights are extinguished or expire or when the contract is transferred to another party. Unearned reinsurance commission Commission receivable on outwards reinsurance contracts are deferred and amortized over the terms of the insurance contracts to which they relate. Amortisation is recorded in the statement of insurance operations and accumulated surplus. Product classification The Company issues insurance contracts that transfer insurance risk. Insurance contracts are those contracts where the insurer accepts significant insurance risk from the policyholder by agreeing to compensate the policyholder if a specified uncertain future event adversely affects the policyholder. As a general guideline, the Company defines significant insurance risk as the possibility of having to pay benefits on the occurrence of an insured event. Derecognition of financial instruments The derecognition of a financial instrument takes place when the Company no longer controls the contractual rights that comprise the financial instrument, which is normally the case when the instrument is sold, or all the cash flows attributable to the instrument are passed through to an independent third party. Fair values 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 statement of financial position date. If quoted market prices are not available, reference can also be made to broker or dealer price quotations. For financial assets where there is no active market, fair value is determined by using valuation techniques. Such techniques include using recent arm>s length transactions, reference to the current market value of another instrument which is substantially the same and/or discounted cash flow analysis. For discounted cash flow techniques, estimated future cash flows are based on Management>s best estimates and the discount rate used is a market related rate for similar assets. Segmental reporting An operating segment is a component of the Company that is engaged in business activities from which it earns revenues and incurs 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 organized into business units based on their products and services and has three reportable operating segments as follows: 23

24 Notes to the Financial Statements 31 December 2010 Medical insurance, which covers medical costs, medicines, and all other medical services and supplies. Motor Insurance, which provides coverage against losses and liability related to motor vehicles, excluding transport insurance. Other classes, which covers any other classes of insurance not included above. Shareholders operations is a non-operating segment. Income earned from time deposits and investments is the only revenue generating activity. Certain direct operating expenses and other overhead expenses are allocated to this segment on an appropriate basis. The loss or surplus from the insurance operations is allocated to this segment on an appropriate basis. Segment performance is evaluated based on profit or loss which, in certain respects, is measured differently from income or loss in the accompanying financial statements. No inter-segment transactions occurred during the year. If any transaction were to occur, transfer prices between operating 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 operating segments which will then be eliminated at the level of financial statements of the Company. 6. SIGNIFICANT ACCOUNTING ESTIMATES AND ASSUMPTIONS The preparation of the financial statements requires management to make estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities and the disclosure of contingent liabilities, at the reporting date. However, uncertainty about these estimates and assumptions could result in an outcome that could require a material adjustment to the carrying amount of the asset or liability affected in the future. The key assumptions concerning the future and other key sources of estimation uncertainty at the date of statement of financial position, that have a significant risk of causing a material adjustment to the carrying amounts of the assets and liabilities within the next financial year are discussed below. The ultimate liability arising from claims made under insurance contracts The estimation of the ultimate liability arising from claims made under insurance contracts is the Company s most critical accounting estimate. There are several sources of uncertainty that needed to be considered in estimating the liability that the Company will ultimately pay for such claims. The provision for claims incurred but not reported (IBNR) is an estimation of claims which are expected to be reported subsequent to the date of statement of financial position, for which the insured event has occurred prior to the date of statement of financial position. The primary technique adopted by management in estimating the cost of notified and IBNR claims, is that of using the past claims settlement trends to predict future claims settlement trends. 24

25 Claims requiring court or arbitration decisions are estimated individually. Independent loss adjusters normally estimate property claims. Management reviews its provisions for claims incurred, and claims incurred but not reported, on quarterly basis. 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 Impairment losses on receivables The Company assesses receivables that are individually significant and receivables included in a group of financial assets with similar credit risk characteristics for impairment. Receivables that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment. This assessment of impairment requires judgment. In making this judgment, the Company evaluates credit risk characteristics that consider past-due status being indicative of the ability to pay all amounts due as per contractual terms. Deferred policy acquisition costs Certain acquisition costs related to the sale of new policies are recorded as deferred policy 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 realized, 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. Goodwill Impairment exists when the carrying value of an asset or cash generating unit exceeds its recoverable amount, which is the higher of its fair value less costs to sell and its value in use. The fair value less costs to sell calculation is based on available data from binding sales transactions in an arm s length transaction of similar assets or observable market prices less incremental costs for disposing of the asset. The value in use calculation is based on a discounted cash flow model. The recoverable amount is most sensitive to the discount rate used for the discounted cash flow model as well as the expected future cash inflows. The key assumptions used to determine the recoverable amount for the different are explained in Note COMMENCEMENT OF INSURANCE ACTIVITIES AND ASSETS AND LIABILITIES PURCHASE AGREEMENT The Company commenced its insurance operations on 1 January During 2009, the Company entered into an agreement ( the agreement ) for the purchase of insurance portfolio and the related net assets and liabilities of the Saudi Arabian Operations of the Mediterranean and Gulf Insurance and Reinsurance Company (MEDGULF) B.S.C. (closed). Accordingly, a due diligence study (including a valuation) was submitted by an independent consultant to the Saudi Arabian Monetary Agency ( the SAMA ). The result of the valuation was approved by SAMA on 12 Dhul Qadah 1429 (corresponding to 10 November 2008), through its letter No. 2172/MTh/MT. 25

26 Notes to the Financial Statements 31 December 2010 The Company held an ordinary general assembly meeting on 22 December 2008, and approved the purchase of the insurance portfolio and the related net assets and liabilities of the Saudi Arabian Operations of the Mediterranean and Gulf Insurance and Reinsurance Company (MEDGULF) B.S.C. (closed) effective 1 January The accompanying financial statements include the assets and liabilities purchased under the said agreement as set out below: (Amounts in SR) Fair value recognised at the date of purchase Assets Cash and cash equivalents 70,843,168 Premiums and reinsurance balances receivable, net 522,010,966 Reinsurers> share of unearned premiums 193,782,376 Deferred policy acquisition costs 17,679,108 Prepayments and other assets 9,014,736 Due from related parties 36,931,331 Property and equipment 17,510,333 Total assets 867,772,018 Liabilities Accounts payable 48,410,552 Reinsurance balances payable 69,298,373 Accrued expenses and other liabilities 17,441,094 Employees end of service benefits 13,924,917 Unearned reinsurance commission 25,907,700 Unearned premiums 703,085,051 Other reserves 9,954,484 Total liabilities 888,022,171 Net liabilities (20,250,153) Goodwill arising from purchase transaction 480,000,000 Total cost of acquisition 459,749,847 During 2010, the Company settled SR Nil (31 December 2009 : SR 206 million) from the balance due amounting to SR 459,749,847 in respect of the purchase of the insurance portfolio and the related net assets and liabilities of the Saudi Arabian Operations of the Mediterranean and Gulf Insurance and Reinsurance Company (MEDGULF) B.S.C. (closed). The remaining unpaid balance as of 31 December 2010 of SR million (31 December 2009 : SR million) has been reported in due to a shareholder caption, under the Shareholder s liabilities in the statement of financial position. 26

27 Goodwill is tested annually for impairment by management. Management has determined that goodwill carrying amounts is less than it s recoverable amount. Recoverable amount was determined on the basis of value-in-use calculations. These calculations use cash flow projections based on financial budgets approved by management. Cash flows are estimated over a period of four years. The pre-discount rate applied to cash flow projections is 11% Discount rate represents the current market assessment of the risks specific to the Company, regarding the time value of money and individual risks of the underlying assets which have not been incorporated in the cash flow estimates. The discount rate calculation is based on the specific circumstances of the Company and its operating segments and derived from its weighted average cost of capital (WACC). The management has budgeted for an annual growth rate for gross premiums to be written over the next four years to be in the range of 20% to 38%. The terminal growth rate has been estimated between 2 % to 2.5%. It is management s assessment that the Company s track record supports the assumptions used in the impairment test. 8. CASH AND CASH EQUIVALENTS (Amounts in SR) Insurance Shareholders Insurance Shareholders Operations Operations Operations Operations Cash on hand and at banks 129,961,906 6,564,101 32,666,051 3,295,463 Time deposits 303,370, ,194,187 94,466, ,972, ,332, ,758, ,132, ,268,055 Cash at banks and time deposits are placed with counterparties who have credit ratings equivalent to A- to B ratings under Standard and Poor>s and Moody s ratings methodology. Time deposits are placed with local and international banks with an original maturity of less than three months from the date of acquisition and earn special commission income at an average rate of 1.82% per annum (2009: 0.84%).The carrying amounts disclosed above reasonably approximate the fair value at the statement of financial position date. 9. TIME DEPOSITS Time deposits are placed with counterparties that have credit ratings equivalent to A- to A+ ratings under Standard and Poor>s and Moody s ratings methodology. 27

28 Notes to the Financial Statements 31 December 2010 Time deposits are placed with local and international banks with a maturity of more than three months from the date of original acquisition and earn special commission income at an average rate of 2.5% per annum (2009: 2.69%). The carrying amounts of the time deposits reasonably approximate the fair value at the statement of financial position date. 10. PREMIUMS AND REINSURANCE BALANCES RECEIVABLE (Amounts in SR) Premiums receivable 953,341, ,811,036 Less: Provision for doubtful debts (111,001,532) (91,001,532) 842,340, ,809,504 Reinsurance balances receivable 127,100, ,546, ,440, ,356,466 The aging analysis of premiums and reinsurance balances receivable is as at 31 December 2010 and 2009 is set as below: (Amounts in SR) Total Neither past due nor impaired Past due but not impaired Less than 31 to 30 day 90 days More than 90 days Past due and impaired ,080,442, ,498, ,739,551 2,397,120 4,736, ,070, ,357, ,104, ,259, ,338 5,063, ,315,840 Premiums and reinsurance balances receivables comprise a large number of customers mainly within the Kingdom of Saudi Arabia as well as reinsurance companies mainly in Europe. Premiums and reinsurance balances receivable include an amount of SR 51,761,379 (31 December 2009: SR 56,967,897) due in foreign currencies, mainly US Dollars. The Company s terms of business generally require premiums to be settled within 90 days. Arrangements with reinsurers normally require settlement if the balance exceeds a certain agreed amount. No individual or company as at 31 December 2010 accounts for more than 24% (31 December 2009: 22%) of the premiums receivable. In addition, the five largest customers account for 39% (31 December 2009: 46%) of the premiums receivable as at 31 December Unimpaired premiums and reinsurance balances receivables are expected, on the basis of past experience, to be fully recoverable. It is not the practice of the Company to obtain collateral over receivables and the vast majority are, therefore, unsecured. 28

29 11. MOVEMENT IN UNEARNED PREMIUMS (Amounts in SR) Gross Reinsurers share Net Gross Reinsurers share Net At beginning / acquired during the year Premiums written during the year Premiums earned during the year 894,351,695 (214,019,042) 680,332, ,085,051 (193,782,376) 509,302,675 2,622,549,160 (640,843,433) 1,981,705,727 1,849,482,433 (339,854,155) 1,509,628,278 (2,258,105,173) 417,133,257 (1,840,971,916) (1,658,215,789) 319,617,489 (1,338,598,300) At the end of the year 1,258,795,682 (437,729,218) 821,066, ,351,695 (214,019,042) 680,332, CLAIMS (Amounts in SR) Gross Reinsurers share Net Gross Reinsurers share Net Outstanding at end of the year 423,546,530 (256,194,483) 167,352, ,210,492 (155,747,603) 156,462,889 Incurred but not reported 192,928,538 (61,237,715) 131,690, ,090,592 (23,362,140) 137,728, ,475,068 (317,432,198) 299,042, ,301,084 (179,109,743) 294,191,341 Claims paid during the year 1,429,984,204 (146,465,692) 1,283,518, ,122,683 (95,084,846) 646,037,837 Outstanding at beginning of the year 312,210,492 (155,747,603) 156,462, Incurred but not reported 161,090,592 (23,362,140) 137,728, ,301,084 (179,109,743) 294,191, Claims incurred 1,573,158,188 (284,788,147) 1,288,370,041 1,214,423,767 (274,194,589) 940,229,178 The Company commenced its insurance operations on 1 January Accordingly the management believes that the disclosure of a claims development table would not be meaningful. 13. DEFERRED POLICY ACQUISITION COSTS (Amounts in SR) At the beginning of the year 26,096,002 - Acquired during the year (Note 7) - 17,679,108 Costs incurred during the year 128,673, ,660,778 Amortised during the year (115,548,528) (92,243,884) At the end of the year 39,221,425 26,096,002 29

30 Notes to the Financial Statements 31 December PREPAYMENTS AND OTHER ASSETS (Amounts in SR) Insurance Shareholders Insurance Shareholders Operations Operations Operations Operations Advances to employees 4,724,641-3,699,076 - Prepaid expenses 2,267,091-1,995, ,125 Advances to suppliers 2,058,724-2,669,777 - Prepaid rent 1,797,258-4,194,535 - Accrued special commission income 866,496 2,494, ,743 3,040,690 Others 2,630,046-4,157, PROPERTY AND EQUIPMENT, NET 14,344,256 2,494,534 16,907,753 3,278,815 (Amounts in SR) Leasehold improvements Office equipment, furniture and fixtures Computers Motor vehicles Total 2010 Total 2009 Cost: 1 January 13,950,901 6,062,842 2,844,077 2,067,107 24,924,927 - Acquired (note 7) ,510,333 Additions 6,985,170 2,367,551 4,177, ,500 14,176,916 7,823,450 Disposals (273,656) (110,124) - (377,008) (760,788) (408,856) 31 December 20,662,415 8,320,269 7,021,772 2,336,599 38,341,055 24,924,927 Accumulated depreciation: 1 January 2,732, , , ,361 4,650,215 - Provided during the year 3,784,313 1,070,985 1,047, ,185 6,585,333 4,964,647 Disposals (48,401) (87,126) - (254,653) (390,180) (314,432) 31 December 6,468,217 1,827,358 1,638, ,893 10,845,368 4,650,215 Net book value: 31 December 14,194,198 6,492,911 5,382,872 1,425,706 27,495,687 20,274,712 30

31 16. INVESTMENTS Investments are classified as set out below: (A) Insurance Operations Available for sale investments The available for sale investments comprise of bonds issued by corporates in the Kingdom of Saudi Arabia amounting to SR 36,883,950 (31 December 2009: SR nil). The change in fair values of available for sale investments amounting to (SR 605,738) (31 December 2009: SR nil) is presented within insurance operations surplus in the statement of financial position. There were no sales during the year (31 December 2009: SR nil). (B) Shareholders Operations Held to maturity investments Held to maturity investments amounting to SR nil (31 December 2009: SR 99,810,497) represent securities issued by governments, international corporations and financial institutions. The fair values of the held to maturity investments are not materially different from their carrying values. All investments under held to maturity as at 31 December 2009 matured during the year ended 31 December 2010 and there were no additional purchases during the year (31 December 2009: SR nil). (Amounts in SR) Available for sale investments Sukuks 30,159,200 29,286,826 Floating rate bonds 11,162,175 18,211,950 Bonds 62,359,655 64,749,513 Equities 18,750,000 21,637,500 Funds 26,024,129 27,331,907 Total available for sale investments 148,455, ,217,696 The cumulative change in fair values of available for sale investments amounting to SR 8,749,430 (31 December 2009: SR 9,323,875) is presented within the shareholders equity in the statement of financial position. No impairment losses on available for sale investments were recorded in the statement of shareholders operations during the year ended 31 December 2010 (31 December 2009: SR 2,335,384). 31

32 Notes to the Financial Statements 31 December 2010 i. The analysis of the composition of investments for insurance and shareholders operations is as follows: (Amounts in SR) Quoted Unquoted Total 2010 Sukuk 30,159,200-30,159,200 Floating rate notes 3,693,750 7,468,425 11,162,175 Bonds 74,287,855 24,955,750 99,243,605 Equities - 18,750,000 18,750,000 Funds 18,639,476 7,384,653 26,024,129 Total 126,780,281 58,558, ,339, Sukuk 29,286,826-29,286,826 Floating rate notes 3,571,875 14,640,075 18,211,950 Bonds 139,560,010 25,000, ,560,010 Equities 2,887,500 18,750,000 21,637,500 Funds 17,455,130 9,876,777 27,331,907 Total 192,761,341 68,266, ,028,193 *There were no investments pertaining to insurance operations during and as at 31 December ii. The analysis of investments by counterparties is as follows: (Amounts in SR) Government and quasi government 37,403, ,560,010 Banks & financial institutions 102,799,253 92,936,933 Corporate 45,135,951 28,531,250 Total 185,339, ,028,193 iii. The credit quality of investment portfolio is as follows: (Amounts in SR) AA- To AA 48,922, ,083,037 A- To A+ 110,429,301 81,800,156 B- 25,987,500 26,145,000 Total 185,339, ,028,193 32