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

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3 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

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5 INDEX PAGE 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 47

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7 Chairman s Statement I am pleased to highlight Medgulf s industry-leading performance in 2009, which came despite the turmoil caused by larger uncertain economic trends. We posted solid financial results, added nearly more than a Million new medical members. I also want to recognize the contributions of our dedicated and engaged employees. Medgulf s success begins with one word values and it is our employees who bring those values to life through their actions, each and every day. On behalf of the Board of Directors of Medgulf Insurance Company, I have the pleasure to present to you this year annual report including the Financial Statements of the company and Auditors Report for the financial year ended 31st December Lutfi Fadel El Zein Chairman 5

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9 Independent Auditors Report 7

10 STATEMENT OF FINANCIAL POSITION At 31 December 2009 (Amounts in SR) Notes INSURANCE OPERATIONS ASSETS Cash and cash equivalents 8 127,132,586 - Time deposits 9 37,862,675 Premiums and insurance balances receivable ,356,466 - Reinsurers share of unearned premiums ,019,042 - Reinsurers share of outstanding claims ,109,743 - Deferred policy acquisition costs 13 26,096,002 - Prepayments and other assets 14 16,907,753 - Due from related parties ,706,670 - Property and equipment, net 15 20,274,712 - Total Insurance Operations Assets 1,753,465,649 - SHAREHOLDERS ASSETS Cash and cash equivalents 8 175,268, ,700,561 Term deposits 9 60,058,888 - Investments ,028, ,073,921 Prepayments and other assets 14 3,278,815 3,725,966 Due from insurance operations 117,739,128 - Goodwill 7 480,000,000 - Statutory deposit 17 80,000,000 80,000,000 Land 30,000,000 30,000,000 Total Shareholders Assets 1,207,373, ,500,448 Total Assets 2,960,838, ,500,448 8 The accompanying notes 1 to 31 form an integral part of these financial statements.

11 (Amounts in SR) Notes INSURANCE OPERATIONS LIABILITIES AND SURPLUS Accounts and commission payable 73,402,787 - Reinsurance balances payable 79,029,502 - Accrued expenses and other liabilities 18 56,689,303 - Due to shareholders operations 117,739,128 - Unearned commission income 20 33,665,524 - Unearned premiums ,351,695 - Outstanding claims ,301,084 - Surplus distribution payable 15,332,142 - Other reserves 9,954,484 - Total Insurance Operations Liabilities And Surplus 1,753,465,649 - SHAREHOLDERS LIABILITIES AND EQUITY Shareholders Liabilities Accrued expenses and other liabilities 18 3,577,313 3,202,892 Provision for zakat and income tax 23 24,655,160 15,363,216 Due to a shareholder ,673,490 - Total Shareholders Liabilities 281,905,963 18,566,108 Shareholders Equity Share capital ,000, ,000,000 Change in fair value of available for sale investments 9,323,875 ( 1,694,486) Statutory reserve 23,228,648 - Retained earnings (accumulated losses) 92,914,593 (10,371,174) Total Shareholders Equity 925,467, ,934,340 Total Shareholders Liabilities And Equity 1,207,373, ,500,448 Total Liabilities, Insurance Operations Surplus, and Shareholders Equity 2,960,838, ,500,448 The accompanying notes 1 to 31 form an integral part of these financial statements. 9

12 STATEMENT OF INSURANCE OPERATIONS AND ACCUMULATED SURPLUS At 31 December 2009 For the Period For the year from 16 April ended to 31 (Amounts in SR) Notes December 2009 December 2008 Gross premiums written 1,849,482,433 - Less: Reinsurance ended (339,854,155) - Excess of loss premiums (38,673,501) - Net Premiums Written 1,470,954,777 - Change in unearned premiums 11 (171,029,978) - Net Premiums Earned 1,299,924,799 - Gross claims paid and other expenses 12 (741,122,683) - Reinsurers share of claims paid 12 95,084,846 - Change in outstanding claims 12 (294,191,341) - Net Claims Incurred (940,229,178) - Policy acquisition costs 13 (92,243,884) - Commission income 20 36,887,051 - Net Underwriting Result 304,338,788 - General and administration expenses 21 (168,607,044) - Other income 22 17,589,679 - Surplus From Insurance Operations 153,321,423 - Shareholders appropriation from surplus (137,989,281) - Surplus from insurance operations after shareholders appropriation 15,332,142 - Distribution of surplus (15,332,142) - Accumulated Surplus, End Of The Year/ Period The accompanying notes 1 to 31 form an integral part of these financial statements.

13 STATEMENT OF SHAREHOLDERS OPERATIONS At 31 December 2009 INCOME For the Period For the year from 16 April ended to 31 Notes December 2009 December 2008 Shareholders appropriation from insurance operations surplus 137,989,281 - Special commission income 11,960,597 46,661,738 Gains on sale of available for sale investments 1,697,381 65,594 Dividends income 457,936 - Losses on Trading investments, net - (994,211) Foreign exchange gains - 16,638 EXPENSES 152,105,195 45,749,759 General and administration 21 (3,255,397) (8,485,524) Impairment losses on investments 16 (2,335,384) (16,095,443) Pre-incorporation and initial public offering expenses, net - (15,830,682) Net Income For The Year/Period 146,514,414 5,338,110 Earnings Per Share For The Year/Period The accompanying notes 1 to 31 form an integral part of these financial statements. 11

14 STATEMENT OF SHAREHOLDERS COMPREHENSIVE OPERATIONS At 31 December 2009 For the Period For the year from 16 April ended to 31 (Amounts in SR) Notes December 2009 December 2008 Net income for the year/period 146,514,414 5,338,110 Other comprehensive income (expenses): Zakat & income tax 23 (19,999,999) (15,709,284) Change in fair value of available for sale investments 11,018,361 (1,694,486) Total Comprehensive Income (Loss) For The Year/Period 137,532,776 (12,065,660) 12 The accompanying notes 1 to 31 form an integral part of these financial statements.

15 STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY At 31 December 2009 Change in fair value of Retained available earnings Share for sale Statutory (Accumulated capital investments reserve losses) Total 2008 Issue of share capital 800,000, ,000,000 Net income for the year ,338,110 5,338,110 Change in fair value of available for sale investments - (1,694,486) - - (1,694,486) Provision for Zakat and income tax (Note 23) (15,709,284) (15,709,284) Balance at 31 December ,000,000 (1,694,486) - (10,371,174) 787,934, 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 value of available for sale investments - 11,018, ,018,361 Provision for 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 The accompanying notes 1 to 31 form an integral part of these financial statements. 13

16 STATEMENT OF INSURANCE OPERATIONS CASH FLOWS At 31 December 2009 For the Period For the year from 16 April ended to 31 (Amounts in SR) Notes December 2009 December 2008 CASH FLOWS FROM OPERATING ACTIVITIES Surplus from insurance operations after shareholders appropriation 15,332,142 - Adjustments to reconcile insurance operations surplus to net cash provided by operating activities: - Depreciation and amortization 4,964,647 - Provision for doubtful debts 6,000,000 - Gain on sale of property and equipment (92,326) - 26,204,463 - Reinsurance share of unearned premiums (214,019,042) - Reinsurers share of outstanding claims (179,109,743) - Deferred policy acquisition costs (26,096,002) - Premiums and insurance balances receivable (828,356,466) - Prepayments and other assets (16,907,753) - Due from related parties (309,706,670) - Unearned premiums 894,351,695 - Unearned commission income 33,665,524 - Accounts and commission payable 73,402,787 - Reinsurance balances payable 79,029,502 - Accrued expenses and other liabilities 56,689,303 - Due to shareholders operations 117,739,128 - Outstanding claims 473,301,084 - Other reserves 9,954,484 - Net cash from operating activities 190,142,294 - CASH FLOW FROM INVESTING ACTIVITIES Purchase of property and equipment (25,333,783) - Proceeds from sale of property and equipment 186,750 - Time deposits, net (37,862,675) - Net cash used in investing activities (63,009,708) - Cash And Cash Equivalents At The End Of The Year/Period 8 127,132, The accompanying notes 1 to 31 form an integral part of these financial statements.

17 STATEMENT OF SHAREHOLDERS CASH FLOWS At 31 December 2009 For the Period For the year from 16 April ended to 31 (Amounts in SR) Notes December 2009 December 2008 OPERATING ACTIVITIES Net income for the year /period 146,514,414 5,338,110 Adjustments for: Amortisation of discount on held to maturity investments (2,526,708) (1,811,005) Commission income on held to maturity investments - (739,819) Commission income on available for sale Investment (2,261,666) (750,853) Dividend income on trading investments - (822,518) Dividend income on available for sale investments (457,936) (112,565) Unrealised losses or trading investments - 1,638,465 Impairment losses on available on sale investments 2,335,384 16,095,443 Realised loss on trading investments - 290,545 Realised gains on sale of available for sale investments (1,697,381) (65,594) 141,906,107 19,060,209 Changes in operating assets and liabilities: Purchase of trading investments - (147,996,538) Sale of trading investments - 64,485,548 Prepayment and other assets 447,151 (3,725,966) Due from insurance operations (117,739,128) - Statutory deposit - (80,000,000) Goodwill (480,000,000) - Accrued expenses and other liabilities 374,421 3,202,892 Due to a shareholder 253,673,490 - Zakat and income tax paid (10,708,055) (346,068) Net cash used in operating activities (212,046,014) (145,319,923) INVESTING ACTIVITIES Purchase of available for sale investments (93,026,175) (57,480,633) Proceeds from sale of available for sale investments 52,978,969 10,548,146 Purchase of held to maturity investments - (114,222,784) Proceeds from sale of held to maturity investments - 18,750,000 Purchase of land - (30,000,000) Commission income on held to maturity investments - 739,819 Commission income on available for sale investments 2,261, ,853 Dividend income on trading investments - 822,518 Dividend income on available for sale investments 457, ,565 Term deposits, net (60,058,888) - Net cash used in investing activities (97,386,492) (169,979,516) FINANCING ACTIVITIES Issue of share capital - 800,000,000 Net cash from financing activities - 800,000,000 Net Change In Cash And Cash Equivalents (309,432,506) 484,700,561 Cash And Cash Equivalents At The Beginning Of the Year/Period 484,700,561 - Cash And Cash Equivalents At The End Of The Year/Period 8 175,268, ,700,561 NON CASH TRANSACTIONS: Change in fair available for sale investments 11,018,361 (1,694,486) The accompanying notes 1 to 31 form an integral part of these financial statements. 15

18 NOTES TO THE FINANCIAL STATEMENTS At 31 December ORGANIZATION AND PRINCIPAL ACTIVITIES The Mediterranean & Gulf Cooperative Insurance & Reinsurance Company (the Company ) is a Saudi Joint Stock Company registered in the Kingdom of Saudi Arabia under commercial registration number dated 8 Rabi Thani 1428H corresponding to 26 April 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 operations and related activities in the Kingdom of Saudi Arabia. The Company commenced insurance and reinsurance operations on 4 Muharam 1430H (corresponding to 1 January 2009). Accordingly, no comparative information is provided in the statements of insurance operations and accumulated surplus and insurance operations cash flows for the period ended 31 December BASIS OF PREPARATION The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS). Basis of measurement The financial statements are prepared under the historical cost concept except for the measurement at fair value of available for sale investments. Functional and presentational currency The financial statements are presented in Saudi Riyals being the functional currency of the Company. 3. CHANGES IN ACCOUNTING POLICIES The following standards and interpretations have been issued by the International Accounting Standards Board (IASB) which have been adopted by the Company during the current year: IAS 1 (Revised) Presentation of Financial Statements Amendment to IFRS 7 Financial Instruments: Disclosures IFRS 8 Operating Segments, which supersedes IAS 14 Segment Reporting and requires disclosure of information about the Company s operating segments; Adoption of these standards did not have any material effect on the financial performance or position of the Company. They did however results in amendments to the presentation of the financial statements. 16

19 4. NEW STANDARDS AND AMENDMENTS ISSUED BUT NOT YET EFFECTIVE The following standards have been issued by the International Accounting Standards Board (IASB) but are not yet mandatory for these financial statements Improvements to IFRSs 2009 various standards effective date 1 January 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 standards and amendments is not expected to have a material impact on the financial statements as and when they become effective. However, it will result in amendments to the presentation 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 at banks and time deposits with an original maturity of less than three months at the date of acquisition. Goodwill Purchase price paid in excess of fair value of net assets or liabilities is considered as goodwill. 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 cashgenerating 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 the future periods. Property and equipment Property and equipment are initially recorded at cost less accumulated depreciation and any impairment in value. Depreciation is calculated on a straight line basis over the estimated useful lives of those assets as follows: Leasehold improvements 15% - 25% Office equipment, furniture & fixtures 10% - 15% Computers 25% Motor vehicles 25% 17

20 NOTES TO THE FINANCIAL STATEMENTS At 31 December Summary Of Significant Accounting Policies (Continued) Investments All investments are initially recognised at cost, 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 in the statement of shareholders comprehensive operations until the investment is derecognized or impaired at which time the cumulative gain or loss previously recognised in the statements of shareholders comprehensive operations should be included in the statement of shareholders operations for the year. Available for sale investments whose fair value can not be reliably measured are carried at amortised cost less impairment provision. b. Investments in held to maturity securities Investments which have fixed or determined 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. 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 based on estimated cash flows that are discounted at the original effective special commission rate. Accruals and other payables Liabilities are recognised for amounts to be paid in the future for goods or services received, whether billed by the supplier or not. 18

21 5. Summary Of Significant Accounting Policies (Continued) Zakat and income tax Zakat and income tax are provided for in accordance with Saudi Arabian Fiscal Regulations and is 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 dividends is established. 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 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 are purchases or sales of financial assets 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 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. 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. 19

22 NOTES TO THE FINANCIAL STATEMENTS At 31 December Summary Of Significant Accounting Policies (Continued) 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. 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 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. Gross outstanding 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. 20

23 5. Summary Of Significant Accounting Policies (Continued) 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 do 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. 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. 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. 21

24 NOTES TO THE FINANCIAL STATEMENTS At 31 December Summary Of Significant Accounting Policies (Continued) Premiums and claims are presented on a gross basis for both ceded and assumed reinsurance. Reinsurance assets or liabilities are derecognised when the contractual rights are extinguished or expire or when the contract is transferred to another party. Unearned commission income 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. Segmental 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 organized into business units based on their products and services and has three reportable operating segments as follows: Health insurance which covers medical costs, medicines, and all other medical services and supplies. Motor Insurance 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 Funds 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 profit or loss in the accompanying financial statements. No inter-segment transactions occurred during the period. 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 22

25 6. Significant Accounting Estimates And Assumptions (Continued) 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 period 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. 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 acquisition costs Certain acquisition costs related to the sale of new policies are recorded as deferred acquisition costs (DAC) 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. 23

26 NOTES TO THE FINANCIAL STATEMENTS At 31 December ASSETS AND LIABILITIES PURCHASE AGREEMENT AND COMMENCEMENT OF ACTIVITIES The Company commenced insurance operations on 1 January Also the company has entered into 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, due diligence study (including a valuation) has been submitted by an independent auditor to the Saudi Arabian Monetary Agency (SAMA). The result of the valuation has been issued by Saudi Arabian Monetary Agency (SAMA) on 12 Dhul Qada 1429 (correspondence to 10 November 2008), through its letter No. 2172/MTh/MT. 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) as at 1 January The accompanying financial statements include the assets and liabilities purchased under the said agreement and as follows: (Amounts in SR) Fair value recognised at acquisition ASSETS Cash & cash equivalents 70,843,168 Premiums & insurance balances receivable, net 522,010,966 Reinsurers share of unearned premiums 193,782,376 Deferred policy acquisition costs 17,679,108 Prepayments & 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 & other liabilities 17,441,094 End of service benefits 13,924,917 Unearned commission income 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 on acquisition 480,000,000 Total acquisition cost 459,749,847 24

27 7. Assets And Liabilities Purchase Agreement And Commencement Of Activities (Continued) During the year, the Company has settled an amount of SR 206 million from the balance due for the purchase of the insurance portfolio and the related assets and liabilities of the Saudi Arabian Operations of the Mediterranean and Gulf Insurance and Reinsurance Company (MEDGULF) B.S.C. (closed). 8. CASH AND CASH EQUIVALENTS Insurance Insurance (Amounts in SR) Operations Shareholders Operations Shareholders Cash at banks 32,666,051 3,295,463-39,385,488 Time deposits 94,466, ,972, ,315, ,132, ,268, ,700,561 Cash at banks and time deposits are placed with counterparties who have investment grade credit ratings. 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 income at an average rate of 1.54% annually (31 December 2008: 3.78%). The carrying amounts disclosed above reasonably approximate the fair value at the end of reporting period. 9. TIME DEPOSIT The time deposits represent a deposit with local and foreign banks with a maturity of more than three months from the date of original acquisition and earn special commission income at a rate of 3.75% annually. The time deposit is placed with a counterparty that has an investment grade credit rating. The carrying amount of the time deposit reasonably approximates its fair value as at the end of reporting period. 10. PREMIUMS & INSURANCE BALANCES RECEIVABLE (Amounts in SR) Premiums receivable 805,811,036 - Less: allowance for doubtful debts (91,001,532) - 714,809,504 - Reinsurance receivable 107,546, ,356,466-25

28 NOTES TO THE FINANCIAL STATEMENTS At 31 December Premiums & Insurance Balances Receivable (Continued) The aging analysis of unimpaired premiums/reinsurance receivable balances is set out below as of 31 December 2009: Past due but not impaired Neither past due 91 to More than (Amounts in SR) nor impaired 180 days 180 days Total 2009 Premiums receivable 686,726,498 9,447,237 18,635, ,809,504 Reinsurance balance receivable 102,483,772 2,816,830 2,246, ,546,962 Total 789,210,270 12,264,067 20,882, ,356,466 Premiums and insurance 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 insurance balances receivables include an amount of 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 accounts for more than 24% of the receivables as of December 31, In addition, the five largest customers account for 45% of outstanding accounts receivable at December 31, Unimpaired Premiums and insurance 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. 11. MOVEMENT IN UNEARNED PREMIUMS (Amounts in SR) Gross unearned premiums acquired (Note 7) 703,085,051 - Gross unearned premiums as at 31 December ,351,695 - Movement in unearned premiums gross 191,266,644 - Reinsurers share of unearned premiums acquired (Note 7) 193,782,376 - Reinsurers share of unearned premiums as at 31 December ,019,042 - Movement in reinsurance share of unearned premiums 20,236,666 - Movement in unearned premiums, net 171,029,978-26

29 12. CLAIMS 2009 Reinsurers (Amounts in SR) Gross Share Net Claims paid 741,122,683 (95,084,846) 646,037,837 Claims provided during the year 312,210,492 (155,747,603) 156,462,889 IBNR provided during the year 161,090,592 (23,362,140) 137,728,452 Incurred during the year 1,214,423,767 (274,194,589) 940,229,178 As at 31 December Outstanding claims 312,210,492 (155,747,603) 156,462,889 IBNR 161,090,592 (23,362,140) 137,728, ,301,084 (179,109,743) 294,191, DEFERRED POLICY ACQUISITION COSTS At 1 January - - Deferred policy acquisition cost acquired (Note 7) 17,679,108 - Cost incurred during the year 100,660,778 - Charge for the year (92,243,884) - At 31 December 26,096, PREPAYMENTS AND OTHER ASSETS Insurance Insurance (Amounts in SR) Operations Shareholders Operations Shareholders Prepaid rent 4,194, Employee advances 3,699, Advances to suppliers 2,669, Prepaid expenses 1,995, , ,081 Special commission receivable 190,743 3,040,690-3,556,885 Others 4,157, ,907,753 3,278,815-3,725,966 27

30 NOTES TO THE FINANCIAL STATEMENTS At 31 December PROPERTY AND EQUIPMENT, NET Office equipment, Leasehold furniture and Motor Total Total (Amounts in SR) improvements fixtures Computers vehicles Cost: At 1 January Acquired (note 7) 10,327,327 4,083,966 1,118,571 1,980,469 17,510,333 - Additions 3,623,574 2,089,705 1,775, ,065 7,823,450 - Disposals - (110,829) (49,600) (248,427) (408,856) - At 31 December 13,950,901 6,062,842 2,844,077 2,067,107 24,924,927 - Depreciation: At 1 January Provided during the year 2,732, , , ,108 4,964,647 - Disposals - (41,608) (2,077) (270,747) (314,432) - At 31 December 2,732, , , ,361 4,650,215 Net book amounts: At 31 December 11,218,596 5,219,343 2,253,027 1,583,746 20,274, INVESTMENTS a. Investments are classified as follows: (i) Investments in held to maturity securites Held to maturity investments represent securities issued by governments, international corporations and financial institutions. The fair values of held to maturity investments are not significantly different from their carrying values. The maturities of the held to maturity investments are as follows: (Amounts in SR) Less than one years 99,810,49 99,810,497 97,283,788 Total held to maturity investments 99,810,4 99,810,497 97,283,788 28

31 16. Investments (Continued) (ii) Available for sale investments (Amounts in SR) Sukuk 29,286,826 14,752,500 Floating rate notes 18,211,950 13,952,250 Bonds 64,749,513 7,125,000 Equities 21,637, ,000 Funds 27,331,907 74,135,383 Total available for sale investments 161,217, ,790,133 Total investments 261,028, ,073,921 During the year ended 31 December 2009, impairment losses on available for sale investments amounting to SR 2,335,384 (2008: SR 16,095,443) was recorded in the statement of shareholders operations. b. The analysis of the composition of investments is as follows: 2009 (Amounts in SR) Quoted Unquoted Total 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, Sukuk 14,752,500-14,752,500 Floating rate notes - 13,952,250 13,952,250 Bonds 104,408, ,408,788 Equities 825, ,000 Funds 54,888,843 19,246,540 74,135,383 Total 174,875,131 33,198, ,073,921 29

32 NOTES TO THE FINANCIAL STATEMENTS At 31 December Investments (Continued) c. The analysis of investments by counter-party is as follows: (Amounts in SR) Government and quasi government 139,560,010 97,283,788 Banks & financial institutions 92,936,933 88,087,633 Corporate 28,531,250 22,702,500 Total 261,028, ,073,921 d. The credit quality of investment portfolio is as follows: (Amounts in SR) AA- To AA 153,083,037 24,621,448 A- To A+ 81,800, ,222,473 B- 26,145,000 7,230,000 Total 261,028, ,073,921 Credit ratings are based on standard and poor s rating methodology or the issuer in case of unrated investments. e. Determination of fair value and fair values hierarchy 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 repacking). 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. Level 3: Valuation techniques for which any significant input is not based on observable market data. 30

33 16. Investments (Continued) The following table shows an analysis of financial instruments recorded at fair value by level of the fair value hierarchy: (Amounts in SR) Level 1 Level 2 Level 3 Total 2009 Available for sale investments Sukuk 29,286, ,286,826 Floating rate notes 3,571,875 14,640,075-18,211,950 Bonds 39,749,513 25,000,000-64,749,513 Equities 2,887,500-18,750,000 21,637,500 Funds 17,455,130 9,876, , 3 3 1, Total available for sale investments 92,950,844 49,516,852 18,750, ,217, Available for sale investments Sukuk 14,752, ,752,500 Floating rate notes - 13,952,250-13,952,250 Bonds 7,125, ,125,000 Equities 825, ,000 Funds 15,612,558 58,522,825-74,135,383 Total available for sale investments 38,315,058 72,475, ,790, STATUTORY DEPOSIT Statutory deposit represents 10% of the paid-up capital which is maintained in accordance with the Law on Supervision of Cooperative Insurance Companies in the Kingdom of Saudi Arabia. This statutory deposit cannot be withdrawn without the consent of Saudi Arabian Monetary Agency. 31

34 NOTES TO THE FINANCIAL STATEMENTS At 31 December ACCRUED EXPENSES AND OTHER LIABILITIES Insurance Insurance (Amounts in SR) Operations Shareholders Operations Shareholders Accrued bonus 16,000, Employees end of service benefits (Note 19) 15,453, Accrued CCHI fees 11,136, Payable to suppliers 10,804, Accrued expenses 2,369,786 1,561,500-3,202,892 Other payables 924,925 2,015, ,689,303 3,577,313-3,202, EMPLOYEES END OF SERVICE BENEFITS (Amounts in SR) Balance as at 1 January - - End of service benefits acquired (Note 7) 13,924,917 - Accrued during the year (Note 21) 2,486,991 - Paid during the year (958,545) - Balance as at 31 December (Note 18) 15,453, UNEARNED COMMISSION INCOME (Amounts in SR) At 1 January - - Unearned commission income acquired (Note 7) 25,907,700 - Commission received during the year 44,644,875 - Commission earned during the year (36,887,051) - At 31 December 33,665,524-32

35 21. GENERAL AND ADMINISTRATION EXPENSES Insurance Insurance (Amounts in SR) Operations Shareholders Operations Shareholders Employee salaries and costs 84,229, ,459,347 Professional fees 16,280, ,021-2,389,167 Rent 16,007, Inspection and supervision fees 14,408, Provision for doubtful debts 6,000, Depreciation and amortization 4,964, Promotion and advertising 4,207, Withholding taxes on reinsurance payments 3,579, Stationery 3,145, Repair and maintenance 2,538, End of service benefits (Note 19) 2,486, Business travel and transport 2,460, , Utilities 438, Board of directors and other committees remunerations and expense - 1,880, ,700 Others 7,858, , , ,607,044 3,255,397 8,485, OTHER INCOME (Amounts in SR) Gain from disposal of properties and equipment 92,326 - Income from settlement of accounts payable 9,677,748 - Others 7,819,605-17,589,679-33

36 NOTES TO THE FINANCIAL STATEMENTS At 31 December ZAKAT AND INCOME TAX a. Zakat charge for the year The zakat charge for the current year consists of the current year s provision amounting to SR 15,465,398 (2008: SR 15,083,424). The current year s provision is based on the following: (Amounts in SR) Share capital 800,000, ,000,000 Opening provisions and other adjustments 508,619,734 16,483,553 Book value of long term assets (554,577,881) (110,000,000) Zakat base 754,041, ,483,553 Saudi partners share of zakat base 618,615, ,336,954 The differences between the financial and the zakatable results are mainly due to provisions which are not allowed in the calculation of zakatable income. b. Income tax charge for the year Income tax relating to the non Saudi partner amounting to SR 4,534,601 (2008: SR 625,860) consists of the current year charge, which has been provided for based on the estimated taxable profit at 21.32% (2008: 14.6%). c) Movements in the zakat and income tax provision during the year The movement in the zakat and income tax provision for the year was as follows: (Amounts in SR) At the beginning of the year 15,363,216 - Provided during the year 19,999,999 15,709,284 Payments during the year (10,708,055) (346,068) At the end of the year 24,655,160 15,363,216 d) Status of zakat and tax assessments The company has submitted return of Zakat and income tax for the period from 16 April 2007 to 31 December 2008 which is still under review by DZIT. 34

37 24. TRANSACTIONS AND BALANCES WITH RELATED PARTIES The following are the details of major related parties transactions during the period and the related balance at the end of the period: (Amounts in SR) Amounts of Amounts of transaction transaction the period for the year from 16 April ended to 31 Balance as of Balance as of parties December December 31 December 31 December Related Nature of transactions Founding Sale of investments (Medgulf B.S.C.) shareholder Due to a shareholder (Medgulf B.S.C.) - 32,582,826 - (2,647,547) for purchasing assets and liabilities (note 7) (459,749,847) - (253,673,490) - Due from a shareholder (Medgulf B.S.C.) in respect of insurance operations for ,406, ,212,871 - Current accounts & term deposits - (The Saudi Investment Bank) ,671, ,636,612 Interest Income from term deposits - (The Saudi Investment Bank) 1,336,713 41,607, Pre incorporation expenses & G&A paid on behalf of the company - 25,376, Purchase of land on behalf of the company - MedGulf B.S.C - 30,000, Purchase of investments- MedGulf B.S.C - 147,639, Initial public offering expenses paid by the company - (The Saudi Investment Bank) - 1,050, Others Payments on behalf of other related parties 38,932,690-6,493,799 - Written Premium 196,123, ,974,422 - Claims On Policyholder (71,411,737) - (10,460,106) - 35

38 NOTES TO THE FINANCIAL STATEMENTS At 31 December Transactions And Balances With Related Parties (Continued) Compensation of key management personnel The remuneration of directors and other members of key management during the year were as follows: period from Year ended 16 April 31 December 2007 to 31 (Amounts in SR) 2009 December 2008 Short-term benefits 11,056,834 5,178,000 Employees terminal benefits 391,253-11,448,087 5,178, SHARE CAPITAL The authorized and paid up share capital of the Company is SR 800 million divided into 80 million shares of SR 10 each. The founding shareholders of the Company have subscribed and paid for 60 million (SR 600 million) shares with a nominal value of SR 10 each, which represent 75% of the shares of the Company and the remaining 20 million (SR 200 million) shares with a nominal of SR 10 each which represents 25% of the shares of the Company, have been subscribed by the public. 26. EARNINGS PER SHARE Earnings per share for the year/period have been calculated by dividing the net income for the year/ period by the ordinary authorised, issued shares for the year amounting to 80 million shares. 27. FAIR VALUES OF FINANCIAL INSTRUMENTS Financial assets and liabilities include cash and cash equivalents, time deposits, investments, receivables, payables, and certain other assets and liabilities. The fair values of the financial assets and liabilities are not materially different from their carrying values with the exception of unquoted financial instruments which are carried at cost. 28. COMMITMENTS AND CONTINGENCIES a. Legal proceedings The Company, in common with significant majority of insurers, is subject to litigation in the normal course of its business. The Company s management, based on independent legal advice, believes that the outcome of these court cases will not have a material impact on the Company income or financial condition. b. Operating lease commitments The minimum future lease payments for the use of the Company office premises total SR 10,590,458 (2008: SR 6,925,636) payable in one annual instalment for the next year. 36

39 28. Commitments And Contingencies (Continued) c. Capital commitments As of 31 December 2009 the Company had no capital commitments (2008: nil). 29. SEGMENTAL 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 as stated below. Segment results do not include general and administration expenses and other income. Segment assets do not include cash and cash equivalents, time deposits, premiums and insurance balances receivable, prepayments and other assets, due from related parties, property and equipment, net. Segment liabilities do not include accounts and commissions payable, reinsurance balances payable, accrued expenses and other liabilities, due to shareholders operations, unearned commission income and other reserves. Operating Segments (Amounts in SR) Medical Motor Others Total For the year ended at 31 December 2009 Insurance Operations Gross premiums written 1,232,076, ,421, ,984,440 1,849,482,433 Net premiums earned 1,032,547, ,038,344 74,338,784 1,299,924,799 Net underwriting result 181,709,928 39,367,364 83,261, ,338,788 Unallocated income ,589,679 Unallocated expenses (168,607,044) Surplus from insurance operations ,321,423 As at 31 December 2009 Insurance operations assets Reinsurers share of unearned premiums 710, , ,624, ,019,042 Deferred policy acquisition costs 9,602,406 8,954,473 7,539,123 26,096,002 Reinsurers share of outstanding claims 32,256,510 1,106, ,747, ,109,743 Unallocated assets ,334,240,862 1,753,465,649 Insurance operations liabilities Unearned premiums 526,579, ,942, ,830, ,351,695 Outstanding claims 272,799,505 45,279, ,222, ,301,084 Unallocated liabilities ,812,870 1,753,465,649 37

40 NOTES TO THE FINANCIAL STATEMENTS At 31 December RISK MANAGEMENT Risk governance The Company s risk governance is manifested in a set of established policies, procedures and controls which uses the existing organisational structure to meet strategic targets. The Company s philosophy revolves on willing and knowledgeable risk acceptance commensurate with the risk appetite and strategic plan approved by the Board. The Company is exposed to insurance, reinsurance, regulatory framework, credit, liquidity, foreign currency, commission rate, and market risks. Risk management structure A cohesive organisational structure is established within the Company in order to identify, assess, monitor, and control risks. Board of Directors The apex of risk governance is the centralised oversight of Board of Directors providing direction and the necessary approvals of strategies and policies in order to achieve defined corporate goals. 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. Audit Committee and Internal Audit Department Risk management processes throughout the Company are audited annually by the Internal Audit Department which examines both the adequacy of the procedures and the Company s compliance with such procedures. The Internal Audit Department discusses the results of all assessments with senior management, and reports its findings and recommendations directly to the Audit Committee. The risks faced by the Company and the manner in which these risks are mitigated by management are summarized below. a. Insurance risk Insurance risk is the risk that actual claims payable to contract holders in respect of insured events exceed the carrying amount of insurance liabilities. This could occur because the frequency or amounts of claims severity, actual benefits paid and subsequent development of long term claims are different than expected. Therefore the objective of the Company is to ensure that sufficient resources are available to cover these liabilities. The insurance risk arising from insurance contracts is mainly concentrated in the Kingdom of Saudi Arabia. 38

41 30. Risk Management (Continued) Frequency and amounts of claims The frequency and amounts of claims can be affected by several factors. The Company underwrites mainly motor and medical 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. Motor For motor contracts the main risks are claims for death and bodily injury and the replacement or repair of vehicles. In recent years, the Company has only underwritten comprehensive polices for owner/ drivers over 18 years of age. Substantially all of the motor contracts relate to private individuals. The Company also has risk management procedures to control cost of claims. The Company has reinsurance cover to limit the losses for any individual claim to SR 750,000. Medical The Company s underwriting strategy is designed to ensure that risks are well diversified in terms of type of risk and level of insured benefits. This is largely achieved through diversification across the industry sectors and geography, the use of medical screening in order to ensure that pricing takes account of current health conditions, regular view of actual claims experience and product pricing, as well as detailed claims handling procedures. The Company further enforces a policy of actively managing and promptly pursuing of claims, in order to reduce its exposure to unpredictable future developments that can negatively impact the Company. The Company has reinsurance cover to limit the losses for any individual claim to SR 35,000 b. Reinsurance risk In common with 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. 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. A significant portion of the reinsurance is affected under treaty, facultative and excess-of-loss reinsurance contracts. To minimize its exposure to significant losses from reinsurer insolvencies, the Company evaluates the financial condition of its reinsurers and monitors the concentrations of credit risk arising from similar geographic regions, activities and economic characteristics of reinsurers. Reinsurance ceded contracts do not relieve the Company from its obligations to the policyholders and as a result the Company remains liable for a portion of outstanding claims reinsured to the extent that the reinsurer fails to meet the obligations under the reinsurance agreements. The credit exposure in this connection is: 39

42 NOTES TO THE FINANCIAL STATEMENTS At 31 December Risk Management (Continued) (Amounts in SR) Middle East 28,312,121 - Europe 150,797, ,109,743 - c. Regulatory framework risk The operations of the Company are subject to local regulatory requirements in the Kingdom of Saudi Arabia. Such regulations not only prescribe approval and monitoring of activities but also impose certain restrictive provisions e.g. capital adequacy to minimize the risk of default and insolvency on the part of the insurance companies and to enable them to meet unforeseen liabilities as these arise. d. 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. For all classes of financial assets held by the Company, the maximum exposure to credit risk to the Company is the carrying value as disclosed in the statement of financial position. The following policies and procedures are in place to mitigate the Company s exposure to credit risk: The Company only enters into insurance and reinsurance contracts with recognised, credit worthy third parties. It is the Company s policy that all customers who wish to trade on credit terms are subject to credit verification procedures. In addition, receivables from insurance and reinsurance contracts are monitored on an ongoing basis in order to reduce the Company s exposure to bad debts. The Company seeks to limit credit risk with respect to agents and brokers by setting credit limits for individual agents and brokers and monitoring outstanding receivables. The Company investment portfolio is managed by the investment officer in accordance with the investment policy established by the investment committee. The Company, with respect to credit risk arising from other financial assets, is restricted to commercial banks, private banking and counterparties having strong balance sheets and credit ratings. There are no significant concentrations of credit risk within the Company. 40

43 30. Risk Management (Continued) The table below shows the maximum exposure to credit risk for the components of the balance sheet Insurance Insurance (Amounts in SR) Operations Shareholders Operations Shareholders Cash and cash equivalents 127,132, ,268, ,700,561 Time deposits 37,862,675 60,058, Investments - 261,028, ,073,921 Statutory deposit - 80,000,000-80,000,000 Premiums and insurance balances receivable 822,356, Reinsurers share of outstanding claims 179,109, Due from related parties 309,706, ,476,168, ,355, ,774,482 f. Liquidity risk Liquidity risk is the risk that the Company will encounter difficulty in raising funds to meet commitments associated with financial liabilities. Liquidity requirements are monitored on a monthly basis and management ensures that sufficient liquid funds are available to meet any commitments as they arise. A significant amount of funds are invested in time deposits with local banks. 41

44 NOTES TO THE FINANCIAL STATEMENTS At 31 December Risk Management (Continued) Maturity profiles The table below summarises the maturity profile of the financial liabilities of the Company based on remaining expected undiscounted contractual obligations: Up to More than Up to More than (Amounts in SR) one year one year Total one year one year Total INSURANCE OPERATIONS> FINANCIAL LIABILITIES Accounts and commission payable 73,402,787-73,402, Financial liabilities arising from insurance and reinsurance contracts: Reinsurance balances payable 79,029,502-79,029, Gross outstanding claims 473,301, ,301, Accrued expenses & other liabilities 56,689,303-56,689, Accumulated surplus Distribution 15,332,142-15, 3 3 2, SHAREHOLDERS FINANCIAL LIABILITIES 697,754, ,754, Accrued expenses & other liabilities 3,577,313-3,577,313 3,202,892-3,202,892 Provision for zakat and income tax 24,655,160-24,655,160 15,363,216-15,363,216 Due to a shareholder - 253,673, ,673, ,232, ,673, ,905,963 18,566,108-18,566,108 Total Financial Liabilities 725,987, ,673, ,660,781 18,566,108-18,566,108 Liquidity profile None of the financial liabilities on the statement of financial position are based on discounted cash flows and are all payable on a basis as set out above. 42

45 30. Risk Management (Continued) g. Foreign currency risk Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. The Company principal transactions are carried out in Saudi Riyal. Management believes that there is minimal risk of significant losses due to exchange rate fluctuations and consequently the Company does not hedge its foreign currency exposure (Amounts in SR) SR US Dollar Other Total INSURANCE OPERATIONS ASSETS Cash and cash equivalents 127,132, ,132,586 Time deposits 37,862, ,862,675 Premium and insurance balances receivable 765,388,570 54,717,314 2,250, ,356,466 Reinsurers share of unearned premium 205,167,668 8,851, ,019,042 Reinsurers share of outstanding claims 179,109, ,109,743 Deferred policy acquisition costs 26,096, ,096,002 Prepayments and other assets 16,907, ,907,753 Due from related parties 309,706, ,706,670 Property and equipment, net 20,274, ,274,712 Total Insurance Operations Assets 1,687,646,379 63,568,688 2,250,582 1,753,465,649 SHAREHOLDERS ASSETS Cash and cash equivalents 175,268, ,268,055 Term deposits 60,058, ,058,888 Investments 261,028, ,028,193 Prepayments and other assets 3,278, ,278,815 Due from insurance operations 117,739, ,739,128 Goodwill 480,000, ,000,000 Statutory deposit 80,000, ,000,000 Land 30,000, ,000,000 Total Shareholders Assets 1,207,373, ,207,373,079 Total Assets 2,895,019,458 63,568,688 2,250,582 2,960,838,728 INSURANCE OPERATIONS LIABILITIES Accounts and commission payable 73,402, ,402,787 Reinsurance balances payable 39,633,242 38,228,579 1,167,681 79,029,502 Accrued expenses and other liabilities 56,689,303-56,689,303 Due to shareholders operations 117,739, ,739,128 Unearned commission income 33,665,524-33,665,524 Unearned premiums 883,132,058 11,219, ,351,695 Outstanding claims 473,301, ,301,084 Surplus distribution payable 15,332, ,332,142 Other reserves 9,954, ,954,484 1,702,849,752 49,448,216 1,167,681 1,753,465,649 43

46 NOTES TO THE FINANCIAL STATEMENTS At 31 December Risk Management (Continued) 2009 (Amounts in SR) SR US Dollar Other Total SHAREHOLDERS LIABILITIES Accrued expenses and other liabilities 3,577, ,577,313 Provision for zakat and income tax 24,655, ,655,160 Due to a shareholder 253,673, ,673,490 Total Shareholders Liabilities 281,905, ,905,963 Total Liabilities 1,984,755,715 49,448,216 1,167,681 2,035,371,612 INSURANCE OPERATIONS ASSETS 2008 Cash and cash equivalents Time deposits Premium and insurance balances receivable Reinsurers share of unearned premium Reinsurers share of outstanding claims Deferred policy acquisition costs Prepayments and other assets Due from related parties Property and equipment, net Total Insurance Operations Assets SHAREHOLDERS ASSETS Cash and cash equivalents 484,700, ,700,561 Term deposits Investments 208,073, ,073,921 Prepayments and other assets 3,725, ,725,966 Due from insurance operations Goodwill Statutory deposit 80,000, ,000,000 Land 30,000, ,000,000 Total Shareholders Assets 806,500, ,500,448 Total Assets 806,500, ,500,448 44

47 30. Risk Management (Continued) (Amounts in SR) SR US Dollar Other Total INSURANCE OPERATIONS LIABILITIES Accounts and commission payable Reinsurance balances payable Accrued expenses and other liabilities Due to shareholders operations Unearned commission income Unearned premiums Outstanding claims Surplus distribution payable Other reserves SHAREHOLDERS LIABILITIES Accrued expenses and other liabilities 3,202, ,202,892 Provision for zakat and income tax 15,363, ,363,216 Due to a shareholder Total Shareholders Liabilities 18,566, ,566,108 Total Liabilities 18,566, ,566,108 h. Commission rate risk Commission rate risk is the risk that the value or future cash flows of a financial instrument will fluctuate because of changes in market commission rates. Floating rate instruments expose the company to cash flow commission risk, whereas fixed commission rate instruments expose the company to fair value interest risk. The Company is exposed to commission rate risk on certain of its investments, cash and cash equivalents, term deposits and bank balances. The Company limits commission rate risk by monitoring changes in commission rates in the currencies in which its cash and cash equivalent and commission bearing investments and term deposits are denominated. The following table demonstrates the sensitivity of statement of shareholders operations to reasonably possible changes in commission rates, with all other variables held constant. 45

48 NOTES TO THE FINANCIAL STATEMENTS At 31 December Risk Management (Continued) The sensitivity of the statement of shareholders operations is the effect of the assumed changes in commission rates on the company s profit for the year, based on the floating rate financial assets and financial liabilities held at 31 December Effect on Change profit for in basis points the year/period , (45,530) , (34,881) i. Market price risk Market price risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market prices (other than those arising from interest rate risk or currency risk), whether those changes are caused by factors specific to the individual financial instrument or its issuer, or factors affecting all similar financial instruments traded in the market. The Company has unquoted equity instruments carried at cost or indicative selling price, where the impact of changes in equity price will only be reflected when the instrument is sold or deemed to be impaired and then the statement of shareholders operations will be impacted. The sensitivity of the statement of shareholders comprehensive operations is the effect of the assumed changes in the market prices of quoted available for sale investments on the statement of shareholders comprehensive operations. Effect on statement of shareholders Change comprehensive in market price operations % 4,638,067-5% 4,638, % 3,743,757-5% 3,743,757 46

49 30. Risk Management (Continued) j. Capital management Capital requirements are set and regulated by the Saudi Arabian Monetary Agency. 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 requirements by assessing 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. In order to maintain or adjust the capital structure, the Company may adjust the amount of dividends paid to shareholders or issue shares. In the opinion of the Board of Directors, the Company has fully complied with the externally imposed capital requirements during the reported financial periods and no changes were made to capital management objectives, policies and processes from the previous year. 31. APPROVAL OF THE FINANCIAL STATEMENTS The financial statements have been approved by the Board of Directors on 16 February 2010 corresponding to 2 Rabi Al Awal 1431H. 47

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